This article is part of a series of articles on lessons learned from the saga of Serba Dinamik. So far, here were the articles already published in i3investor.

1. Lessons from the saga of Serba Dinamik

https://klse.i3investor.com/web/blog/detail/kcchongnz/2022-05-20-story-h1623333498-Lessons_from_the_saga_of_Serba_Dinamik_kcchongnz

2. Can you cari makan from speculating? Lesson 1 on Serba Dinamik

https://klse.i3investor.com/web/blog/detail/kcchongnz/2022-05-24-story-h1623390006-Can_you_cari_makan_from_speculating_Lesson_1_on_Serba_Dinamik_kcchongnz

“Among all the stock selection criteria such as cash flow, NTA, healthy balance sheet, debt free etc, the most powerful catalyst that can push the stock price up is profit growth prospect. Never buy any stock if the company cannot report increasing profit.”        A high-profile stock speculator

“No growth no buy!”       A low-profile stock investor

Investing in growth stocks can be a great way to earn life-changing wealth in the stock market. The key, of course, is to know which growth stocks to buy, and when. The other equally important thing is what to look out for.

Growth stocks are companies that increase their revenue and earnings faster than the average business in their industry or the market. Businesses that can grow faster than average for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process. And the faster they grow, the bigger the returns can be.

That has been the prevailing maxim in the stock market investing.

Nobody can find fault in this belief as multi-baggers and even 100-baggers were born, almost all from high growth companies.

Serba Dinamik: A high growth stock

Since its listing in early 2017, Serba Dinamik has been growing at a very impressive manner. Its revenue and net profit have been growing at a compounded annual growth rate (CAGR) of 39% and 35% to RM8.6 billion and RM758 million respectively in the last 5 years as shown in Figure 1 below.

The financial results for year 2021 as shown in Figure 1 above was based on the 18 months unaudited account ended 30 June 2021. The financial year was pushed 6 months later, on hight sight, was probably due to its inability to produce the audited account on time.

That increase in net profit was 400% in just 5 years. Serba definite fit in as a high growth stock.

Despite the advent of Covid-19 pandemic, where there were lock downs all over the world, including in the Middle East in Qatar, United Emirates and North Africa, where most of its lucrative jobs were secured, its revenue and net income continued to grow at higher rate as shown in Figure 1 above, as if nothing had happened.

The rise and rise of Serba’s share price

What resulted was the unabated steep rise of its share price from the beginning of year 2017 at an adjusted price of about 75 sen, when the oil and gas industry was still in doldrum, to a peak of RM2.42 (Point A) at the beginning of year 2020 as shown in Figure 2 below.

Serba became the darling high growth stock in Bursa everyone knew and well sought after, including many institutional investors. EPF was also a major shareholder. Yes, that is you and me, our money.

The continuous rise of Serba’s share price was only hindered by the advent of the Covid-19 Pandemic when it plunged from RM2.42 to RM1.33 as shown in figure 2 above (Point B). It did recover a little, but it was far cry from its share price before the pandemic. Its share price hovered between RM1.50 to RM1.70 range subsequently. Suddenly, it was announced that its external auditor, KPMG, had problems of verifying some transactions in Middle East amounting to billions of Ringgits. The share price of Serba plunged subsequently.

What happened?

The disparity between accounting profit and cash flows

Cash flows are lumpy as it depends on the timing of working capital requirements and capital expenses which vary widely from year to year. A high growth company also requires a lot of cash for working capitals and capital expenses needs. However, for a normal business, over a period of time, cash flows from operations (CFFO) should be closely resemble net income.

The cash flows from operations of Serba had been just a small fraction of the net income for all the years as shown in figure 3 below.

In 2021, CFFO even went negative of RM235 million, although net profit was astounding at RM758 million!

What it means is, hey, I made a lot of money on paper, but I need more money, in real cash, just to keep our doors open.

OOp, I forgot. We need a lot more money than the deficit of CFFO above, a lot more as we need to spend on capital expenses, to maintain our plant and equipment to be operational, as well as more money to buy more plant and equipment for the new projects we got.

Figure 4 below shows the free cash flows of the company for the last 6 years.

Free cash flows = CFFO – Capital expenses

Though the company had been making increasing profit every year as shown in figure 1, the business had been sucking cash from the operations, every year without fail. That was really something!

In 2021, the company needed RM1.54 billion, yes, billion and not million, to be injected into the business as shown in Figure 4.

Why is that the company was making huge amount of profit, but it had been sucking enormous amount of cash?

What are the results of this dilemma?

That would be the next lessons.

Serba Dinamik’s share were suspended from trading on 24 May 2021 for a short period when the saga unfolded, and it was last traded at RM1.61. It went limit down a couple of times when trading was resumed. It was suspended again at 35 sen in middle of October 2021 when it was unable to provide its audited account, followed by a series of dramas. When trading resumed, its share price went down to a low of 6 sen, before recovering and closed at 11.5 sen on 3 June 2022. This was described in the link below,

https://klse.i3investor.com/web/blog/detail/kcchongnz/2022-05-24-story-h1623390006-Can_you_cari_makan_from_speculating_Lesson_1_on_Serba_Dinamik_kcchongnz

KCChong