Below is a personal view of a market addict, peruse at your own delight...or risk...

Over the past week we have seen an enormous amount of information / rumours being circulated over multiple channels. This addict thinks it would be beneficial to compile these information and perhaps share his 2-cents worth of analysis of the situation.

Key audit matters highlight

1. Customer confirmation

• KPMG sent out 12 customer confirmation letters and only 1 returned.
• Management sent out remaining 11 again without KPMG's knowledge, responses from all customers were received and sent back directly from customer to KPMG.
• 96% of the receivable balance in dispute has been repaid as of May.
• Some of these customers highlighted were with Serba since 2013.

2. Local supplier

• ​Registered address of 6 suppliers are similar, 5 out of 6 have small paid-up capital but has been able to participate in large transactions
• Serba explained that the registered address is actually belonging to a company secretary

3. Foreign customer and supplier

• ​An employee's name appeared in true caller app for one of the customers in Bahrain
• Serba provided telephone bill receipt of customer which indicates otherwise

4. IT contracts

• Minor administrative discrepancies noted 
• Payment terms non-typical with sub-con receiving payment directly from customer
• Serba explained that this is part of a tripartite agreement
• Market is concerned the Abu Dhabi contract is not real (opinion below)

What does this all mean?

1. Lack of customer confirmation implies a completeness issue ie auditor is unable to ascertain whether or not the customer balances are accurate for the year under audit, while that is a concern, it does not mean the auditors are saying these balances do not exist. Since some of these customers are long term customers and would (under my personal assumption) have been cleared in previous audits, and to further reinforce the case of these balances, 96% of the receivables have been received (according to Serba) in May, this item is more likely a discomfort than a potential fraud area.

2. As for local suppliers, this seems likely to be a case where these private companies are proxy companies who have partners that are able to support them in these transactions with Serba. While this is not ideal on textbook, in the real world especially where high value contracts are involved with GLCs and government projects, this addict does not think of such arrangement as peculiar, in fact to seasoned businessmen this should come as no surprise. 

3.  On group's employee name appearing on a true caller ID, this issue is a red flag however inconclusive to be deemed as fraud at this stage. Assuming the employee is indeed involved as the customer, this creates a potential conflict ie related party transaction which needs to be disclosed. The lack of disclosure implies a few things, on the optimistic note the employee is leveraging on a business opportunity and intends to do business with Serba with no disclosure; however to a realist, the said employee could be unfairly extracting profits from Serba, again this is merely for the sake of argument, nothing is conclusive at this point. Please don't sue me...

4. On IT contracts, this is perhaps the most sizzling bit these days which was not clearly highlighted by KPMG but had been highlighted multiple times via social media through private groups - the fact that Dato Karim is involved in Block 7 Investments (the company which awarded a mega contract to Serba) and Serba's JV partners in this project. While this may be stunning to some, and a curious case to a few... is it really such a surprise that there are many layers involved in the award of this project? 

Let's examine the facts, Serba has had limited experience in building such large scale IT projects but strong connections in the Middle East. An obvious fact to point out is that such contract is won largely due to relationship, which may not be ideal on textbook but is the reality in business. In such cases, would it be that surprising to have some sharing of profit with parties who brought the deal together? Legality aside (that is a problem of the JV partners and middleman rather than Serba), the key question here is whether the contract exists.

Let's understand the project here: the ultimate customer awarding the Block 7 Innovation Hub project is ZonesCorp, a subsidiary Abu Dhabi Ports company. Abu Dhabi Port is a very well known company in the Middle East, hence the existence of the ultimate customer should not be in question. For your reference: https://www.adports.ae/ , https://www.zonescorp.com/ , you may also find plenty of interviews of zonescorp CEO online and their previous projects.

Still in doubt? Let's take a look at ZonesCorp's official media center release on the project and who the project is being awarded to.

https://www.zonescorp.com/en/media-center/latest-news-events/news/2021/new-820-000-square-metre-hub-to-foster-research-and-innovation-in-abu-dhabi

  So based on this info we can safely put to rest the discussion on whether the mega project and contract is legit. (Obviously if ZoneCorp and Abu Dhabi port does not exist then all these would have been a sham, but I'll leave that to your judgment).

So what's next?

While management has eloquently refuted most of KPMG's queries, it is a cast-iron fact that the audit partner in question is not willing to sign the accounts - while there could be some petty issues which created misunderstanding, there certainly are pain points such as the red flag on employee name appearing on truecaller ID. 

Let's be objective here, a 50% correction in share price implies a total destruction in confidence and integrity of the company. Is there any middle ground to the situation?

Let's say a special audit happens and they find that some of the employees are embezzling cash from the company, what happens next? This is not a new issue to seasoned investors - the company will simply sue these employees, recognize a one-off adjustment in their accounts and move on. If the founder Dato Karim is not involved, that clears his name and in turn lift up all the other companies he is associated with such as Kpower and SCIB.

Then again, that remains a conclusion we will find out in the coming months.

As for immediate positive catalyst that might happen next:
1. Shareholder has specifically spelled out BDO to be appointed in the next EGM, the amount of confidence in naming BDO implies that there has been ongoing discussions with BDO and the firm has been (presumed to be) be briefed about the relevant issues and is comfortable to eventually sign the accounts. Given that customer confirmation has been obtained for revenue balances and receivables has been repaid, there seems to be less on an issue on this front, which is the bulk contributor to the RM2bn figure being thrown around.

2. Dato Karim has bought RM5m shares on Monday when the first limit down happened. Any reasonably experienced investor would know it is a futile act to support the price on Monday given the size of selling, so what is this about? Signalling. RM5m thrown into the stampede of investors to show the world that Dato Karim is confident the share price will rise above RM1.13. 

Another key point is the major shareholder Dato Abdul Kadier who raised the issue to remove auditors (it is obvious that he is supportive of the business he has been part of in the past decades), has also announced that he has intention to deal in Serba shares, what do you think he will do? It seems both Dato Abdul Kadier and Dato Karim has ample capacity to buy Serba shares before triggering a MGO, this could be one of reasons behind the speed of which RM500m value of shares was done in the first hour on the second limit down. "But they have no money" you might add.....well do a quick google on Abdul Kadier Sahib and you will find him on Forbes list of top 50 richest person in Malaysia....certainly richer than us market junkies and keyboard heroes. lol.

3. Last point is reserved specifically for the minority shareholder watch group (MSWG) for their many comments on the issue. As a minority shareholder I appreciate the many textbook feedback that has been given and plenty of publicity on MSWG's articles but let's be realistic here, the KPMG audit partner in question no longer has the confidence to sign off the accounts for Serba given the issues raised (obvious given they have not responded to management since 3rd May), and you are insisting that KPMG stays on as auditors for the company. What do you think the outcome would be for minority shareholders if we follow your advise? It is clear this is no longer an issue of competence or factual evidence, it is simply an issue of confidence.

Does having BDO sign off the accounts imply any mediocrity in BDO's credibility? Given the publicity and pressure on the new audit partner I believe he would be concerned that he might end up in jail for signing the accounts as well.

Lastly, we look forward to your clarification article on the governance issue of Serba's board for announcing a potential change of auditor since it is clear that the motion was put forward by a non-executive director and major shareholder of the company rather than the executive board. A clarification would show that the MSWG is a matured and responsible organization who is able to put things straight.

Conclusion
The above is simply the musings of an addict, please trade at your own risk (please be aware that in the event of fraud you could lose all your capital, this is not a recommendation of any stock). The arguments set forth here are inconclusive, we might very well end up with fraud issues or in an opposite case, very limited issues with Serba's accounts and life goes back to normal. 

As for what is the truth? I am looking to follow the money, after all if tens and hundreds of millions get poured into Serba stock by majority shareholder in the coming days/ weeks, I would rather follow those with skin in the game rather than textbook munchers or keyboard warriors.

Good luck retards.


Summary

Key Positive Catalyst:
-Acceptance of appointment by new audit firm

-Massive insider buying

-Clearing of Dato Karim's name from special audit, even if there turns out to be minor embezzlement not involving senior management this would be positive catalyst for the stock.

Key Risk:
- new auditor BDO rejecting appointment
- Independent director / key management personnel resigning
- Continued selling by institutional investors (assuming they have not cleared their bulk already in the RM1.5bn value traded on Tuesday, that's a bit slow guys....just do market, don't do TWAP anymore, just kidding insti gor gor jiejie please have mercy on us retards.)
- more negative newsflow and rumours