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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » Touchwood Case Review

Touchwood Case Review

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seyon


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Unofficial information that the expected Touchwood case against Sri Lanka Accounting and Auditing Standards Monitoring Board(SLAASMB) next hearing will be on 26th May 2011. Yes everyone looking the favorable outcome. Today, there are rumors that outcome will be favorable to the company and some brokers recommend to buy at current price. I could see some collection (about 820,000 shares) was made @ 23.60 levels.

I just did some research on the Touchwood Case. It looks like decision will be favorable to company. (This is not a promotion, just merely to getting your views. To be honest I do not have TWOD shares at the moment.)

We all know about the case related to the valuation of biological assets. I extracted some facts from SLAASMB website of case information to start from beginning.

The Sri Lanka Accounting and Auditing Standards Monitoring Board has determined that the estimates of fair value of biological assets used by Touchwood Investments Limited in its financial statements for the years ended 31 March 2005 and 31 March 2006 are clearly unreliable. The Company has also not been able to provide the Board with any other estimates which are reliable. Further, the method of valuation used for the year ended 31 March 2005 was not in accordance with International Accounting Standard, IAS 41 Agriculture, which the company has purportedly adopted.

As the company has purportedly adopted International Accounting Standard, IAS 41 Agriculture, the Board has concluded that the biological assets should have been valued at a value which approximates cost in accordance with paragraph 24 (b) of IAS 41 or at cost less accumulated impairment in accordance with paragraph 30 of IAS 41. Based on such valuation the company would not show a net profit for the relevant financial periods.

As the impact on the financial statements is substantial the Board has decided to refer the non-compliance to the Attorney General. The Board has also decided to investigate the compliance with auditing standards by the auditors in relation to the audit of the financial statements of the Company.

Based on the above information I can see in the absence of Sri Lanka Accounting Standards, company uses International Accounting Standards 41, Agriculture for the valuation of biological assets. But SLAASMB argument is that estimates of fair value of the biological assets in not accordance with IAS 41 and the financial statements are unreliable.

Further I have received BASL News Letter (Bar Association) of December 2010, there talked about some legal judgment (I attached the newsletter in our research forum http://research.srilankaequity.com/t96-touchwood-case-basl-bar-association-news-letter-judgement-views , refer page 4 for the Touchwood case). There they briefed about the case and given their views. Based on that, Board had not statutory power to challenge the valuation of the Petitioner on non compliance with IAS 41.

Further company received the Certificate of Compliance by the Institute of Chartered Accountants of Sri Lanka for the Annual Report Awards 2010. This certificates covers the CSR, Financial, Presentation and Compliance. Therefore, this reveals that the company practice in valuing biological assets in accordance with IAS 41 as the certificated awarded by ICASL which is the statutory for setting the Accounting Standards

Followings extract from Touchwood website

Certificate Of Compliance

January 24th 2011

We are proud to announce that our Sri Lankan office, Touchwood Investments PLC has been awarded the “CERTIFICATE OF COMPLIANCE” by the Institute of Chartered Accountants of Sri Lanka for the Annual Report Awards 2010 - at the ceremony held on 7th December 2010.

This award is granted by the Inst. of Chartered Accountants of Sri Lanka every year. They evaluate and grant awards in key areas such as - CSR, Financials, presentation, compliance, etc.

This certificate emphasizes that all requirements are being met in order for us to achieve our goals and serve our investors with industry leading standards.

For the year to come Touchwood Investments PLC has its goals set on the CSR awards to be handed out in the 2011 ceremony.

Thank you to all our accounting and administration staff who made the award possible.

http://www.touchwood.com/news/certificate-compliance

So Guys, Based on the above information and facts, to me the decision would be favorable to company. How do you all look into that..

Pls Share ur thoughts and views

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Post Tue Jul 05, 2011 8:46 pm by Rajaraam

I tyried to copy some data with regard to today Touchwood share transaction. But not successful. Anyway today over 1.1 mn shares were traded up to 27.40 level. This indicates buying preasure and tommorow price would hit 30.00 I believe.

Post Tue Jul 05, 2011 9:06 pm by smallville

I witnessed some buying pressure building up for last 4 days.. may be that pushed the price up..However with these talks of TWOD winning the case and stuff it can go pass 30.. regardless of the fact whether TWOD win it or not there are enuf parties to buy this above 30 even Wink
I must say technically its on the good side but this is not a buy recommendation..

Post Tue Jul 05, 2011 11:27 pm by seyon

@smallville wrote:I witnessed some buying pressure building up for last 4 days.. may be that pushed the price up..However with these talks of TWOD winning the case and stuff it can go pass 30.. regardless of the fact whether TWOD win it or not there are enuf parties to buy this above 30 even Wink
I must say technically its on the good side but this is not a buy recommendation..


Yes, absolutely u are right. buying pressure is slowly building up for the run. I am very much sure that before the court case the price will be shoot up with rumor that out come would be favorable, So , if we want, we can exit from reasonable profit in the first run ( before the court case) or other option to wait till outcome is released. I plan to be in both run ( in-case outcome is going to be favorable)

Pls update ur tech analysis of TWOD.

Post Wed Jul 06, 2011 12:09 am by m2_yapa

i am planing to exit at 32 level on 7th may be.

Marketinvest

Post Wed Jul 06, 2011 12:15 am by Marketinvest

My target is set at 35 but if buying pressure falls will exit before that

Marketinvest

Post Wed Jul 06, 2011 12:19 am by Marketinvest

Is their any possibility the hearing to be postponed again and if so is their way we get to know it before hand

avatar

Post Wed Jul 06, 2011 8:35 am by seyon

@smallville wrote:I witnessed some buying pressure building up for last 4 days.. may be that pushed the price up..However with these talks of TWOD winning the case and stuff it can go pass 30.. regardless of the fact whether TWOD win it or not there are enuf parties to buy this above 30 even Wink
I must say technically its on the good side but this is not a buy recommendation..

Small

Can u upload the tech chart of TWOD with ur comments, this must be great useful for these days.

Thanks

mono

Post Wed Jul 06, 2011 12:24 pm by mono

i expect this to be a cash cow, provided the win the court case. IF TWOD wins the case this will go to 70+

lbnnirmal

Post Thu Jul 07, 2011 8:24 pm by lbnnirmal

@mono wrote:i expect this to be a cash cow, provided the win the court case. IF TWOD wins the case this will go to 70+
How could u tell like this ??? Wt r d evidence 2 tell like dat??

mono

Post Thu Jul 07, 2011 8:57 pm by mono

@lbnnirmal wrote:
@mono wrote:i expect this to be a cash cow, provided the win the court case. IF TWOD wins the case this will go to 70+
How could u tell like this ??? Wt r d evidence 2 tell like dat??

EPS 7+, NAVPS 40+.

lbnnirmal

Post Fri Jul 08, 2011 4:40 am by lbnnirmal

@mono wrote:
@lbnnirmal wrote:
@mono wrote:i expect this to be a cash cow, provided the win the court case. IF TWOD wins the case this will go to 70+
How could u tell like this ??? Wt r d evidence 2 tell like dat??

EPS 7+, NAVPS 40+.

Yea technically it should be but with the currant market condition will it happens in near future ???? Question

smallville

Post Fri Jul 08, 2011 6:42 am by smallville

@lbnnirmal wrote:
@mono wrote:
@lbnnirmal wrote:
@mono wrote:i expect this to be a cash cow, provided the win the court case. IF TWOD wins the case this will go to 70+
How could u tell like this ??? Wt r d evidence 2 tell like dat??

EPS 7+, NAVPS 40+.

Yea technically it should be but with the currant market condition will it happens in near future ???? Question

What mono says is possible if the court order is in favour of the TWOD.. As per the hear-says and the forum update we saw from Seyon of the BASL news letter, this is positive..TWOD can turned out to be a cash cow if so..

However one must realise allocating funds to grab TWOD at this point is riskier too as we depend on a court case and not the fundamentals.. Again this is like delaing with biological assets.. We expect Trees and lands to do the wonder here... So if some undesireable effect is seen on these trees, those can be proven a greater risk too..
On the other side current share price is half of the discount to the NAV as well..
Given the fact of risk, I'd say half of that NAV is fair for the counter ..
So if both NAV & sahre price are in same range, this is expected to go more passing its NAV price Wink

mono

Post Fri Jul 08, 2011 9:26 am by mono

in any case we don't even know if the case will be decided on the 18th. It just a hearing.

avatar

Post Fri Jul 08, 2011 9:43 am by duke

I think somebody pointed out this before. The assets / trees don't belong to the company, right? Buffer stock would be just a small insurance of sort.
It's like that NAMAL fund. The TWOD company is only the 'garden keeper' but the trees or the estates don't belong to the 'garden keeper'. The garden keeper only waters and maintains the garden and he gets a salary for that. He doesn't own the garden.
If there is a real profit then it goes to the customers of the TWOD not the shareholders. The shareholders only get the 'garden keeper's salary.

avatar

Post Fri Jul 08, 2011 9:51 am by LoveMoney

@Duke, I don't think so, because you don't own the trees; you get your share of the plantation, and the future value has been already decided for the trees, whenever you want to get the profit of your investment with the TWOD as a customer, you can only get the promised value per tree, that value can be a percentage of the real value; lets say after 10, 15, 20 years from now on. So the rest of that tree's profit goes to the company, so TWOD is much more than "garden keeper". Correct me if I'm wrong

mono

Post Fri Jul 08, 2011 9:52 am by mono

@duke wrote:I think somebody pointed out this before. The assets / trees don't belong to the company, right? Buffer stock would be just a small insurance of sort.
It's like that NAMAL fund. The TWOD company is only the 'garden keeper' but the trees or the estates don't belong to the 'garden keeper'. The garden keeper only waters and maintains the garden and he gets a salary for that. He doesn't own the garden.
If there is a real profit then it goes to the customers of the TWOD not the shareholders. The shareholders only get the 'garden keeper's salary.

no, my parents have a small plot from TWOD. All they got was shares.

avatar

Post Fri Jul 08, 2011 9:54 am by LoveMoney

@mono, can you tell us how much did your parent pay for a tree and how much they are going to get for a tree? and how long they have to wait?

mono

Post Fri Jul 08, 2011 9:59 am by mono

@LoveMoney wrote:@mono, can you tell us how much did your parent pay for a tree and how much they are going to get for a tree? and how long they have to wait?

I get back to you on that.

avatar

Post Fri Jul 08, 2011 10:02 am by duke

@mono wrote:
no, my parents have a small plot from TWOD. All they got was shares.

I'm a bit confused. That doesn't sound right. So if customers invested on trees, they were given company shares? That sounds like TFC converting fixed deposits to company shares recently?

avatar

Post Fri Jul 08, 2011 10:05 am by LoveMoney

@Duke, no. I think the customers get a share of the profit according to the period of time the customer want to hold the investment, other than that customer doesn't own the trees or he can't go and cut it Very Happy. Customer only can visit the plot and nurture the trees, if he or she feels like.

mono

Post Fri Jul 08, 2011 10:08 am by mono

@LoveMoney wrote:@Duke, no. I think the customers get a share of the profit according to the period of time the customer want to hold the investment, other than that customer doesn't own the trees or he can't go and cut it Very Happy. Customer only can visit the plot and nurture the trees, if he or she feels like.

They also guaranteed a return. I can't remember the details. My father was very suspicious about the whole thing so he invest only a small amount. I'll see if i can dig through our files to find out what the exact numbers are

Chinwi

Post Fri Jul 08, 2011 10:09 am by Chinwi

In the case of TWOD, it was always a gem for the shareholders who bought it at correct times.
In early days shareholders earned lot of money by getting bonus shares; I think many times.
Tree owners who are the real source of yearly cash flow have to wait years to get a return.
( vanilla investors already get income)

If you take the value of a tree promised to the owners, they (the Directors) were smart enough to make it only a part of the future selling value.

Hence, IF the business become a success in the future , when those trees are matured enough to cut and sell to get the real inflow, the shareholders are to get more benefits.



mono

Post Fri Jul 08, 2011 10:12 am by mono

@Chinwi wrote:In the case of TWOD, it was always a gem for the shareholders who bought it at correct times.
In early days shareholders earned lot of money by getting bonus shares; I think many times.
Tree owners who are the real source of yearly cash flow have to wait years to get a return.
( vanilla investors already get income)

If you take the value of a tree promised to the owners, they (the Directors) were smart enough to make it only a part of the future selling value.

Hence, IF the business become a success in the future , when those trees are matured enough to cut and sell to get the real inflow, the shareholders are to get more benefits.




Chinwi i think tree owners also got some shares on top of a guaranteed return after maturity. Not sure though. In anycase TWOD is getting way more than a simple management fee

Marketinvest

Post Fri Jul 08, 2011 9:04 pm by Marketinvest

Do we have any update on twod

avatar

Post Fri Jul 08, 2011 9:37 pm by seyon

Hi Small

Please Can u update ur tech charts and ur views. This would be the great helpful

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