Singaporean Accounting at Its Best

As I have written about the discrepancy between inflows into Singaporean public assets, reported earnings, and then the amount they claim as assets under management, the question of how to reconcile these divergent numbers arises.  There are numerous reasons for the difference between earnings, inflows, and assets under management but a recent case exemplifies the difference perfectly.

Singapore Airlines recently sold its 49% stake in Virgin Atlantic to Delta Airlines.  A summary article of the deal from Bloomberg News reports the following:

Delta will buy the 49 percent shareholding for $360 million, according to a stock exchange filling late yesterday. Singapore Air will book an S$322 million ($264 million) gain from the sale, after accounting for a writedown in its investment in the U.K. carrier controlled by billionaire Richard Branson…Singapore Air bought the stake for S$1.65 billion, Germaine Shen, a spokeswoman, said by e-mail.”

To summarize the article: Singapore Airlines buys its 49% stake in Virgin Atlantic for $1.65 billion SGD, sells it for $360 million, and books a profit of $322 million SGD.  Only through extremely shady accounting can a company buy an asset for $1.65 billion and sell it for a $1.3 billion less but record a $322 million profit.  Let’s explain how this is possible.

Because Virgin Atlantic is a private company, its shares are not publicly traded on an exchange and provide no public record to value the stake.  Singapore Airlines therefore, marked the value of its Virgin Atlantic holding on its balance sheet based upon what it believed it could sell the shares for on the open market.  So in the most technical of ways, Singapore Airlines is completely within its accounting rights to book a profit on this transaction.

However, a closer look reveals some very disturbing trends and patterns.  First, to book a profit of $322 million SGD on a sale of $360 million, Singapore Airline implicitly valued the Virgin Atlantic stake at $38 million SGD.  This means that Singapore Airlines was valuing its Virgin stake at 98% less than what is paid for it.  Booking “profits” like this eventually cause a firm to go bankrupt.

Second, as has been pointed out by Muddy Waters Research in the Olam fight, recording large amounts of “accounting” profits and cash losses should cause real concern for investors.  If “accounting” profits are growing fast or are a large portion of total profits, this should raise a red flag to investors.  As I have noted previously about Singapore, Inc. public balance sheet, given the rapid growth in “unlisted assets” this should cause everyone some real concern.  In the absence of “unlisted asset” growth, Singapore, Inc. returns are abysmal.  This is the hallmark of a company trying to stay afloat not a prosperous company enjoying strong returns.

Third, this further harms the reputation of Singapore companies and their overseas adventures.  At the same time that Singapore Air was buying a part of Virgin Atlantic, it was buying a part of Air New Zealand which it eventually wrote down to near zero.  Given the range of international investments  which have lost money, it should concern investors and citizens that the only place Singapore seems to be able to make money, is in Singapore.

Fourth, the baseline price used by Singapore Air is extremely suspect.  The $38 million SGD baseline for 49% of Virgin Atlantic used by Singapore is for an airline with $5.4 billion SGD in revenue and a $158 million SGD operating loss in 2012.  Valuing the 49% stake of a $5.4 billion SGD at $38 million after a difficult year appears designed to provide the basis for an accounting profit.  In other words, Singapore Air has every incentive to undervalue its Virgin Atlantic stake to record a “profit” rather than accurately valuing the company.

This continued pattern of suspect accounting and returns at Temasek linked companies should provide serious cause for concern to investor and citizens alike.  With “profits” like that, companies eventually go out of business.

Olam, Temasek, and Singapore

For some time, I have been writing about the financial and accounting inconsistencies in Temasek Holdings, GIC, and the public records of Singapore.  Even the International Monetary Fund is confused enough to re-state and then re-re-state the accumulated government surplus of Singapore.

To briefly recap the questionable finances of Singapore, with $364 billion SGD in public debt and $266 billion in accumulated surpluses, all supposedly invested, totaling $630 billion SGD in public assets.  Temasek and GIC claim to have earned 17% and 7% annually since 1974 and 1981 respectively.  However, the Singapore government only lists assets totaling a little more than $705 billion SGD on its balance sheet.  In other words, it cannot mathematically 1) take in $630 billion SGD since 1974 2) claim to earn 17% and 7% in Temasek and GIC and 3) only have a little more than $700 billion SGD.  Even after accounting for interest and currency costs, that is some truly magic accounting.

One question I am frequently asked is whether I think there is the potential for are other financial problems in Singapore Inc.  I always respond that given what we already know about the misleading financial reported by Temasek, GIC, and the government of Singapore, it does not stretch credibility to think that companies underneath this umbrella are presenting misleading financial statements.

Recently others have begun looking into Temasek related companies and have been disturbed by what they found.  In a scathing report by the research firm Muddy Waters, Olam International is the first Temasek linked firm to come under the microscope.  In a report that can only be termed blistering in its frankness about Olam financials, Muddy Waters writes among other things:

  1. A major and increasing portion of Olam profits are coming from non-cash accounting gains.  In other words, Olam is making profits by revaluating existing assets.
  2. Muddy Waters cannot account for nearly $1 billion SGD of Olam investment funds.
  3. The history of Olam accounting is incompetent at best and fraudulent at worst.
  4. Trading volumes are increasing but cash is being burned at a faster rate.  In other words, volumes are going up and money being lost is going up.
  5. Cash on hand is deceiving because nearly two thirds of that amount comes from margin accounts of brokerages.
  6. Olam runs an “asset” heavy business but if the assets do not cash flow adequately, which they do not appear to be, this rapidly increases the possibility of default.

If all of this sounds a little to familiar, it should.  As I have pointed out previously:

  1. One of the biggest sources of increases on the Singaporean balance sheet in recent history has been “non-listed” assets.  In other words, assets with Singapore may just revalue for accounting purposes to claim returns that do not actually exist.
  2. Temasek, GIC, and Singapore cannot account for a large amount of funds that should exist.
  3. The history of Singaporean, Temasek, and GIC accounting is incompetent at best and fraudulent at worst.
  4. The Singapore defense that debt is backed by assets only works if the assets are cash flowing enough to cover principal and interest.

As of yesterday, Temasek and DBS (another Temasek company) were providing a near blanket bail out to Olam in the form of additional debt financing with other equity benefits.

There are a couple of interesting points in closing that are worth noting.  First, Muddy Waters has an excellent track record of spotting companies engaged in large frauds.  They identified a large number of fraudulent Chinese firms that had been listed on North American stock markets that has since resulted in the collapse of many firms, criminal charges, and diplomatic problems between the US and China over accounting and auditing standards.  Muddy Waters research and accusations should not be taken lightly.

Second, despite the Temasek led bail out of Olam, as Muddy Waters points out, neither party has even attempted to refute their charges.  Just as Singapore has not addressed my charges about missing funds and financial deception, this should concern investors and Singaporeans.  Third, Olam has sued Muddy Waters in Singapore, which they will undoubtedly win and no one will take seriously.

In closing, there is a clear pattern of misleading financial statements and ambiguity through Temasek and its linked companies.

Disclaimer:  I have no connection to Muddy Waters or any other financial research firm of financial institution.  I have not previously nor do I now advise any firm on these issues.

Disclaimer:  This is not and should not be construed as investment advice in anyway.