Kudos To Koda For A Great Annual Report


Foreword from ShareInvestor

This article “Kudos To Koda For a Great Annual Report” by R Sivanithy was first published in The Business Times on 09 Feb 2004 and is reproduced in this blog in its entirety.

Annual reports are usually a boring read. The first half is usually devoted to telling the reader how great the company is via the chairman’s statement and other public relations information; the second is typically chock-full of financial data, fine print and footnotes that few shareholders bother to wade through.

So when we come across an annual report that’s well put together, informative, easy to read, free from clutter and innovative in its disclosures, we think it’s well worth highlighting.

Making it all the more refreshing is that it doesn’t come from a big blue-chip company – showing that you don’t have to have a generous budget in order to practise good disclosure.

The company we’re talking about is Sesdaq’s Koda Ltd, a maker of furniture with operations in Malaysia and Vietnam. Unlike most others, its 2003 annual report contains no fancy graphics, only a bare minimum of colour photos and bears an unremarkable plain grey front.

But substance is always greater than form and Koda’s management clearly aims to put this maxim into practice. For instance, how many companies provide e-mail addresses of its senior management in their annual reports and invite shareholders to provide feedback to those managers? A random sample of 20 annual reports found none which adopts this shareholder-friendly approach. Truth be told, most senior managers prefer to actively avoid having to answer questions from shareholders – especially when profits are down or results are less than satisfactory.

Yet in Koda’s case, even though net profit fell 37 per cent for the year ended June 2003 to $2.3 million, non-executive chairman Koh Teng Kwee and managing director James Koh’s e-mail contacts are prominently displayed for shareholder communication.

Of course, making senior management accessible to the public might lose some effectiveness if the rest of the disclosures are found lacking; but they aren’t. Perhaps the most striking feature of Koda’s 2003 annual report is the easy-to-read yet informative ‘Results at a glance’ pages that precede the chairman’s statement.

To the best of our knowledge, no other listed company adopts this reporting format, where the profit-and-loss statement and balance sheet for the latest two years are placed side-by-side and reasons given on the same pages for changes in every item.

For example, next to the gross profit drop of 6.6 per cent, Koda reports that this was ‘due to 1) higher research costs for development of the North American market and 2) initial technical hiccups and a steep learning curve for Vietnam operations’. It added: ‘Gross profit margin remained a healthy 26.3 per cent.’

Koda also gives details of why its net profit suffered a drop, with similar disclosures accompanying almost all items in its balance sheet.

Even with a cursory reading of these two pages, shareholders with even the most rudimentary understanding of accounting would have been able to understand the important developments during the company’s latest reporting period.

Contrast this to the much more complicated and confusing practice used by most other companies where footnotes are employed to explain changes to each item in the financial statements.

Confronted by scores of footnotes – which sometimes hide material information – and daunted by having to flip pages back and forth, most shareholders usually don’t bother to read the annual report thoroughly and therefore fail to gain a decent grasp of the company’s financials.

Another noteworthy Koda practice is the expressing of meaningful information in per dollar terms. For example, managing director James Koh states that although borrowings have increased, the financial health of the company remains good. ‘You may wish to note that every dollar borrowed was backed by $2.42 of total assets and $1.01 of shareholders’ funds,’ writes Mr Koh.

Unfortunately for Koda, the local market doesn’t really reward such openness and innovation. Koda is covered by only a handful of brokerages – among them Kim Eng Securities and DMG – and despite ‘buy’ recommendations and estimates that at 27 cents the counter sells for a single-digit forward price-earnings multiple, its shares have languished for months.

One view is that the company has been too open in its pursuit of transparency so that, when it comes to the stock market, punters only pay lip service to the need for companies to be open and honest in their disclosures – when, in reality, they want the playing field to be uneven so as to be able to gain an advantage over others, unfair or otherwise.

If this is true, it’s a shame, since Koda’s reporting format is worthy of study – and emulation – by others looking to improve their own disclosure practices. In the meantime, are Koda’s shares a good buy? The best advice we can offer is this: read the annual report to find out.