QuinmonSince the latest CMI profit forecast announcement that...

Quinmon

Since the latest CMI profit forecast announcement that you referred to was quite brief I have reproduced it here:


Profit Guidance

CMI Limited today issues profit guidance to the market for the year ending June 30th 2010.

The Company considers the receivable from CMI Industrial Pty Ltd carried on the books at $16.5m is impaired to the extent of $8 million leaving a carrying value of $8.5 million. This impairment decision is based on a review of the general market conditions of the automobile sector in which the debtor operates and the likelihood of the receivable being paid in full at maturity.

The debtor remains obligated to pay monthly interest on the face value of the receivable of $17 million. The receivable matures on April 2011.

The Company forecasts, after this impairment, that it will make a profit after tax in the range of a break even result to $1 million in the year ended 30 June 2010. This result includes an insurance recovery relating to the TJM warehouse fire of $1 million after tax, which at this stage is only an estimate.

Due to the above impairment the directors have resolved not to declare a quarterly dividend to the holders of its Class A shares for the quarter ending 21st August 2010.

Yours faithfully

Company Secretary
Sharon Williams


I did a search of the Australian Accounting Standards website and came up with the following paragraph (paragraph 59) in Standard AASB 139 which applies to financial transactions and I believe that our listed companies are bound to act in accordance with it:

"A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset that can be reliably estimated losses expected as a result of future events, no matter how likely, are not recognised..."

It appears clear that a company such as CMI cannot take an impairment loss on an asset which is not due for payment at the time.

It is a good time to have a look back at what was said in regard to security for the vendor loan at the time CMI shareholders approved it. Besides a second ranked fixed and floating charge on CMI Limited, we were advised of the following:

If CMI Industrial (the Hofmeister controlled buyer of the car parts business) does not repay certain minimum amounts of the loan ensuring CMI is released from certain obligations in relation to leases, creditors and employees of the business within the prescribed period or otherwise does not comply with the transaction documents, CMI Ltd will have the right to acquire up to 45% of the shares in Transport, Water and Holdings Pty Limited (the parent company of CMI Industrial) by converting up to $4.5 million of the amount outstanding under the loan.

The Independent Expert who valued the transaction had this to say:

"CMI has taken security over the assets, knows the assets well and is confident as to the value of that security."

Never mind whether Hofmeister's company can repay this loan or not, the ordinary CMI shareholders voted in favour of this transaction because this Board and this expert gave assurances that the vendor loan was very well secured. Yet now, CMI has indicated a write down in the value of that loan by half without any explanation as to what has happened to their confidence in the value of that security.

The Independent Expert also said that Max Hofmeister had provided personal guarantees in the amount of $2.5 million.

I think there is a lot more to come regarding this vendor loan.

It is interesting that the directors have advised on the non-payment of the August dividend two months before they were due to comment on it. They have never done this before. It makes me wonder if they might not be too concerned to see the CMIPC share price weaken over the next few months. The first buyback meeting was set for November 7th in 2008 and the second one was held on 20 November 20 2009. So both buyback meetings were set to be held around the time of the AGM. Perhaps it is about to become an annual event. CMI put out a very negative report in May 2009 and followed that up with the announcement of the last buyback two months after that. This latest announcement has the same feel about it.

I do think that the Company will make another offer for the CMIPC class rather than reinstate the dividends. If they were to reinstate the dividends first, the share price of the CMIPC would go through the roof and CMI would have to pay a lot more to get rid of us. Imagine if Hofmeister pays the vendor finance back in April when it is due and he does risk losing a large portion of his parent company and his personal guarantee if he doesn't. CMI would be wallowing in cash and also have to add back the $8m impairment to the profit as well. I think that there is a good chance that a new offer will come before April 2011 when the Hofmeister loan is due and previous form suggests November. But regardless of whether that happens or not, I intend to stay the course until we get a fair result out of this company.

GPASAS