FGE - Forge Group

ROE said:

5k down the drain, you can't get out its a legal contract they will go after you for it ...
What happen to FGE got nothing to do with comsec, they are a regulated brokers and they must pay the other side of the trade, they will go after you for the money if you don't pay up

Write off the 5k you don't want to be mark down as not honouring your trade, it will cost you FAR more than 5k going forward

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+1

Unless you plan to leave Australia forever or live using a barter system for the rest of your life

300k on FGE cfd........just wow.

Probably kill himself soon, poor guy.

ROE said:

Some dude leverage 300k using CFDs on hotcopper
Telling the family going to be the hard part I reckon

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Poor guy. Hope he hasn't lost the roof over his head in the process.

TheUnknown said:

300k on FGE cfd........just wow.

Probably kill himself soon, poor guy.

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Probably shouldn't say things like that...

If you hold $300k CFD position with IG you will be using tiered margin.

0-25k shares = 25%
25k-50k shares = 30%
50k-75k shares = 60%
75k shares and above 75%

So if those $300k CFD averaged @ $1 per share, total margin is ~$200k.

So hopefully it means that it is a hefty but not life threatening loss. It fact, nothing should be a life threatening loss...

Buying just before it collapsed - it's a legal contract as others have said and the broker is merely facilitating the trade. There's likely to be no legal option other than handing your money to the broker.

The broker hasn't done anything wrong, they're just providing (in return for the brokerage fee) a facility for you to buy and sell shares with and it's up to you how you use it.

Same principle as, say, an airline is just providing a means for you to get from A to B. As long as they get you there as promised, it's not their fault if the hotel you booked is crap and it rains the whole time you're on holiday. The airline did their part and got you from A to B and you have to pay for the flights.

As for the collapse, something I've learned over the years is that most collapses follow the same basic pattern.

1. The underlying business has problems and is seriously exposed should a "trigger event" arise.

2. As time progresses and the company's finances worsen, the size of the trigger required to bring about the collapse gets progressively smaller. At one point it might have taken a major problem to do it, but if that doesn't happen and the situation progresses then eventually you get to the point where something truly trivial is enough to tip the company over the edge. Eventually, something happens and then it all falls in a heap very quickly.

3. The majority of people don't see it coming until it's too late.

4. A small number of people see it coming well in advance and will usually have taken the appropriate actions to protect themselves.

From the perspective of an individual investor, it really comes down to being alert for warning signs and "joining the dots" yourself. Nobody's going to announce that the company is going broke until it's too late, but if the alarm bells are ringing then it's wise to act accordingly.

As for the person who bought $300K of shares, I hope they can afford to lose that sort of money otherwise they've got a rather big problem.

galumay said:

I would be interested to hear other's opinions - even with the benefit of hindsight!

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The most obvious things to me (after learning a fair bit from what others more experienced than me have encountered with similar collapses):

a) Cyclical earnings that are exposed to violent mean reversion at the margin level at a moment's notice. At the lower parts of the cycle there are much fewer really profitable jobs (aka big projects) and too many companies fighting over them for the industry to be highly profitable in the long term.

b) the business model of engineering / construction companies that build projects on a fixed contract basis is fraught with hidden dangers as we saw with FGE. McLovin said it in this thread; they're highly leveraged to their order books with a very slim margin for error. Pricing risk on long-term contracts, when combined with mean reversion in margins and increased competition can spell doom for smaller to medium sized companies who aren't capitalised enough to take the heavy hits when they get it wrong. If you're completing a $500m project and you mis-price it by 10% that's $50m in costs that you suddenly have to come up with. It's not that uncommon for this to happen when everyone is fighting over the scraps of the boom and low ball offers get put in so that projects can be won.

c) cash flow issues - related to the above. big projects require up-front working capital, you spend a lot of money at the start of a project to get it underway and then have to wait for progress to be made before the real fruits can start to be seen. Often you get to the end and only then realise that you're way over-budget and have a big problem. The perfect storm happens when you need working capital to start a massive job and you realise at the same time that you've overrun costs on another big job you're due to finish.

d) despite what most people seem to say in the good times, I don't think these companies are truly scalable. No matter how big they get the fixed costs and asset requirements always seem to increase with the growth in revenue. It's like an albatross around their necks. It can choke you at any minute. This makes organic growth pretty hard to sustain, especially when recurring revenue streams are few and far between.


Poor Earnings visibility + undercapitalisation / default risk = too hard for me

Ves said:

Poor Earnings visibility + undercapitalisation / default risk = too hard for me

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Agree with this all but the cold hard fact is this... FGE management completely took their eyes off the problem projects. They've taken over the power projects for over 2 years. Had they reviewed them earlier they may have been able to reduce the size of the loss, put in better management team, and strengthen their balance sheet by raising equities when the share price was +$4-5. There were a hundred ways to control and manage the situation and they did nothing. Instead they went on empire building which conveniently also increased their bonus cheques.

All other factors about nature of the contracting cyclical businesses are risks, but they should not be terminal to a well managed company.

skc said:

Agree with this all but the cold hard fact is this... FGE management completely took their eyes off the problem projects. They've taken over the power projects for over 2 years. Had they reviewed them earlier they may have been able to reduce the size of the loss, put in better management team, and strengthen their balance sheet by raising equities when the share price was +$4-5. There were a hundred ways to control and manage the situation and they did nothing. Instead they went on empire building which conveniently also increased their bonus cheques.

All other factors about nature of the contracting cyclical businesses are risks, but they should not be terminal to a well managed company.

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Poor management + tricky business model more often than not ends in tears. Agree it was poorly managed, and it wouldn't surprise me if there were further problems that we'll never find out about now that the receivers are running the show.

There's something in Buffett's quote:

"Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it."

My personal view is that engineering and construction service firms don't fit this description. How many of the bigger companies still on the ASX have had poor project management issues? I'm thinking LEI, UGL, WOR, BLY etc I would have thought most of them have had material project problems. Whilst share holder value gets destroyed, for the purposes of their on-going survival it is lucky that they are well capitalised and have access to the lending markets to fill in the bullet holes.

This could make a very interesting case study for business and management students, in terms of what went wrong.

It is a timely reminder, when investing in a company, one should not only look at the potential upside, but assess the probability of loss of capital.

nem23 said:

This could make a very interesting case study for business and management students, in terms of what went wrong.

It is a timely reminder, when investing in a company, one should not only look at the potential upside, but assess the probability of loss of capital.

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This is no different from dozen of other collapse that came before it ... ABC learning...Centro....MFS
they all have similar themes...

Getting delisted at 91c, a lot of people didn't see that coming! interesting to note that only 1 non-executive director held 5k shares, pocket change really, in other words the entire board didn't have any skin in the pot, not very aligned with shareholders if you ask me, usually the CEO and chairman will hold a decent chunk, so the culture here was high-risk for bonus checks, guarantee you they're already shopping around for their next gig, let somebody else eat the share price. Shareholders have taken a bit of a haircut however let's not forget the 1,300 employees and their families which are the real victims here...management should be held accountable, but we all know that's a pie in the sky ideology.

The cost of FGE stock 1 year ago = $6
The cost of reckless management = 1300 jobs and 80m in shareholders cash down the drain
The cost of management patting each other's back to their next gig = priceless

The same thing happened to me with KZL, i bought it with an algorithm signal. The NEXT day it went t*ts up... $5000 down the drain:flush:.

Next 1000 trades...

CanOz said:

The same thing happened to me with KZL, i bought it with an algorithm signal. The NEXT day it went t*ts up... $5000 down the drain:flush:.

Next 1000 trades...

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We'll... I think u are much smarter than me as I invested 2k in forge from Jan, which I think those money are gone into the sea now!! Sigh...

CanOz said:

The same thing happened to me with KZL, i bought it with an algorithm signal. The NEXT day it went t*ts up... $5000 down the drain:flush:.

Next 1000 trades...

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At least it's only $5k. You could easily end up with a pretty big position with a standard 2% rule.

Pairs Trader said:

Getting delisted at 91c, a lot of people didn't see that coming! interesting to note that only 1 non-executive director held 5k shares, pocket change really, in other words the entire board didn't have any skin in the pot, not very aligned with shareholders if you ask me, usually the CEO and chairman will hold a decent chunk, so the culture here was high-risk for bonus checks, guarantee you they're already shopping around for their next gig, let somebody else eat the share price. Shareholders have taken a bit of a haircut however let's not forget the 1,300 employees and their families which are the real victims here...management should be held accountable, but we all know that's a pie in the sky ideology.

The cost of FGE stock 1 year ago = $6
The cost of reckless management = 1300 jobs and 80m in shareholders cash down the drain
The cost of management patting each other's back to their next gig = priceless

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It is quite amazing, that at the finish, the board of FGE had only $4550 of skin in the game, when the company went belly up.

Perhaps an inventory of ASX listed companies on this metric might save punters some pain, in the future.

No wonder ANZ were uncomfortable.

gg

skc said:

Agree with this all but the cold hard fact is this... FGE management completely took their eyes off the problem projects. They've taken over the power projects for over 2 years. Had they reviewed them earlier they may have been able to reduce the size of the loss, put in better management team, and strengthen their balance sheet by raising equities when the share price was +$4-5. There were a hundred ways to control and manage the situation and they did nothing. Instead they went on empire building which conveniently also increased their bonus cheques.

All other factors about nature of the contracting cyclical businesses are risks, but they should not be terminal to a well managed company.

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But...

Isn't one of the problems with these companies that you don't know management has taken their eyes off the problem until the problem blows up, by which point it might be too late? The last accounts don't exactly paint a picture of a company teetering on the edge. So you have to use other things, like the business cycle, as the guide to when risk of implosion is rising.

McLovin said:

But...

Isn't one of the problems with these companies that you don't know management has taken their eyes off the problem until the problem blows up, by which point it might be too late? The last accounts don't exactly paint a picture of a company teetering on the edge. So you have to use other things, like the business cycle, as the guide to when risk of implosion is rising.

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You are partially right.

Thou even when the business cycle is booming these companies are coming undone on these projects.

I wont mention the big engineering company that was manipulating every month end until it finally caught up with them and they lost a huge amount of money.

I have worked as in independent contractor for a number of engineering companies and been actively involved in setting up their projects in SAP and interfaces and managing cost reports month end etc

The basic problem is that the people who win these contracts really don't have the expertise to manage them and the line between profit and loss is very thin and the losses can quickly mount up.

I was always envious of FGE because they seemed to be doing better than all the ones I worked for and I invested quite a lot of money in them. Fortunately I sold most of my stock when it hit mid 6 ers. I almost didn't and I did keep a few thousand which ended up me losing around 10k on my last sell out of FGE. In the future I wont ever allocate so much capital to these sort of companies and will only deal on a very short term basis.

Ironic in a way that the two stocks Montgomery pumped primed the most for a long time MCE and FGE has some of the most spectacular collapses of any stocks on the ASX> Really makes a mockery of his long term investing strategy and value investing model. Anyone listening to him has rocks in their head. He should come with a warning whenever he speaks.

Interesting to look at the chart, it would have been a nice short

With the benefit of hindsight...

I guess if one would have been long, they would have been asking some serious questions after the GAP down...However, most technical traders likely would have been stopped out of a long or stopped into a short at the break of the TL...

ROE said:

4 weeks is a long time in trading halt when they came back so a lot must have happened and lot of dealing and wheeling going on and no one know what it is

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http://www.afr.com/p/business/companies/acquisitions_integration_and_the_zDSKCbjUC4Wn9ussrUs4sJ

Lesson learned, when something in trading halt for that long, look for exit when it resume

Garpal Gumnut said:

It is quite amazing, that at the finish, the board of FGE had only $4550 of skin in the game, when the company went belly up.

Perhaps an inventory of ASX listed companies on this metric might save punters some pain, in the future.

No wonder ANZ were uncomfortable.

gg

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Not only did the Forge board not have any skin in the company, it's executives failed in management. It appears they also had their nose trailing in the trough of entitlement until the final days.

From the Australian.

http://www.theaustralian.com.au/bus...plurged-on-execs/story-e6frg9df-1226827684754

Sinking Forge splurged on executives

ON a Friday night last December -- just weeks after revealing problems that would ultimately prove the company's downfall -- contractor Forge Group threw a lavish Christmas party for its staff.

Forge had booked out the State Reception Centre at Frasers Restaurant in Kings Park, a blue chip venue in Perth thanks to its spectacular views of the Perth skyline.

According to a number of the 400 guests who attended the night, the Middle East-themed event was just one of several puzzling expenditures carried out in the group's final months.

Former company insiders estimate the cost of the party was in the tens of thousands, a large amount at a time when the company was on its knees and supposed to be working to cut costs.

The spending did not end there.

Between Forge disclosing issues at two of its power station contracts in November and its collapse last Tuesday, the company relocated its executive team from Perth to Sydney.

The exercise, according to those with knowledge of the situation, cost hundreds of thousands of dollars. Included in the relocation expenses, according to sources, was a 12-month lease paid upfront for an apartment for one of the executives.

Another executive was said to have been reimbursed a substantial five-figure sum for the stamp duty he paid on his new house in Sydney as part of his relocation package.

And the relocation of Forge executives back to Sydney came just over a year after Mr Simpson and a group of hand-picked executives were relocated from Sydney to Perth at considerable expense.

The relocation came despite the group opening its new office in West Perth in mid-2013 after an extensive fit-out complete with a huge chief executive's office and costly video-conferencing systems.

And despite Forge's ultimately fatal financial issues becoming more and more apparent, Forge insiders say the company's executives never lost their appetite for high-end travel.

Forge executives continued to enjoy business class and first class travel in the company's last months, despite public assurances from managing director David Simpson that the company was committed to carving millions of dollars out of its cost base.

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Perhaps the Royal Commission may be extended in to an investigation of governance of Boards, and Executives of failed companies, and civil and criminal charges be laid, if necessary.

gg