Hovid Wants To Save $400,000 By Losing 3.7 Million.

Caught this news clip the other day: Hovid sells Carotech shares to reduce loan

• HOVID Bhd said it has sold 80 million Carotech Bhd shares, or an 8.77 per cent stake, for RM5.6 million, to help reduce its loan owing to Affin Investment Bank Bhd.
  
  Last year, Hovid accepted a term-loan facility of RM20 million from Affin Investment to subscribe for new shares under a rights issue.
  
  The loan was secured by its entire 58.19 per cent stake in Carotech.
  
  The sale is expected to result in a loss of some RM3.7 million.

Hovid was actually queried by Bursa. (oO)

The following was the interesting reply made by Hovid.

With reference to Bursa Malaysia Securities Berhad ("Bursa Securities")'s query letter dated 1 September 2010 in relation to the Company’s announcement dated 27 August 2010 on the Disposal, the Company wishes to provide the following additional information:-

Query 1
Whether the disposal of shares is done on the open market of Bursa Securities. If not, to state the identity of the purchaser

Response
The shares were disposed in the open market of Bursa Securities.

Query 2
Average market price of Carotech’s shares disposed off

Response
The shares were disposed at an average market price of RM0.07 per share.

Query 3
Net interest saving per annum to your Group arising from repayment of the term loan

Response
The expected net interest saving per annum is RM400,000.

Query 4
Rational of Disposal, other than to reduce the loan owing to Affin Investment Bank Berhad as stated in your announcement, given that the Disposal will result in a loss of RM3.7 million

Response
There is no other reason other than to reduce the loan owing to Affin Investment Bank Berhad to mitigate the risk of Margin Call.

Query 5
Average original cost of investment by your Company in Carotech’s shares and date of such investment

Response
The shares were acquired over a period of time; the first was in November 2004 before Carotech’s IPO and the latest in December 2009 when Carotech issued the Rights Issue.

The average cost of investment is RM0.11 per share.

Query 6
To quantify the reduction in gearing of your Company

Response
The Company’s gearing ratio will be reduced from 0.55 to 0.51.

Query 7
The highest percentage ratio applicable to the Disposal pursuant to paragraph 10.02(g) of the Listing Requirements

Response
The highest percentage ratio applicable is 6.5% relating to Total Assets.

----------------------------------------------------

Ok, so it was expected that Hovid will lose money selling their Carotech shares and this sale resulted in a loss of 3.7 million for Hovid.

So the reason given by Hovid was 'to help reduce its loan owing to Affin Investment Bank Bhd. '

And now I have to give Bursa and its staff credit for Query No.3. ( Bravo! *clap hand*)

• Net interest saving per annum to your Group arising from repayment of the term loan

Hovid answer was:

• The expected net interest saving per annum is RM400,000

So what does this say to you?

What does this say to me?

Well... I might be wrong but Hovid is telling me that it wants to 'save' rm400,000 per year by losing 3.7 million.

How?

Smart move?

( Do see Oh Carotech: Using Debts To Grow A Business Is Not Sure Win!)

Read more...

And How About Hovid?

I realised that I did not blog on Hovid since I had blogged on Carotech on the 2nd July 2010: Oh Carotech: Using Debts To Grow A Business Is Not Sure Win!

On Saturday, 3rd July 2010, Star Business had the following article on Hovid: Hovid: Default no impact on unit

• Saturday July 3, 2010
  Hovid: Default no impact on unit
  
  PETALING JAYA: Hovid Bhd has clarified that the the default in some loans by 58.2% owned subsidiary Carotech Bhd has no impact on the company.
  
  “The default in loans by Carotech happened solely at Carotech and it has no legal implication on Hovid as Hovid has not provided any guarantee for the loans of Carotech. Additionally, Hovid does not have any financial obligation to Carotech,’’ it said in statement to Bursa Malaysia yesterday.
  
  Hovid and its other subsidiaries, excluding the Carotech Group, are not in default of any of their respective loan obligations.
  
  Although, Carotech is major subsidiary of the Hovid group of companies, the businesses of Hovid and Carotech are different.
  
  Shares in Hovid plunged 3.5 sen, or 17% to 17 sen yesterday, while Carotech tumbled 4.5 sen, or 33% to a record low of 9 sen.

Yes, I realised that I should have blogged on Hovid too because I do have some concerns in regards to those statements in bold rather incredible.

Here's the link to Hovid's last reported earnings notes: Hovid Bhd Q3 2010.pdf

Here's the simple logical reasoning why I would be concerned. If Carotech had defaulted on its loans, won't Carotech's business operations (ie sales) be affected? Now if Carotech sales could be impacted, then does Carotech's sales and earnings contribute to Hovid's bottom line?

Well according to the above pdf file link, Hovid said it's profit after tax was 12.82 million. Here's the segmental breakdown as stated on page 6 of the pdf file.

As seen in the table, Hovid reported a sales revenue of 107.079 million for the quarter. Carotech contributes 75.595 million sales to Hovid's bottom line.

And look at the Profit After Tax. Hovid said it had net earnings of 12.822 million. Out of that 12.822 million, Carotech contributes a massive 9.751 million!!!!

So if Carotech's business is impacted by its own default in payment to its bankers, then surely Carotech business would be hit. And if so, surely Hovid's earnings would be hit also, yes?

So would Carotech default of loans have an impact on Hovid?

And Hovid's balance sheet does show weakness too! It has some 173.172 370.127 million in total borrowings. Cash on hand is only 12.556 million. And like Carotech, Hovid is carrying lots of inventory too! It inventory balance is a huge 183.483 million.

How?

Read more...

Oh Carotech: Using Debts To Grow A Business Is Not Sure Win!

Assume I am a business and my business is a listed entity. ( LOL! Ok, ass-u-me I am dreaming. :P) One day I decided to embark on an adventure. Since as a listed entity or rather one of the primary purpose of a financial market, is to allow business like mine to raise fund from the market to expand my business.

So I drew my plan. A 100 million plan.

That was in 2006.

The previous year, I owned a smallish company, doing sales turnover of around 53 million and had earnings of around 7 million. I had some 183 thousand in my piggy bank and bank loans around 3 million.

Today my business (judging by the last 12 months) have sales turnover of around 237 million.

However, I am sad. My business despite expanding FOUR folds, is now deep in trouble!

My friends, my name is Carotech and this is my story!

28th Feb 2006: Carotech's RM100 Million Plant

• Carotech’s RM100m plant
  By Kevin Tan
  
  Carotech Bhd is stepping up its biodiesel production with a RM100 million investment in a new plant in Lumut, Perak to boost its earnings.
  
  Its managing director David Ho said the proposed plant would increase its production capacity from crude palm oil (CPO) in the next two years. The first phase, to be completed by the second quarter of 2006, will have a daily production capacity of 150 tonnes.
  
  Speaking to FinancialDaily, he said the second phase would increase the output by least another 150 tonnes. “We will make a decision by the third quarter of 2006 on what the capacity should be,” he added.
  
  Early this month, Carotech had proposed to acquire a 12.84ha piece of land in the Lumut Port Industrial Park for RM9.79 million, earmarking it for the new plant.
  
  “The new plant starts operations this year but it’s unlikely to benefit the company until the first or second quarter of 2007,” Ho said.
  
  He added that the new plant would be financed by internal cash and bank borrowings. “We have already secured most of it. We are quite confident of raising the funds,” he said.
  
  Carotech, a 51% subsidiary of Hovid Bhd, is involved in the extraction and processing of palm oil nutrients for pharmaceutical, phytonutrient and oleochemical products.
  
  The company produces unprocessed methyl ester, which can be used as biodiesel — a form of environment- friendly fuel.......

Internal cash? Internal cash?

That was the start of the 'adventure'... and this is the current end result.

Here are my comments.

Sales and Profits.

Remember in 2005, company had 53 million sales and had earnings of around 7 million. Cash was some 183 thousand and bank loans around 3 million.

Compare then and now. Company now sells some 237 million worth of products but earnings is exactly the same as it was in 2005!

Loans. in 2005, it owed the banks some 3 million. Today? It owes its holding company some 21 million (ahem! ahem!) and currently it owns its bankers some 292 million!!!!

What was more incredible, Aug last year, Carotech had a 1-1 rights issue. ( see Announcement - Carotech.pdf ) And according to that announcement, some 45.6 million could be raised if the rights issued was fully subscribed.

So how? Justifiable capital expansions? Was the adventure to use debts to build the grand factory in Lumut a wise idea? What has it achieve? Yes, company makes more sales but profitability, sadly, is the same as it was in 2005!!!

Last but not least, look at the size of the inventory build up!

In 2006, its inventory was 29.6 million and sales was 60.267. Currently, as indicated by its most recent 12 months earnings, inventory is a staggering 163.129 million! Is this a concern?

And naturally, the size of the debt is a massive concern and yes Carotech had defaulted on its loan payments! (** see this updated news clip from the Edge Carotech defaults on RM213m worth of loans )

Anyway, on last night's Edge Financial: CDRC to mediate Carotech debt revamp scheme.

• KUALA LUMPUR: The Corporate Debt Restructuring Committee (CDRC) has accepted CAROTECH BHD's application to mediate between the company and its financial creditors on its proposed debt revamp.
  
  Carotech said on Thursday, July 1 the CDRC had accepted the application to be the mediator and "the CDRC has allowed the company a period of six months to complete the scheme".
  
  The company will make the necessary announcement once the scheme has been finalised.
  
  Meanwhile, HOVID BHD, which owns 58% of Carotech, said the latter had defaulted on its principal and interest servicing in respect of certain banking facilities from financial institutions.
  
  "The default arose mainly due to over expansion of capacity, significant rise in working capital and inability to clear stocks due to curtailed demand arising from poor economic conditions in Europe and US. Nevertheless, Carotech’s underlying business model and products remain sound and well received in the markets," it said.
  
  Hovid said it did not have any obligation on the defaulted loans by Carotech.
  
  "Carotech is currently working directly with the financial institutions with the assistance of the CDRC to construct and implement a Debt Restructuring Plan," it said.
  
  Hovid also said it would be able to continue with its existing business. Hovid manufactures and distributes pharmaceutical products.
  
  "The business is independent of Carotech," it said.

That statement in red bold font says it all...

• "The default arose mainly due to over expansion of capacity, significant rise in working capital and inability to clear stocks due to curtailed demand

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