Frankly Speaking: Nov 29-Dec 5, 2010

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Receivables galore! Last week, 19 companies disclosed to Bursa Malaysia the amounts owed by related parties, as well as the timelines of their outstanding receivables. A number of companies have been owed the outstanding receivables for more than five years, and some of them are owed significantly more than the cash that they hold. This raises the question of whether managements should have been more forthcoming in their disclosure of receivables.
Perak Corp Bhd, for instance, disclosed that its total outstanding receivables from related parties amounted to RM106.1 million as at Sept 30, of which RM87.8 million hasn’t been paid for 5 to 10 years.
While the amount owed is less than Perak Corp’s total cash reserves of RM167.3 million as at Sept 30, it is about 1.9 times the company’s net cash position of RM56.6 million after deducting its total borrowings of RM110.7 million. (Perak Corp is a subsidiary of Perak’s State Economic Development Corp or Perbadanan Kemajuan Negeri Perak.)
Another company, Dutaland Bhd, is owed RM20.4 million, of which RM5.6 million has been owed for three to five years. The sum owed may seem small but Dutaland has only RM7.5 million in cash and short-term investments. Its total borrowings amount to RM233.4 million.
Dutaland’s sister company, Olympia Industries Bhd, is owed RM185.6 million, of which RM140.8 million has been outstanding for more than 10 years.
In business, it is not prudent to have high receivables. It tends to tie up working capital, which is a factor in improving revenue and profit. It is worse when large sums of receivables are owed by related parties for a long time. Can the money be recovered?
It only works in the favour of minority shareholders when companies have high payables owed to related parties, not the other way around.

Minorities should decide on forensic report Although the Sime Darby Bhd board had decided to withhold the forensic audit report into the conglomerate’s RM2.1 billion in losses in its energy and utilities division from its AGM on Nov 16, the decision will continue to spark intense debate.
On the face of it, it sounded prudent for Sime Darby chairman Tun Musa Hitam to say that the board could not table the findings of the financial audit to its shareholders to protect the group’s interests over its legal claims relating to its losses. However, should that decision have been made by the board, which is answerable to the shareholders for the management of the company? Shouldn’t it have been left to the minorities, for whom the AGM is the primary forum for seeking accountability of the company’s performance?
Secondly, mounting speculation over the various reasons that led to losses at the energy and utilities businesses could have been pre-empted had the report been released to the minority shareholders.
Even though legal action against those responsible for the losses may lead to material information being revealed in court, the disclosure would be specific to the court proceedings. This would be a poor substitute for the level of accountability that is expected for such a damaging development in financial and management oversight.
It is also disappointing that the Public Accounts Committee has backed down from investigating the debacle. PAC chairman Datuk Seri Azmi Khalid’s contention that Sime Darby’s affairs are beyond the committee’s purview since the company’s major shareholders, Permodalan Nasional Bhd and the Employees Provident Fund, are funded by investors stretches credulity. The decision merely undermines the PAC’s credibility.

There’s life for brokersThere’s life for standalone brokers after all. Last week, Inter-Pacific Securities Sdn Bhd (Inter-Pac) and Singapore-listed Kim Eng Holdings Ltd entered into a strategic alliance via a RM142 million special purpose vehicle (SPV).
The deal will effectively see Berjaya Corp Bhd (BCorp) transferring Inter-Pac’s stockbroking businesses into an SPV for RM142 million — comprising RM100 million in assets and RM42 million in goodwill.
Kim Eng will then take up a 70% stake in the SPV and in return pay BCorp RM42 million cash. The remaining 30% will be held by Interpac Securities, a unit under BCorp.
The deal effectively sets a premium of RM42 million for a broker such as Inter-Pac. This is a vast improvement from the previous deal, where the premium was only RM7.5 million. Considering that there are bidders prepared to pay decent premiums for stockbroking licences, this must come as a new lease of life for owners of brokerage firms.
However, the improved premium is still far from the sum that some in the industry paid to acquire their rivals in 2002. That was when the Securities Commission initiated a consolidation that required a broker to merge or buy up another three to qualify for universal broker (UB) status.
The brokers that went into consolidation paid premiums of up to RM100 million to acquire other brokers to secure the UB licence. The UBs were then told to fork out another RM500 million to become standalone investment banks.
But the returns on capital invested did not come as the stock market languished. Interest in the licences also waned. Now, there is renewed interest after the authorities ruled that up to 70% can be owned by foreigners. Inter-Pac has got the ball rolling. Who will be next?

This article appeared in Corporate page of The Edge Malaysia, Issue 834, Nov 29-Dec 5, 2010