Dancing With Wolves - PN17

What a great article in the Business Times, finally somebody looking at PN17 companies and putting things on the table. But PN17 companies are not dead, there are always a few of them on the top 10 volume list. So, why are so many investors or punters willing to trade them when they are already PN17?

I can think of two. One, they are good stocks to trade when they have volume. They are cheap in absolute price, usually less than 40 sen, and minute moves will be sufficient volatility for traders and punters to move in and out.

Two, some of the PN17 companies will go through a genuine restructuring. Once clean, or relatively clean, they will be attractive to private companies wanting to inject assets in exchange for new shares, thus reviving the fortunes of the company.

At the end, I will try to classify these PN17 companies, and point out what to look for. Some are salvageable, some are not.

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As at August 25, there were 34 companies under PN17, a category assigned by Bursa Malaysia to companies in financial distress

The number of public-listed companies falling under Bursa Malaysia's Practice Note 17/2005 (PN17) classification has increased this year.

As at August 25, there were 34 companies under PN17, or 3.53 per cent of the 964 companies listed on Bursa Malaysia Securities. PN17 is a category assigned by Bursa Malaysia to companies in financial distress.

Such companies need to tell the approving authority of restructuring measures they intend to undertake to maintain their listing status.

This year alone, Bursa Malaysia has recorded 15 PN17 admissions to date. Metech Group Bhd, one of the leading world-class manufacturers of steel racking systems, was the latest entry last week. According to Bursa Malaysia's website, six companies fell under PN17 last year, mainly related to financial distress.

Among those categorised under PN17 this year were Hock Sin Leong Group Bhd, Transmile Group Bhd, VTI Vintage Bhd, Kenmark Industrial Co (M) Bhd, Linear Corp Bhd, Malaysian Merchant Marine Bhd and Tracoma Holdings Bhd.

..... whenever a company announces some bad news to the public, such as defaulting on their loan repayments, some accounting issues or a delay in releasing their financial results, there could be more bad news yet to be revealed.

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To ascertain whether a PN17 company is worth betting on, one needs to look at their financials. The first has to be their debts relative to their assets. Then you have to look at how realisable those assets are, mainly, you can basically forget about receivables. If its land or factory, then we can take that into the asset category.

How big are the accumulated losses relative to share premium account? Whats the paid up? What is the likelihood of a capital reduction? Yes, its not easy to bet on PN17.

The following classifications are not definitive but only my opinion. Take with a huge ladle of salt.

VERY TOXIC (will find it tough even with capital reduction)
Linear
Transmile
Kenmark
Gula Perak
M'sia Merchant Marine

TOXIC (likely to have capital reduction)
Ngiu Kee
Nam Fatt
Hock Sin Leong
VTI Vintage
Haisan Resources
Tracoma

REVIVE-ABLE
Metech
Baswell
Ibraco

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Need To Quicken The PN4/PN17 Process Even More

As reported in The Star (10/11/05) a public listed company that is financially distressed and makes little effort to restructure within the new time frame set by Bursa Malaysia faces de-listing. If, in the past, Bursa has been lenient in extending time for companies to restructure, that would no longer be the case. A specific time frame, for instance eight months, will be given. If nothing is done in that time, the exchange would no longer be “generous’’ in allowing extensions.

In the past, the exchange had often been lambasted for being too slow and too lenient in its actions to penalise companies that did not conform with listing requirements, e.g. negative shareholders’ funds. Previously, companies that were financially distressed were categorised under Practice Note 4 and given a lot of time to regularise or restructure.
There were times when up to two years' grace period was granted by Bursa for companies to restructure while minority shareholders of those companies held on to their shares.

Since the 1997 Asian financial crisis, Bursa has de-listed only 27 firms but it was a long and winding process.

Under the "new" PN17, companies are give 8 months to be successful in regularising their financial situation during the time set, failing which they would be de-listed fairly quickly. Some companies that ceased to be PN4 are now in financial trouble again. If PN4 companies that are restructured get into trouble again, and if the situation is not rectified, they would then fall into the PN17 category. If still nothing is done, they would be de-listed.

When discussing the PN4/PN17 companies, we need to bear in mind the following:

a) companies are still allowed to trade even when they were on PN4, and if I remember correctly, there were "hot stocks" even within the PN4 circle, and some did attract substantial trading volume and price movements - i.e. it has been too long for companies that were classified in PN4, stayed there. If a company is in PN4, there must some urgency in restructuring its financial affairs and NOT allowed to be languishing for over 2 years - its like being held in lock-up but not locking the door at all

b) the lack of urgency (before) also helped create a false sense of security among investors. Just ask any share investor on the street and they would say that PN4,..."no difference la.." ... "can still make money if got action.."

c) USUALLY it is those companies with dubious financials that would engage "syndicates" to financially engineer their stocks (and vice versa) - a bit like.. well.. last chance to really make some money here. Specky stocks can attract big players, big syndicates and big traders because everyone thinks that there is no danger of financial calamity or that the authorities would even act on them, and even if they did the process will take such a long time anyway. If a syndicate knew that a "bad stock" could very well land itself in PN4 anytime, and that once in PN4 it would scare the bejeezus out of all investors (thus removing all volume) - I doubt very much that big syndicates would want to "play those stocks" as they could be left holding a huge chunk of a "suddenly-PN4ed" counter to the grave.

So, all in all, a bit over due but better late than never, and please stick to the proposed time frame - 8 months means 8 months, no ifs or buts... there have been just too many ifs and buts allowed in our country, just look at the application deadline for the new MYKAD, or the shifting goal posts for Universal Brokers...

Oh, btw good job Bursa...