Thursday, October 22, 2009
Shedding Some Light On SILK
Sometimes a stock will take on wings and you cannot find any credible research on the counter. SILK is one of them. Its only asset is the Kajang Ring Road, and owing to high financing cost, it registered losses of RM37.3m on revenue of RM40.9m for the year ended June 2009. The key is to read its annual report carefully. Just concentrate on the highlighted below from the annual report:
For the period ended 31 July 2009, SILK Holdings Berhad (“SILK” or “the Group”) recorded a loss before tax of RM 37.3 million on the back of an improved revenue of RM 40.9 million. This marks a reduction in loss before tax of 47.1%, compared with the pre-tax loss after excluding one-time gain of RM 70.5 million. Revenue improved 23.6% to RM 40.9 million from RM 33.1 million recorded for the previous financial year. In addition, the financial performance was also augmented by the significant improvement in the Group’s ability to manage costs. Although the Kajang SILK Highway is maturing and requires increasing levels of maintenance, the Group has managed to peg these expenditures to that of the prior year.
The improved results have enabled the Group to meet its debt obligations during the period. During the financial period, Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd paid the minimum annual Ijarah Rental obligation of RM39.4 million together with an Excess Funds payment of RM 9.2 million to its Sukuk Mudharabah lenders.
At the operating level, SILK’s subsidiary, Kajang SILK Highway recorded traffic volume of 39.3 million vehicles for the period under review. Average Daily Traffic Volume improved to 99,170 vehicles per day, which is a 14.2% improvement over the Average Daily Traffic Volume of 86,850 vehicles per day recorded in the previous financial year. After excluding the nonrecurrent items from the loan restructuring, this improvement consequently resulted in an increased operating profit before interest of RM 25.1 million in 2009 compared to RM 20.4 million recorded in the previous financial year.
SILK has during the course of the period under review, carried out various strategic and tactical initiatives aimed at strengthening the foundation for future growth.
Approval of the Regularisation Scheme
SILK had announced on 24 November 2008, that it intends to undertake a Regularisation Scheme to address its status under Amended Practice Note 17/2005 of the Listing Requirements of Bursa Securities (“PN17”). As a company under PN17, the Group had limited options as to how to move forward. It was also at great risk of being delisted, which would have been detrimental to all its shareholders. Doing nothing and remaining status quo also clearly not an option. It had to have a meaningful strategy to generate new sources of cash and revenue. Unfortunately, at the time, SILK had neither cash, nor cash generating assets. Borrowing to acquire cash generating assets is also not possible, given its PN17 status. As such, the main priority was to implement a series of actions that would enable SILK to address these issues quickly, effectively and efficiently and thereafter to apply for the upliftment of the PN17 status. The Regularisation Scheme is comprised of several components including proposals designed to reconstruct SILK’s balance sheet and recapitalise the Company. The proposed acquisition of a new business in a growth industry is to provide future growth opportunities to the Group. Further details relating to the Regularisation Scheme can be found in the Group’s Circular to Shareholders dated 8 April 2009. The High Court has also approved SILK’s propose Par Value Reduction exercise on 28 August 2009. SILK is currently in the midst of implementing the various aspects of the Regularisation Scheme and expects this to be completed by the fourth quarter of 2009.
Strengthening of managerial resources
As SILK progresses, its human capital requirements, particularly at the managerial level, will also evolve accordingly. Given this, during the period under review, SILK took the conscious step to strengthen its managerial resources, particularly those that are core to the Group’s operations. The Group foresees that this strengthening will be an ongoing process, with emphasis on enhancing the talent pool of critical functions. SILK firmly believes that the step taken to strengthen the managerial resources is a necessary and prudent long-term investment for the Group.
SILK’s improved financial performance for the period ended 31 July 2009 is a clear reflection of the power of perseverance, as well as the need to continuously change, refocus one’s priorities and adapt to changing situations.
Existing highway business
SILK in its present form, with the core business in highway operations is expected to continue to incur accounting losses in the immediate to medium term. This is consistent with the nature of an infrastructure company, which has a long gestation period. At the operating level, efforts are being taken in the immediate term to contain and manage operational costs, including
detailed identification of critical and non-critical costs and optimising of highway maintenance works. On a longer term basis, other measures being considered include:-
i) Improving traffic flow by promoting development along the highway;
ii) Working closely with adjacent highway concessionaires to improve connectivity and increasing traffic throughput;
iii) Improving non-toll revenue including:
(a) advertising and promotion revenue; and
(b) development of rest and service areas and to provide commercial activities including petrol stations
As part of the strategic objective to enhance the financial performance of the Group, the Board has identified the oil and gas sector as the additional business driver for SILK. The initial investment in this sector is via the acquisition of AQL Aman Sdn Bhd (“AQL”), the holding company of Jasa Merin (M) Sdn Bhd (“Jasa Merin”), an offshore marine support services company, to the oil and gas sector. Having reviewed the oil and gas industry, the Board of SHB is of the view that there are continuing prospects in the Malaysian market for Offshore Supply Vessels (“OSV”). Malaysia currently has approximately two hundred and fifty (250) offshore oil and gas platforms. The planned development work for the Malaysian oil and gas industry is estimated to require approximately sixty (60) to seventy (70) new platforms over the next three (3) years. For every oil and gas platform, an estimated two (2) to three (3) AHTSVs and/or SSVs are required for transportation and logistic support. This would translate to an estimated additional demand for at least one hundred and twenty (120) new offshore vessels for the period.
The demand of OSVs is dependent on the level of activities in the oil and gas industry. At the exploration and development stage, high fuel prices would encourage development and exploration activities undertaken by the oil and gas majors and hence increase the demand for offshore support services. Where fuel prices are low, it is expected that the oil majors are likely to reduce or postpone some of the activities, given the substantial capital outlay involved.
However, with oil and gas being a depleting commodity and therefore scarce, it is expected that oil and gas prices will continue to experience an upward movement over the medium to longer term. Given that the majority of Malaysia’s oil and gas exploration, development and production activities are offshore, this is expected to translate into continued and increasing demand for offshore marine support services. Also, given the high cost of mobilisation and demobilisation, the impact of fluctuation in oil prices during the period on the level of exploration and development activities will be somewhat tempered.
However, in the event there is a major decline in the fuel price that is sustained over a longer period such that it is not economical for oil and gas majors to continue with the exploration and development activities, this will affect the demand for offshore support services.
In the case of AQL Group however, the risks of impact from fluctuating oil and gas prices is further mitigated as its vessels are mainly chartered to oil and gas majors on time charter contracts ranging from one (1) to ten (10) years. In addition, in view of the large foreign participation in the Malaysian offshore support services sector, with an estimated 60-65% market share of OSVs, the prospects for local OSV operators to penetrate further into the market are considered bright. In view of the above, AQL Group is in a good position to benefit from the continuing opportunity in the oil and gas sector. In this respect, AQL Group is currently pursuing a renewal and expansion program with the acquisition of six (6) new vessels which have been contracted for construction and are expected to be delivered during 2010 to 2012.
From a realistic perspective, it will clearly take time, significant effort and continued support from all stakeholders for SILK to achieve what it has set out to accomplish. The task is not insurmountable if everyone in SILK, from the Board to Management to our employees, along with the support of all the shareholders work together to take the Group to greater heights.
Well, it looks like the company's prospects are being revived into oil and gas. Normally, I would not look too much into these kind of aspirations, but the key is to assess who is taking charge. One of the very few business figure I like is at the helm. Dato’ Mohammed Azlan Bin Hashim is the Executive Chairman (Non-Independent). Dato’ Mohammed Azlan bin Hashim was appointed to the Board of SILK as Non-Executive Director on 4 June 2008 and was subsequently appointed Executive Chairman on 24 June 2008.
A Chartered Accountant by profession, he graduated with a Bachelor of Economics from Monash University, Australia. He is a Fellow Member of the Institute of Chartered Accountants, Australia, member of Malaysian Institute of Accountants, Fellow Member of Malaysian Institute of Directors, Fellow Member of the Institute of Chartered Secretaries and Administrators and Honorary Member of The Institute of Internal Auditors, Malaysia. He has extensive experience in the corporate sector including financial services and investments. Among others, he has served as Chief Executive / Executive Director of Bumiputra Merchant Bankers Berhad, Group Managing Director of Amanah Capital Malaysia Berhad, Executive Chairman of Bursa Malaysia Berhad (formerly known as Kuala Lumpur Stock Exchange), Group, and Chairman of Proton Holdings Berhad. Current directorships in public companies and other organisations include Khazanah Nasional Berhad, Labuan Offshore Financial Services Authority, D&O Ventures Berhad and Scomi Group Bhd. He is also Chairman of Universiti Darul Iman Malaysia and is currently a Member of the Investment Panel of the Employees Provident Fund.
Sometimes when you don't really know the horse, you can still bet on the jockey. Its a trade, its a punt, yes it is speculative ... there nothing much to go on, but I think SILK will go somewhere with Mohammed Azlan at the helm. Sometimes you just have to make a call based on the minimal information you have - not for everybody I guess. The counter has only 180m shares, even at 0.45, its market cap is just RM81m - doesn't take much to turn it around. Anyway, the Kajang Ring Road should be cash flow positive in 3-5 years time.
p/s photos: Lee Ji Ah