Its single largest shareholder Hovid Bhd had substantially sold down its equity stake in Carotech while the emergence of Lembaga Tabung Haji (LTH) as a new major shareholder has raised questions about the fortunes of Carotech which had grabbed headlines for not being able to service its bank borrowings.
Carotech chairman and managing director David Ho told The Edge Financial Daily via email that Hovid had disposed of a portion of its shares in Carotech to raise funds which would be used to reduce the parent company’s bank borrowings.
Ho said Hovid had been proactive in reducing its RM20 million debt obligation with Affin Investment Bank which was secured by Carotech shares. The move to slash borrowings is crucial to mitigate against any margin calls which could translate into cash flow constraints for the borrower.
“Due to the uncertainties and volatility in the stock market, our directors have decided to pare down the loan from Affin (which is secured by the Carotech shares) to minimise any negative impact on the cashflow of Hovid arising from market volatilities.
“Hovid sold the Carotech shares via the (open) market. Presumably LTH acquired them from the market to increase their stake in Carotech,” said Ho who is also the chairman and managing director of Hovid.
The laboratory in Carotech’s biodiesel plant in Chemor, Perak.
Hovid had disposed of a substantial 16.44% stake comprising 150 million shares in Carotech for RM10.5 million or seven sen a share between Aug 17 and Sept 14, according to updates to the stock exchange. Carotech has an issued share base of 912.29 million shares.
Following the disposal, Hovid owns 380.96 million shares or some 42% of Carotech. As the share sale was done below Hovid’s average cost of investment in Carotech, the disposal translated into a loss of RM8.2 million for the parent company.
Coincidentally, LTH has been actively scooping up shares in Carotech. Filings to the exchange indicated that LTH became a substantial shareholder in Carotech after the Islamic pilgrimage fund acquired seven million shares in Carotech on Sept 1 this year, raising its interest to some 6%.
going lean... Carotech Bhd chairman and MD David Ho says the company is raising funds by selling down a substantial portion of its shares to pare down the bank borrowings of parent company Hovid Bhd. He says the current emphasis is to resolve its debt obligations ‘as soon as possible’ and rejuvenate the company’s operations.
LTH had subsequently purchased another 25.5 million shares in Carotech between Sept 2 and 9, hence, raising its equity portion to 80.74 million shares or 8.85%.
Hovid had obtained the RM20 million loan from Affin Investment to subscribe for rights shares in Carotech last year. Carotech had then undertaken a renounceable rights issue of up to 456.14 million new shares in the company on a one-for-one basis. The rights unit was priced at 10 sen each.
The fund-raising exercise, which intended to raise RM45.61 million, was undertaken to finance the capital needs of Carotech which had expanded its production capacity with a new plant in Lumut, Perak in January last year. The cash call was also intended to enlarge Carotech’s issued share capital base, and reduce its gearing.
Upon completion of the rights issue, Carotech had an expanded issued share base of 912.29 million shares versus 456.14 million units previously. Hovid had owned 530.82 million shares or 58.2% of Carotech’s enlarged capital base prior to the disposal of its shares in the open market.
Carotech defaults on RM214 million worth of loans
In July this year, Carotech said it had failed to fulfil some RM213.6 million worth of debt obligations involving several lenders as the company had not been able to generate adequate cash due to a tough operating landscape.
The company said the default was a result of over expansion of capacity, significant rise in working capital and inability to clear stocks on lower demand for its products due to the weak economic backdrop in Europe and the US.
Carotech said the bulk or 72% of the RM213.6 million consists of US dollar-denominated term loans amounting to US$47.78 million. The balance is made up of ringgit-based term and trade facilities worth RM59.12 million.
The company said it had invested more than RM300 million over the past few years to increase its annual output capacity of phytonutrients and oleochemical products from 18,000 tonnes to 120,000 tonnes to cater to growing demand for its offerings.
However, the significant increase in commodity prices in late 2008, particularly crude palm oil which forms Carotech’s primary feedstock, and the subsequent global economic turmoil affected the company’s ability to generate cash flow to fulfil its debt obligations.
The company, which had defaulted on its loans since July 2009, said it had negotiated with several financial institutions to reschedule and restructure the repayment terms, and certain lenders had agreed to restructure their loans to Carotech.
Nevertheless, the company said it would like to embark on a composite long-term solution for its debt obligations and, as such, had sought the assistance of the Corporate Debt Restructuring Committee (CDRC) to mediate on the debt restructuring exercise.
The CDRC had approved Carotech’s application for mediation. Carotech was given six months beginning July 1 this year to complete the debt restructuring exercise.
The way ahead..
Ho said Carotech’s current emphasis was to resolve its debt obligations “as soon as possible” to rejuvenate the operations of the company.
Pending the debt restructuring, Ho indicated that it was unlikely that Carotech would initiate dividend payouts, adding that the firm’s earnings would be minimal.
The weaker earnings outlook for Carotech, according to Ho, comes against a backdrop of a still-weak economic environment in advanced countries such as the US, Europe and Japan which are deemed important markets for the company’s palm-oil based nutrients namely carotene and tocotrienols.
Poorer consumer sentiment in these markets had translated into a slower pace of product launches using these nutrients, according to Ho.
Carotech’s quarterly financials have deteriorated, with a wider net loss of RM6.26 million in the fourth quarter ended June 30, 2010 versus a net loss of RM3.96 million a year earlier, dragged down by higher operating and finance expenses. Revenue, however, rose 12% to RM52.81 million from RM47.15 million.
On a full-year basis, the firm raked in a net profit of RM4.86 million versus a net loss of RM17.46 million a year earlier. Revenue was up 76.8% to RM242.85 million from RM137.32 million.
As at June 30, 2010, Carotech’s net assets per share stood at 15.6 sen. The company had cash of RM730,000 versus RM270.89 million worth of debt, hence, with net debt of RM270.16 million and a net gearing ratio of 1.9 times based on its equity of RM142.18 million.
According to Carotech’s website, the company owns the first and largest integrated plant in the world to commercially extract tocotrienol and carotene from palm oil. Tocotrienols and carotene are chemical components of Vitamins E and A.
These phytonutrients are produced based on clients’ specifications, and are mainly used in final products including dietary supplements, pharmaceutical offerings and cosmetics. Looking ahead, Ho said Carotech’s long-term goal was to promote the use of tocotrienols in the pharmaceutical industry.
Carotech’s strategic direction will be closely watched by the investment fraternity as the company attempts to repair its financials and rejuvenate its fortunes. At a glance, the entry of a new major shareholder in the form of LTH certainly offers a glimmer of hope for Carotech as the firm seeks fresh funding to take its business to the next level.
It remains to be seen if the pilgrimage fund would play a strategic role or merely become a passive investor in Carotech.
Written by Chong Jin Hun
This article appeared in The Edge Financial Daily, September 27, 2010.
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