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