Getting a grip on Hap Seng Plantations’ aborted Kretam deal
IN the hey days of the market in the 1990s, public viewing galleries will cheer every time when they see Kretam Holdings Bhd’s (Kretam) share price move along with other market darlings of the yesteryear. They would say in the Malay language, “Ketam mari, Ketam mari”, as in the stock is having an upward run and it’s time to “jump in.”
Recently, Kretam was again in the limelight, both rightly and wrongly. Rightly, as Hap Seng Plantations Holdings Bhd (HSPB) had entered into a conditional share sale agreement (SSA) with the existing largest shareholders of Kretam, representing approximately 55% of the issued and paidup capital of the company at RM0.92 per share on Feb 21, 2018.
At the same time, HSPB also proposed to extend a mandatory general offer (MGO) upon completion of the proposed acquisition of the shares in Kretam.
The SSA was conditional upon the approval of HPSB shareholders as well as acceptance of the results of the due diligence of Kretam.
In the same announcement, HSPB rationalised its proposed acquisition of Kretam as it would not only enable the plantation giant to increase its landbank and planted area by more than 59% and 54% respectively but the fact that Kretam’s plantation land is located strategically close to HSPB’s own landbank.
All seems to sound well and good, a win- win situation for both and naturally, Kretam’s share price reacted positively on the resumption of trading with the share price rising by 1.5 sen to close at 85.5 sen with about 25 million shares changing hands, a seemingly uneventful price action as the MGO price was set at 92.0 sen.
However, a close look suggests that in actual fact Kretam share price has been rising since the beginning of the year.
At the end of December 2017, Kretam share price was at just 54 sen.
Kretam has also an issue with public shareholding spread as only 21.75% shares are traded publicly.
In fact, prior to its share price seeing some upward action with volume, Kretam’s share price hardly trades with more than 0.5 million shares a day.
However, since the start of the year, Kretam saw its volume rise 10-fold to average just over five million shares a day and share price moved from 54 sen to 84 sen, an increase of 55.6% between early January 2018 and right up to the announcement by HSPB on Feb 21.
Looks like some investors had “information” pertaining to HSPB impending move for an MGO by HSPB on Kretam.
What is interesting is after the February 21 announcement, Kretam’s share price hovered between 78 sen and 85.5 sen and of course below the proposed MGO price of 92 sen right up to June 1, 2018.
On June 4, 2018, Kretam’s share price dropped to 62 sen or down 16 sen from previous day’s close with about 4.8 million shares changing hands.
One wonders what was going on as the only material announcement were on May 25, 2018 where HPSB said that the expiry of the due diligence has been extended to June 30, 2018 (from an earlier expiry date of June 4, 2018). In between, the date of the first announcement of the potential takeover by HSPB on Feb 21, 2018 and May 25, 2018, there were also three material announcements made by Kretam. First was its Q4 results ended Dec 31, 2017 (announced on Feb 27, 2018), second was its annual report for 2017 released on April 27, 2017) and third was its Q1 2018 quarterly results (announced on May 25, 2018).
Kretam’s Q4 2017 showed that the company reported a quarterly loss of RM3.4mil mainly due to losses at its refinery operations.
For the Q1 period ended March 31, 2018, Kretam reported a profit RM1.5mil, down by about 88% y-o-y despite a 13% rise in revenue as lower CPO prices despite higher FFB output resulted in lower margins at its plantations while losses at its refinery continued. What was interesting from its Q1 2018 results announcement was Kretam’s adoption of new MFRS Framework as it falls within the definition of transition entities.
The net effect of MFRS adoption for Kretam was that its shareholders’ equity was reduced by RM210.7mil or approximately 23% from RM919.6mil to RM708.9mil for the period ended 31 March 2018.
It is obvious that adoption of the MFRS Framework will have an impact not only on Kretam but any other plantation company that adopts the new rules.
As for its 2017 Annual Report, there were no material disclosures and Kretam’s auditors opined that Kretam’s financial statements gave a true and fair view of the company. In addition, there were no key audit matters that arose other than some related to impairment of Kretam’s cash generating units (CGU) where some RM42.8mil of good- will has been allocated.
From the price correction on June 4 to 62 sen, Kretam’s share price moved back to about 70 sen by June 14 and on that evening, HPSB threw in the towel and aborted the SSA as well as the consequent MGO.
As the offer is no longer on the table, Kretam’s share price fell sharply and dropped 23.5 sen or down almost 34% to close at 46 sen on June 18 with more than 167 million shares changing hands.
According to HPSB, it found that the results of the due diligence work carried out pursuant to the SSA was unsatisfactory and unacceptable.
While HPSB has all the rights to abort the deal citing the unsatisfactory outcome of its due diligence, Kretam shareholders, who were hoping to cash out at the MGO or at 92 sen per share, were probably left fuming.
After all, its past two quarterly results showed no red flags nor did the audited accounts of the company, which was signed off on April 18, has materially stated any adverse opinion.
Judging by the price action of Kretam shares, it does seem there were some price movement prior to the announcement of the SSA on February 21, 2018 as well prior to the announcement of the aborted deal on June 14, 2018.
Perhaps HPSB would like to explain a bit more as to why it felt unsatisfied with the due diligence carried out or should the auditors now step up and re-instate its true and fair view of Kretam’s financial statements if the due diligence is related to financial matters.