This article first appeared in The Edge Malaysia Weekly on March 29, 2021 - April 4, 2021

BOUSTEAD Holdings Bhd, a 59.43%- owned subsidiary of Lembaga Tabung Angkatan Tentera (LTAT), is in a race against time to sell assets, shore up its balance sheet and pare down mounting debt as losses pile up. The diversified conglomerate has been in talks with its lenders to top up existing loans, as well as to refinance existing debt and give it extra time to make payments, according to sources.

Of concern is its heavy reliance on revolving credit facilities, which make up the bulk of its total borrowings.

A revolving credit facility essentially allows a borrower to draw down against and pay off a credit line without having to apply for a new loan. But the borrower also runs the risk of lenders withdrawing the credit facilities anytime due to large losses or failure to pay.

Boustead’s financial statements for the third quarter ended Sept 30, 2020 (3QFY2020), show that the group had revolving credit amounting to RM3.6 billion, which accounted for 47% of the group’s total borrowings of RM7.7 billion as at end-September last year. Of the RM3.6 billion in revolving credit, RM3.19 billion (or about 89%) were short term and RM410 million long term. It also had short-term loans totalling RM273.1 million.

Sources point to the urgency for Boustead to restructure its debts in order to have a sustainable debt structure moving forward. This includes weaning off its reliance on short-term general purpose debt such as revolving credit. When contacted by The Edge, Boustead says it is currently “crafting a major comprehensive strategy that will revamp the whole group’s business plan, which will be revealed soon”.

The recent decision by LTAT to scrap plans to take Boustead private is also seen as a major setback for the latter as it would have addressed the group’s debt levels as a private entity and be more focused on what it can do best, say sources. However, the plan was aborted last month due to the ongoing uncertainty amid the Covid-19 pandemic, “which could further delay the privatisation journey and throw up more uncertainties for the key businesses of the Boustead group”, says the armed forces pension fund.

Shares of Boustead have dropped 25% from its 52-week high of 82 sen since LTAT called off its plan to take the conglomerate private on Feb 2. The counter closed at 61.5 sen last Thursday, giving the company a market capitalisation of RM1.25 billion.

According to Boustead’s 2019 annual report, its principal bankers are Affin Bank Bhd, Affin Hwang Investment Bank Bhd, Alliance Bank Malaysia Bhd, Ambank (M) Bhd, CIMB Bank Bhd, Malayan Banking Bhd, OCBC Bank (Malaysia) Bhd, RHB Bank Bhd and United Overseas Bank Bhd.

Boustead has been suffering losses since the financial year ended Dec 31, 2018 (FY2018). In 9MFY2020, its net loss widened 29.7% year on year to RM198.6 million and according to Kenanga Research, the group is expected to continue seeing volatile quarterly results based on its historical earnings trend. It has postponed its 4QFY2020 earnings release by one month, following the one-month extension granted to all listed issuers by the Securities Commission Malaysia and Bursa Malaysia, and is due to announce the results this week.

In his last report on Boustead dated Dec 1, 2020, Kenanga Research senior analyst Raymond Choo Ping Khoon predicted that Boustead would continue to post losses in FY2020 and FY2021. He has ceased coverage on the stock due to a lack of investor interest and losses over the past several quarters.

Boustead continues to be dragged down by its trading and heavy industries divisions, but cushioned by the pharmaceutical division and turnaround in plantation.

On March 17, Pharmaniaga Bhd flagged a return to the black in FY2020, with a net profit of RM27.49 million, due to the absence of a one-off recognition of remaining unamortised Pharmacy Information System (PhIS) costs amounting to RM247 million in FY2019. Boustead Plantations Bhd also returned to the black, posting a net profit of RM42.95 million in FY2020 after two straight years of losses. This was on the back of improved palm product prices and absence of impairment loss.

An industry observer, however, says the recovery in its pharmaceutical and plantation divisions is not enough to offset Boustead’s woes.

Not helping matters is the group’s low cash levels. As at end-September 2020, Boustead had RM531.2 million in cash, leading to a net debt of RM7.17 billion compared with its shareholders’ equity of RM3.53 billion (excluding perpetual sukuk and non-controlling interests). Net gearing stood at 2.03 times.

Boustead also needs to contend with yearly payments to holders of its perpetual Junior Islamic Medium Term Note Programme of up to RM1.2 billion, which was established in 2013 when Tan Sri Lodin Wok Kamaruddin was group managing director of Boustead.

Perpetual bonds are recognised in the books as equity rather than debt, hence reducing the debt-to-equity ratio. However, perpetual bonds typically carry higher coupon rates as there is no predetermined maturity.

Boustead’s 2019 annual report shows that the perpetual sukuk has a step-up distribution rate ranging from 6.1% to 6.25% per year if it does not exercise its option to redeem at the end of the fifth year, and increases by 1.5% per year for the sixth year. From the seventh year, the periodic distribution rate will be further increased by 1% per year for every year thereafter, subject to a maximum of 15% per year.

At end-September 2020, Boustead had RM622.1 million in perpetual sukuk, which would translate into an annual coupon payment of RM53.5 million, assuming a coupon rate of 8.6%.

How will Boustead improve its debt woes? Boustead’s newly appointed group managing director Datuk Seri Mohammed Shazalli Ramly said in February that the group is targeting a strategic sale of assets under its asset rationalisation plan, value creation within the group’s existing core businesses, changing business models for new revenue sources, rationalising a few non-strategic assets, as well as venturing into the digital services and technology sector as part of its “Reinventing Boustead” strategy.

Already, it has started the process of monetising assets, with the sale of a 82.84ha parcel of land in Penang in 2019 and Royale Chulan Bukit Bintang last year. On March 19, it disposed of its loss-making Boustead Cruise Centre in Pulau Indah, Selangor, for RM230 million, of which RM120 million has been earmarked to partially repay the group’s borrowings, which is estimated to generate interest savings of RM6.2 million per year.

According to its 2019 annual report, properties currently owned by the group include hospitality asset Royale Chulan Damansara and Royale Chulan Hyde Park in London, retail assets The Curve and eCurve, and office assets such as Menara Affin, Wisma Boustead and Menara Boustead in Kuala Lumpur as well as Menara Boustead in Penang.

It also holds equity interest in non-listed entities such as Irat Properties Sdn Bhd (50%), The University of Nottingham Malaysia Sdn Bhd (66%), MHS Aviation Bhd (51%), Cadbury Confectionary Malaysia Sdn Bhd (25%), Kao (Malaysia) Sdn Bhd (45%) and Rakan Riang Sdn Bhd (20%), which owns the licence for KidZania in Malaysia and Singapore.

Industry observers say Boustead could also pare down its stakes in its subsidiaries via a placement or sale to raise fresh capital to ease tight cash flow. Boustead holds equity interest in four listed companies on Bursa Malaysia — Affin Bank Bhd (20.73%), Boustead Heavy Industries Corp Bhd (65%), Pharmaniaga (55.93%) and Boustead Plantations (57.42%) — as well as Indonesia-listed pharmaceutical company PT Millennium Pharmacon International Tbk (41%).

It is clear that significant challenges remain for Boustead and more needs to be done to reduce its net debt and rebuild its balance sheet. Still, the pandemic-induced uncertainty may slow its efforts to reap the low-hanging fruit.

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