This article first appeared in The Edge Malaysia Weekly on May 8, 2017 - May 14, 2017

INTEGRATED palm oil producer Kwantas Corp Bhd is eyeing further asset sales after signing a deal last month to sell plantation land in eastern Sabah at a loss.

The company is raising cash to improve its financial health. In particular, it has a June 30 deadline for meeting a financial covenant — to maintain a current ratio of not less than 1.0 — with one of its lenders.

As at Dec 31 last year, Kwantas had current assets of RM319.87 million and current liabilities of RM791.33 million, yielding a current ratio of 0.4.

The amount due to the aforementioned lender is around US$35 million (RM151.49 million at current exchange rates) at the moment, the company tells The Edge in an email. The loan will mature in four to five years’ time, it says.

On April 19, Kwantas announced a proposed disposal of 3,791 acres in Sabah to a unit of KUB Malaysia Bhd for RM100.45 million in cash — a 19.3% discount to the parcel’s book value.

It originally bought the parcel for RM20.52 million in December 1998.

“With the proceeds from the sale of the land to KUB, we are looking at paying back up to two-thirds of the loan amount in advance,” says Kwantas. “Our bankers are happy with the proposed exercise.”

However, the land sale is expected to be concluded only in the fourth quarter, a few months after the lender’s deadline. According to a filing with Bursa Malaysia, the lender had previously granted Kwantas an extension until June 30.

Missing the deadline may lead to an event of default, unless Kwantas manages to obtain another extension from the lender.

On KUB’s side, the proposed acquisition requires shareholders’ approval at an extraordinary general meeting (EGM), which has yet to be scheduled. The matter was not listed on the agenda of its upcoming EGM on May 23.

In response to the timing mismatch, Kwantas says it may seek an extension. The company believes the lender will likely grant it another financial year to comply with the covenant. It is also open to restructuring the loan with another bank.

“As the financial covenant comes along with a particular loan, we are exploring ways to settle the said loan earlier, hence the financial covenant will not be there anymore should an early settlement take place,” the company says.

Of the proceeds from the sale, Kwantas has earmarked RM91.95 million to repay its borrowings. It may require another RM50 million or so to settle the loan, based on its indication that at least a third of the outstanding amount would be left after the repayment.

According to the company’s 2016 annual report, it still has four parcels of oil palm plantation land worth more than RM100 million each and another five parcels with a net book value of above RM50 million.

Kwantas previously said the 19.3% discount to KUB was due to the size and location of the parcel, which is in the Kinabatangan district in Sandakan.

Of the nine parcels worth more than RM50 million each listed in its annual report, eight are in the same district while one is in Balingian, Sarawak. This raises the possibility that any further divestment may also see pricing pressure.

The discount to KUB was, however, partly mitigated by KUB agreeing to sell all the fresh fruit bunch (FFB) from the land to Kwantas’ mill.

To some extent, this may alleviate possible shareholder concerns that Kwantas has to perform a balancing act between retaining productive plantation land and raising cash to improve its balance sheet.

For perspective, the parcel being sold contributed less than 10% to Kwantas’ production and 7% to total FFB processed at its mills. After the sale, it will retain about 56,916ha of the land, of which 18,743ha are planted.

If the company obtains a similar arrangement for its future land sales, it will still receive crops for processing into downstream products, despite some loss of FFB output.

For the second quarter ended Dec 31, 2016 (2QFY2016), Kwantas reported a net profit of RM7.5 million from revenue of RM470.4 million — higher than the net profit of RM1.3 million and revenue of RM318.6 million seen in 2QFY2015.

That brings its six-month cumulative profit to RM23.6 million compared with a net loss the year before. It had made losses on an annual basis for the past three financial years, though it only saw negative free cash flow in FY2015, based on Bloomberg data.

Kwantas had attributed the headwinds to the softening China economy and fluctuations in commodity prices, in addition to erratic weather patterns and volatile foreign exchange rates.

Some 43.3% of its FY2016 turnover came from China, with 36.9% from Singapore and 19.8% from Malaysia. It previously said competition had intensified amid the slowing China economy, pressuring its margins.

In 2016, Kwantas said margins for its refining and fractionation business in Malaysia and China had been persistently negative due to the stringent quality controls of Chinese importers, which dragged down the group.

As at Dec 31, the company’s gearing ratio stood at 0.54 times. Of its total borrowings of RM681 million, some RM659.6 million is short term. It had a cash position of RM82.7 million.

That said, it is not a new situation for Kwantas. Based on historical Bloomberg data, its current ratio has been below 1.0 since FY2009 — the lowest so far is the 0.4 times seen as at Dec 31 last year.

In its annual report released last October, the company addressed its financial health, saying that it is looking at asset divestment to improve its overall financial position and liquidity.

With the land sale to KUB, “we are delivering what we planned for, carrying out divestment exercises for better financial performance”, Kwantas tells The Edge.

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