This article first appeared in The Edge Malaysia Weekly on November 13, 2017 - November 19, 2017

LAST Friday, Puncak Niaga Holdings Bhd closed at 70.5 sen per share, capping a roughly 21.2% decline year to date. The stock is now trading at levels unseen since early 2013, hovering just above the 70 sen mark.

It has been a rough ride for shareholders. In the two years since Puncak Niaga sold its Selangor water assets to the state government, its adjusted share price has fallen 75% up to last Friday, from RM2.83 on Nov 12, 2015.

For perspective, the stock was last seen below 80 sen back in February 2013 and had not fallen below 70 sen since January 2012, according to Bloomberg data.

The closing price last Friday gives the counter a market capitalisation of RM315 million — equivalent to just 55.6% of its unaudited cash reserve of RM566.8 million as at June 30.

The cash reserve does not include short-term investments of RM420.7 million. Overall, its cash and short-term investments total RM987.5 million.

The water assets disposal, part of the state’s water industry consolidation exercise, was completed on Oct 15, 2015, for RM1.55 billion cash. According to its 2015 annual report, the net cash inflow from the sale was RM1.44 billion.

Since then, Puncak Niaga had sought to diversify into the plantation and oil-and-gas businesses but had been unsuccessful in replacing the lucrative earnings from the water concessions.

Its current business segments are water and wastewater management, construction, oil and gas, and plantation. Only the water and wastewater segment was profitable in the second quarter of this year but all segments remain loss-making for the six-month period up to June 30.

Puncak Niaga’s plantation foray will take time to yield fruit while its oil and gas push came at an unfortunate time as the industry has slipped into a downturn since crude prices crashed in late 2014.

The group posted a net loss of RM258.9 million in the financial year ended Dec 31, 2016, (FY2016) from RM73.8 million in revenue. It attributed the loss to lower revenue across other businesses.

In the first half of FY2017 (1HFY2017), Puncak Niaga remained in the red with a cumulative net loss of RM73.36 million from RM49.94 million in revenue, mainly due to higher operating expenses.

In a nutshell, minority shareholders might be getting disappointed as the company’s cash pile is shrinking, with no fresh income stream in sight yet.

To provide some perspective, the company’s cash and short-term investments swelled to RM1.3 billion as at Dec 31, 2015, after the sale was completed. Up to June 30, 2017, that figure had reduced by nearly a quarter or RM312.57 million.

Minorities thinking of exiting now could be taking a big hit, given how much the share price has fallen over the past two years. On the other hand, staying on could mean continuously chasing the share price to keep their average shareholding costs low while waiting for potential light at the end of the tunnel.

Puncak Niaga declined to comment.

Burning cash

It could be argued that Puncak Niaga is tremendously undervalued given its net assets per share of RM3.03, according to its latest financial report. That is primarily thanks to RM987.5 million in cash and short-term investments.

However, that cash pile has also been depleting at a faster rate this year — mitigated only by its income from investments. For 1H2017, Puncak Niaga had net operating cash outflow of RM139.34 million due mainly to payments to contractors and operating expenditures, compared with RM180.2 million for the whole of FY2016.

The expenditure would have dented its cash holdings as at June 30, 2017, had it not recorded RM427.08 million in net proceeds from its short-term investments, nearly tenfold higher than short-term investment proceeds of RM47.25 million in 1QFY2017.

The short-term investments are categorised as level 2 investments, according to regulatory filings. In essence, that means their value is not measured using quoted prices in active markets but rather, using other observable metrics.

The cash burn could accelerate. On July 3, Puncak Niaga completed its indirect acquisition of Danum Sinar Sdn Bhd, which owns 46,674ha of plantation land in Murum, Sarawak, for RM248.93 million.

According to Puncak Niaga’s filing dated Oct 17 last year announcing the proposed buy, only 20.9% of the plantation land is planted, out of which only a quarter has palm trees over 18 months old.

As a benchmark, oil palms generally give the best yield at their prime age of between eight and 18 years while trees below four years old are generally considered immature. This means the palm oil business would take some years to cultivate, especially as much of the land had not been planted at the point of purchase.

In the meantime, Puncak Niaga would be expected to lend financial support, especially in meeting finance costs, while the unit could remain loss-making.

For its financial year ended Dec 31, 2016, Danum Sinar recorded  revenue of RM6.79 million and a net loss of RM13.52 million, according to Companies Commission Malaysia data.

The company had RM181.92 million in short-term liabilities and another RM128.62 million in long-term liabilities. It had RM282.9 million long-term assets and RM29.17 million short-term assets.

Last month, Danum Sinar signed a RM290 million financing facility from Affin Islamic Bank Bhd, which is conditional upon Puncak Niaga’s corporate guarantee. The group said the financing will enable Danum Sinar to foot its development expenditure as well as refinance existing banking facilities and provide day-to-day working capital.

A clearer picture of how much the plantation arm could drag Puncak Niaga’s financial performance further could emerge when the group reports its 3QFY2017 results later this month. It would be the first financial quarter since it completed the takeover of Danum Sinar.

Skirting PN16

Notably, Puncak Niaga’s cumulative cash balance and short-term investments of RM987.5 million represents 63.1% of its RM1.57 billion total assets.

Crossing the 70% mark may trigger the PN16 classification as a cash company — meaning a listed issuer with over 70% of its consolidated assets comprising cash or short-term investments.

In essence, if Bursa Malaysia deems a listed entity a cash company, the rules require 90% of its cash and short-term investments to be placed in a special account while the company tries to regularise its condition or ceases to be a cash company.

If these are unsuccessful, Bursa Malaysia may delist the company. For Puncak Niaga shareholders, that scenario could mean some cash being returned given the company’s low liabilities relative to its assets.

As at June 30, 2017, Puncak Niaga had a total of RM174.06 million in total liabilities against RM1.57 billion in total assets.

Puncak Niaga came close to crossing the threshold upon completing the sale of its water assets. After receiving the proceeds, its cash and short-term investments swelled to RM1.3 billion, making up 69.7% against total assets of RM1.87 billion for the quarter ended Dec 31, 2015 (2QFY2015).

On a quarterly basis, that ratio had gradually reduced to 63.1% as at June 30 this year. Interestingly, in 2QFY2016, it also had RM63.7 million in long-term investments on its books, which remained in 3QFY2016, but were no longer on its books in 4QFY2016.

The investment was classified as a level 3 investment, meaning its value was estimated using unobservable inputs.

Hypothetically, had the RM63.7 million investment been short term rather than long term, it may have pushed Puncak Niaga past the 70% threshold in 2QFY2016, when the ratio was 67.63% against RM1.75 billion total assets. An additional RM63.7 million to its short-term investments would have bumped the ratio to over 71%.

In any case, the cash burn at Puncak Niaga may steer it away from this risk. However, the remaining worry for shareholders is whether the company will eventually see substantial returns for its cash spent before too much of the cash pile is gone.

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