This article first appeared in The Edge Financial Daily on November 7, 2018

KUALA LUMPUR: Kim Teck Cheong Consolidated Bhd (KTC), in the spotlight following its audit and risk management committee chairman’s resignation in September, is ready to leave its “receivables saga” behind.

For perspective, Wee Hock Kee stepped down as the group’s audit and risk management committee chairman after a disagreement with the group’s board over a sum of receivables amounting to RM4.926 million in KTC’s books, outstanding for over 270 days. Wee reckoned that the amount should be impaired, but the majority of KTC’s board disagreed as they felt it was recoverable.

In his resignation letter, Wee stated he had no choice but to step down as he felt his role as the committee’s chairman was undermined.

When met by The Edge Financial Daily recently, KTC executive director (ED) Dexter Lau said that RM4.72 million of the outstanding RM4.926 million had been collected. Lau also stressed that the Sabah-based consumer package goods distributor was ready to leave the whole receivables fiasco, or the “RM4.9 million saga” as Lau referred to it, behind.

“This RM4.9 million is actually less than 1% of KTC’s revenue, so it is not material to us. At the point of Mr Wee’s resignation, we managed to collect RM1.1 million. Now, to date, we have collected RM4.72 million, and we are providing for a write-off of RM180,000.

“We have a long-term relationship with our customers and we know their financial strengths, so it was just a matter of going there [to their offices] and negotiating with them. It was an executive decision to not impair. We run the day-to-day business; we know our customers,” he told The Edge Financial Daily.

As per its annual report for the financial year ended June 30, 2018 (FY18) released last Wednesday, KTC’s trade receivables from external parties that have been past due, but not impaired, had more than quadrupled to RM38.31 million from RM8.8 million in FY17.

However, according to KTC chief financial officer (CFO) Pamela Phui Hee Yung, most of these receivables that have not been impaired are a day to 60 days past due.

“It is not a concern for us. If you look carefully at the breakdown, the increase mainly comes between a day and 60 days. Our credit term is between 30 days and 90 days, so the increase is quite a norm as our sales have increased from six new distributorships. Further, KTC gives large pharmacy chains a 90-day credit term.

“These amounts are recoverable as they are already reflected in our new quarter. The group is very confident as we have several large chain outlets with a strong financial standing as our customers,” she said.

According to its annual report, the amount outstanding between a day and 60 days but not impaired was RM28.83 million in FY18, compared with RM4.52 million in FY17. The amount outstanding past 61 days was RM9.48 million, compared with RM4.28 million in FY17.

The report also revealed that the group had a negative cash balance of RM33.24 million as of FY18, as its bank overdrafts amounted to RM40 million versus RM6.79 million of cash and bank balances. Given this scenario, why did the group not push for a quicker recovery of its receivables?

“There was a pressing need, but we had new distributorships crushing in [the last financial year], and this caused our negative cash flow position to escalate because we had to buy the stocks, and [the average holding period] for our inventory is 60 days. So we had to orchestrate the inventories which were coming into our Sarawak and Brunei [warehouses],” said Lau.

“We had five new distributorships coming in at the same time [in the last financial year], so it was not possible to see a dramatic improvement in cash flow. But we expect this to improve gradually moving forward, as most of the new distributorships are fast-moving inventories,” said Phui.

The new distributorships include contracts with Nestle Products Sdn Bhd in Brunei, Heineken Marketing Malaysia Sdn Bhd in Sarawak, L’Oreal Malaysia Sdn Bhd in Sabah, Labuan and Sarawak, Oriental Food Industries Sdn Bhd in Sabah and Sarawak, and Power Root Marketing Sdn Bhd in Sarawak. The contracts are targeted to contribute a monthly revenue of RM16 million to the group.

With the contracts in hand, Lau is confident about the group returning to profitability, after falling into the red in FY18 with a net loss of RM8.13 million, from a net profit of RM418,000 in FY17, despite registering a 7.15% increase in revenue to RM459.22 million.

“We want to go into harvest mode and stabilise these new businesses of the group — this will be the main challenge. This is because we are not talking about small businesses here, tagging along with our infrastructure. Instead, they are businesses big enough to dictate how they want to run their [respective] business, and this needs to be synchronised into KTC’s current operations.

“We will be releasing our first quarter (1Q) of FY19 results soon, and I can say I am pleased. We will also be refreshing our board as some directors are up for retirement. We look forward to bringing on board more commercially and technically astute board members,” he said.

Lau, together with Phui, also addressed the recent amendments to 3QFY18 results that resulted in a significantly higher net loss, after what the group said was inaccurate consolidation adjustments.

KTC’s net loss jumped to RM11.82 million in 3QFY18, up 72% from the initial RM6.85 million announced in May. The group said the variation stemmed mainly from a revised consolidated tax calculation. “Our new audit committee chairman had detected a miscalculation of tax, so she advised the management to make the announcement on Bursa Malaysia [about the amendments],” said Phui.

“There was a change of CFO, hence the change of guard [in the finance function], but we are now much stronger. Moving forward, the auditors will perform a limited review of our quarterly announcements,” added Lau. Phui joined KTC as the CFO on March 8, after its previous CFO Christina Yap Chui Fui resigned.

KTC shares fell to 13 sen on Oct 26, below its initial public offering price of 15 sen. Since then, the shares have recovered by 23% at 16 sen on Monday, with a market capitalisation of RM81 million. Lau and his family control some 72% of the group.