No sparks flew at what was expected to be a fiery annual general meeting (AGM) of plantation and sugar manufacturer Tradewinds (M) Bhd.

And there was good reason for the expectation of fireworks. The increasing trade receivables in Tradewinds’ balance sheet have been a growing concern, with the amount ballooning to RM398.4 million in the company’s latest financial report for the period ended March 2009. This was a rise of 23.4% from three months earlier when trade receivables stood at RM322.79 million.

Much of the receivables are linked to related party Bukhary Sdn Bhd (BSB), which has the mandate to sell the sugar produced by Gula Padang Terap Sdn Bhd (GPT), a wholly-owned subsidiary of Tradewinds. Apart from GPT, BSB is a distributor of sugar produced by Central Sugar Refinery Sdn Bhd (CSR), which is also a wholly-owned subsidiary of Tradewinds.

According to Tradewinds’ annual report, BSB owes it some RM193.9 million, which amounts to about 60% of the company’s total trade receivables.

Checks with the Companies Commission of Malaysia (CCM) revealed that BSB is a unit of KHSB Marketing Sdn Bhd, a company linked to tycoon Tan Sri Syed Mokhtar Al-Bukhary, who is also the controlling shareholder of Tradewinds, with some 43% equity interest held via Perspective Lane (M) Sdn Bhd, Kelana Ventures Sdn Bhd and Seaport Terminal (Johore) Sdn Bhd.

BSB’s directors are Chuah Seong Tat, who is also a non-independent non-executive director of Tradewinds, and Ahmed Kamil PM Mustafa Kamal, who is also a director of GPT.

Interestingly, documents obtained by The Edge reveal that BSB itself had receivables of RM167.7 million as of Sept 30, 2007. These were due from several related parties, including Bukhary Realty Sdn Bhd, Energetic Advantage and Hikmat Abad Sdn Bhd. The bulk of the amount is due from Hikmat Abad, which owes BSB some RM62.5 million in the form of advances.

For FY2007 ended Sept 30, BSB posted a net profit of RM327,197 on the back of RM209.8 million in revenue.

During the year, BSB advanced RM62.5 million to Hikmat Abad. In FY2006, it had advanced Hikmat Abad, which is involved in general trading, RM61.7 million.

Checks with CCM showed that Hikmat Abad’s accounts after 1996 are not available. The company’s directors, based on latest filings, are Anuar Ramli and Zul Azri A Aziz, both of whom are believed to be linked to Syed Mokhtar.

Anuar was a shareholder in Syed Mokhtar’s Johor-based water treatment company Aliran Ihsan Resources Bhd, controlling some 10.2% or 22.7 million shares via private company Lindungan Sinar Sdn Bhd, which is linked to Syed Mokhtar.   

The chairman of Aliran Ihsan, Datuk Mohamed Feisal Ibrahim, is said to be a close associate of Syed Mokhtar. Mohamed Feisal is also the executive chairman of Bina Puri Holdings Bhd — another of the many listed companies linked to the tycoon — as well as of Perkasa Sutera Sdn Bhd, a privately held construction company. According to its website, Perkasa Sutera has an order book of about RM59.5 million. The executive director is Zul Azri, who controls 70% of Hikmat Abad.

To recap, Tradewinds acquired GPT from privately held Jalinan Semangat Sdn Bhd, Perbadanan Kemajuan Negeri Kedah and tycoon Robert Kuok Hock Nien’s PPB Group Bhd for RM188 million in 2006. Jalinan Semangat is said to be controlled by Syed Mokhtar.

Prior to the acquisition, Tradewinds already owned CSR, which has a melting capacity of 1,500 metric tons (MT) a day. GPT, meanwhile, has a refining capacity of 800 MT a day.

Tradewinds had earlier said the acquisition of GPT would provide it with future earnings, the opportunity to expand its geographical presence and a larger market share in the sugar refining industry. But based on Tradewinds’ growing receivables from BSB, GPT’s contribution will only matter if the outstanding amount is collected.

Tradewinds management told the media last week that it was concerned about BSB’s growing debt to the company. However, chairman Datuk Wira Syed Abdul Jabbar Syed Hassan said BSB had experienced a tough year in 2008 following the financial crisis.

“BSB has been our agent since 2004 and it has helped us develop the market in the peninsula as well as Sabah and Sarawak. We have to take into account the problems on its side because of the difficult year but we are going to reduce the debt amount progressively,” he told reporters after the AGM last week.
He did not say how it was planning to do so, which leaves room for speculation that the amount may never be recovered.

Apart from trade receivables, Tradewinds’ 69.8%-owned unit Tradewinds Plantation Bhd has not been performing well.

For the first three months of the year, it suffered a net loss of RM9.4 million on the back of RM133 million in revenue. Tradewinds Plantation is among the largest plantation counters in the country.

It has a landbank of 150,000ha, of which 81,000ha have been planted and 39,000ha are being replanted. Some  30,000ha remain unplanted.

While it is common knowledge that the plantation sector was badly hit by a sharp fall in crude palm oil prices late last year, it must be noted that none of the other large plantation companies bled. While peat soil has been blamed for most of the problems, industry observers say inefficiency could be a reason too for the paltry performance of Tradewinds’ plantation arm.  

Related-party transactions are not new to companies linked to Syed Mokhtar. For instance, GPT was privately held by Syed Mokhtar before it was injected into Tradewinds. And just like Tradewinds, the tycoon’s other companies, such as MMC Corp and DRB-Hicom Bhd, have seen related-party transactions.
What is new is receivables owed by a related party.

So, why is Tradewinds maintaining BSB as the sole distributor of GPT’s products even after acquiring the sugar refinery in 2006?

Tradewinds’ shareholders seem more concerned about retaining BSB’s services rather than the rising debt itself. They proposed and passed a motion at the AGM to give the group of companies the mandate to enter into recurrent related-party transactions without much hassle.

This will enable Tradewinds to continue to trade with BSB for up to another RM300 million in receivables. If BSB maximises its credit limit and fails to reduce the current amount owed to Tradewinds, it could mean a debt of more than RM600 million owed to Tradewinds by the end of this year.

Whether Tradewinds recovers the trade receivables from BSB remains to be seen, but certainly, the company and its shareholders seem the least bothered by it.

This article appeared in Corporate page of The Edge Malaysia, Issue 760, June 22-28, 2009