All eyes on Harvest Court today

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KUALA LUMPUR: Investors will closely watch the share price performance of Harvest Court Industries Bhd today after Bursa Malaysia lifted its nearly two-month old designation status last Friday.

In mid-November, Bursa Malaysia declared Harvest Court’s shares and warrants as “designated securities” after the share price skyrocketed as much as 20 times in a matter of weeks.

Since then, the stock price has halved from a peak of RM2.14 to RM1.08 last Friday, although it is still well above the below-10-sen- level the stock traded at prior to its run-up. Trading volume also dwindled to just 202,200 shares last Friday, compared with a peak of 9.5 million shares in early November.  

Clearly, the restrictions had worked and taken away some froth, although the stock exchange also warned that it would continue to monitor the trading in the stock.

“In the discharge of its frontline regulatory role, the stock exchange will continue to monitor the trading activities of Harvest and Harvest-WA, and where trading concerns are noted, the exchange may take appropriate regulatory actions”, Bursa Malaysia said in a statement last Friday.

How the stock reacts today remains to be seen. However, one thing is almost certain — Harvest Court will likely not be the last stock to be designated as the market is prone to speculative trading.

It is often said that a little speculation is sometimes good for the market, especially during times when the market is listless, sentiment is poor or where there are few fresh leads. However, there is a clear line drawn between speculation and stock manipulation, and the authorities are seen as doing the right thing in clamping down hard on the latter.

Still, one should note that the designation of a stock is purely a reflection of the company’s share price rather than its actual operating business, although valuations may have disconnected.

Since the entry of new shareholders, Harvest Court for instance, has clinched several contracts for projects related to its new directors.

While its financial performance will likely improve with the new contracts, at what level the stock should trade is a subjective matter.

The company’s net assets per share stood at a low of 17.5 sen as at Sept 30, 2011.    

Indeed, history has proven that designated stocks do not necessarily mean a death sentence for the companies involved.

A slew of stocks were given the dreaded designation status in the early 1990s — the height of the bull run.

One of them, Union Paper Holdings Bhd, became the subject of national and even criminal interest. Many of these companies were either taken private or were loss-making and eventually changed hands, including Union Paper.

However, some have flourished into stronger entities, notably Iris Corp Bhd — the last designated stock before Harvest Court — which is scaling new heights financially.

The Edge Financial Daily takes a trip down memory lane to look at some companies which made history by being designated — and where they are now.

Union Paper Holdings Bhd One of the biggest scandals that rocked the credibility of the then Kuala Lumpur Stock Exchange in the early 1990s involved Union Paper Holdings Bhd (UPHB), a joss paper, toilet paper and wrapping paper processing company.

Its share price skyrocketed 1,229% in a span of three months, from a low of RM1.73 to RM23, before crashing to RM4.72 following its designation by the local bourse.

The meteoric rise in its share price during the height of the bull run in 1993 was partly attributed to a rumour that KUB Malaysia Bhd was poised to make a reverse takeover.

The rumour never materialised. The company had a paid-up capital of only RM17.37 million and former deputy prime minister, the late Tun Ghafar Baba, was its chairman. It became a topic of national interest not only for punters but also the man on the street who lost a lot of money from investing in the stock.

“It is easy to understand why people were scared. This was the time when someone with a yen to invest and with balls of steel could become a millionaire overnight. This was a time when investment strategies were non-existent and investment decisions were made because ‘someone’s mother, brother, uncle’ had a hot tip. People borrowed heavily to invest, often from people who no one in their right mind would ever want to owe money. And they took all that money and sank it into UPHB,” wrote Teoh Siang Swee in an essay competition organised by the Securities Industry Development Corporation.

During the investigations, short- selling in the stock came to light.

Tan Sri Ibrahim Mohamed, then CEO of Uniphoenix Corp Bhd and Damansara Realty Bhd, was fined RM500,000 after pleading guilty to short-selling 825,000 UPHB shares.

After the debacle died down, the company’s finances suffered and posted losses from 1994 to 1998, before it was acquired by the Tung Hup Group in 1999 via a reverse takeover.   

But the stock did attempt one more last hurrah.

It saw another sharp rally in late 1996 and early 1997 that drove the stock price to a high of RM17.80 in February, before tumbling all the way down to RM1 by the end of the year as the Asian financial crisis occurred.

Under the reverse takeover, UPHB was renamed TH Group Bhd. Its paper business was sold for a nominal RM1 and assets worth RM333.64 million were injected into the group via an issue of new shares.

TH Group’s new core businesses were in timber extraction, plantations and construction, and they fared relatively well financially for the next few years.

Subsequently, TH Group diversified its operations to include an information technology venture capital arm. The company was also active in its contracting and civil engineering divisions, garnering contracts locally and from Indonesia.

Nevertheless, it fell into the red in 2007 and 2008.

In September 2008, TH Group’s major shareholders proposed to privatise the company via a selective capital reduction and repayment of 75 sen.

The company was delisted in 2009 after the exercise was completed — 10 years after the reverse takeover and 16 years after the stock’s designation.

A final chapter closed in July last year when NTPM Holdings Bhd, which manufactures tissue and toilet paper, entered into agreements with Union Paper Industries Sdn Bhd, the core subsidiary of the formerly listed UPHB, to buy its land and machinery for RM20 million.

Ho Wah Genting Bhd In the middle of 2001, Ho Wah Genting Bhd’s (HWGB) securities became the target of punters, driving the stock price up 284.2% from a low of 57 sen to a high of RM2.19 within six months.

The speculation was much more feverish for its warrants, whose price exceeded even that of the underlying shares by several folds.

HWGB warrants skyrocketed from RM1.30 in late July to RM12.60 by mid-August, earning the ire of regulators which designated the stock and warrants then.

After the stock’s designation status was lifted at the end of January 2002, it drifted down to around the RM1 level, and fell below 50 sen by mid-2004, where it has largely stayed since.  

HWGB manufactures and trades in wires and cables, moulded power supply cord sets and cable assemblies for electrical and electronic devices and equipment. It is also involved in mining dolomite and manufacturing magnesium ingots. The US market contributes to the bulk of its revenue, subjecting it to volatile commodity prices and the uncertain economic recovery in the US.

Shortly after its designation, HWGB tried its luck in the gaming industry and opened a casino in Poipet, Cambodia. However, the casino ceased operations in 2006 following several years of losses.

Recently, the company had been gambling on mining and natural resources to spur its earnings, which have been relatively unexciting in the past decade.  

Its subsidiary HWG Tin Mining Sdn Bhd has been awarded a 10-year tin mining lease until 2020 on a 202.4ha site in Pengkalan Hulu, Grik, Perak.

“From mid-February until now, we’ve extracted around 30 tonnes of tin ore”, managing director William Teo said in July last year. He is targeting to produce 1,800 tonnes a year in 2012.

Teo expects HWGB’s tin mining business to be a major earnings driver as the operations move into commercial production by mid-2012.

“Back in January 2008, tin was trading at US$16,500 (RM51,975) per tonne and as at June 2011, it climbed to US$25,500 per tonne. The buoyant pricing was mainly due to global demand outpacing supply. The weakening US dollar had also contributed to the price hike,” he said.

Teo had then expected tin prices to reach between US$25,000 and US$30,000 per tonne due to limited supply and rising demand from the electrical and electronics sector.

Unfortunately, tin prices have since fallen to around US$20,000 per tonne.  

Malaysia Smelting Corp Bhd CEO Mohammad Ajib Anuar was recently quoted in media reports as saying that 20% of the world’s tin producers would go out of business at the current price level, adding that their production costs were around US$20,000 to US$25,000 per tonne.

HWGB also owns a 26% stake in Hong Kong-listed magnesium producer CVM Ltd, which has dolomite reserves of some 20 million tonnes in Perak.

In the 10 years after the designation, HWGB has gone through various ups and downs, finding new businesses to spur growth. It now bets on mining for its future, although that is subject to volatility in metal prices.

Financially, HWGB appears to be turning around the corner. For the year ended Dec 31, 2010, the company recorded an all-time high revenue of RM240.53 million from RM144.04 million the previous year, with a net profit of RM9.85 million versus a net loss of RM23.81 million.

Investors will be monitoring if the recovery continues and the tin venture pans out.

Iris Corp BhdPrior to Harvest Court, Bursa Malaysia had not designated a company for five years, since Iris Corp Bhd in 2006.

Iris, a security systems company, saw its share price soar from around 14 sen to just under RM1.40 in the course of five months before it was designated in May 2006 to curb excessive speculation.

Following the designation, the stock fell back to around 70 sen, but attempted to reach a similar high in July 2006 before tumbling to the 20 to 30 sen level by year-end. Since then, Iris has been a penny stock, languishing mostly below 20 sen in the past few years. It last traded at 16 sen.    

Ironically, while the stock price is languishing, Iris appears to be faring quite well operationally.  

The company specialises in digital identity, business, food security and environmental solutions. Iris pioneered the world’s first electronic passport and national multi-application identity card with the introduction of the Malaysian Electronic Passport and the MyKad, whose technologies were introduced across Asia, the Middle East and Africa.

In the months leading up to the designation, filings with Bursa Malaysia indicated that the group was awarded various contracts from the governments of Bahrain, Thailand, India, Nigeria and Somalia for the implementation of its digital identity solutions and securing local contracts with clients such as MyRapid KL.

It also signed agreements with IBM and Hewlett-Packard. This probably drove the masses to punt on the stock. These efforts appeared to have borne fruit, as Iris had banked on electronic passports as the springboard for its growth.  

For the financial year ended Dec 31, 2010, Iris’ revenue increased 10.4% to a record high of RM366.1 million, with 66% and 35% from domestic and foreign contracts respectively.

The company attributed the growth to sustained demand for digital identity solutions and its success in making inroads into financial institutions.

Net profit for the year surged 79.9% to a record RM28 million, or two sen per share, due to higher contributions from domestic and overseas ePassport projects and cost reduction measures. This placed the stock’s trailing price-to-earnings ratio at 8.3 times. The company’s digital identity solutions division is the main driver of growth, accounting for 82% of revenue in 2010.

Major existing projects are the Malaysia ePassport, Malaysia MyKad, Nigeria ePassport and the Bangladesh MRP Passport. Other contracts include the Thai inlay project, Senegal ePassport, Cambodia ePassport, Italy inlay project, Egypt CSO job, Maldives ePassport and the Canadian driving licence project.

According to the 2010 annual report, the group continued to expand its global presence via the signing of a US$149.9 million contract with the Ministry of Home Affairs of Tanzania for the implementation of the national identity card system.

To add strength to its already impressive portfolio, the group received three industry awards in 2010. These were the MSC Malaysia Research and Development Grant Scheme Top Performer award, the Ernst & Young Entrepreneur of the Year award and the Ministry of International Trade and Industry Excellence award for export excellence.

For a company shunned by investors due to the stigma of its 2006 designation, Iris appears to have come a long way.

Inch Kenneth Kajang Rubber plc, Kluang Rubber Co (M) Bhd, Mentakab Rubber Co (Malaya) Bhd and Sungei Bagan Rubber Co (M) Bhd   While some companies have changed hands, restructured or improved post-designation, there are some which continue operating just as they were.

In mid-2005, a handful of old and very thinly capitalised plantation companies were designated as their share prices shot up in response to large bonus issues. They are Inch Kenneth, Kluang Rubber and Sungei Bagan Rubber. The last two are related companies.

Another small company, Mentakab Rubber was designated in 2004 when an 18-for-1 bonus issue was proposed.

The large bonus issues were in response to new minimum capital regulations for listed companies set by the regulators, namely RM60 million for then Main Board companies and RM40 million for Second Board.

Inch Kenneth, for instance, went through a 50-for-1 bonus issue, and its stock price jumped 89% in three days.

“The rationale for this bonus issue was to meet the minimum issued and paid-up share capital of at least RM60 million as required by the Securities Commission and to reward the existing shareholders of the group for their continued support,” it said in the group’s 2005 annual report.

“The bonus issue was effected by capitalising on the company’s revaluation reserve account and retained profits,” it continued.

After the issuance, the company’s operations continued as before the designation. Inch Kenneth owns several plantations in Kajang and Bangi, which are prime for property development, and late last year sold a 448.6-acre (179.4ha) plot to UEM Land Holdings Bhd for RM259.9 million or RM13.30 psf.    

The same was seen with Kluang Rubber when it issued a 29-to-1 bonus issue in 2005, the same year Inch Kenneth was designated.

“The Bursa Malaysia Securities Bhd Listing Requirements for Main Board public-listed companies (plc) require a minimum paid-up capital of RM60 million. The company has yet to comply with this requirement and is currently looking at various options,” it said in its 2004 annual report.

As of the financial year ended 2004, Kluang Rubber only had a paid-up capital of RM2 million, less than 1% of the required RM60 million.

After increasing its capital base, the company has remained a low-profile small plantation company with 1,600 acres of land in Kluang and annual revenue of RM7 to RM8 million a year.

Similarly, Sungei Bagan is also collecting earnings from its 2,744-acre plantations in Kelantan, with little impetus or growth or corporate developments. Its revenue for the year ended June 2011 stood at just RM13.5 million.

It was a different story for Mentakab Rubber which is a very small and odd subsidiary of government-controlled giant Golden Hope Plantations Bhd.

Mentakab was eventually privatised with Golden Hope and several other companies under the Synergy Drive merger exercise in November 2007 to create what is now the enlarged Sime Darby Bhd.

This article appeared in The Edge Financial Daily, January 9, 2012.