It has been more than two years since an accounting scandal was uncovered at Transmile Group Bhd, but until now, the air cargo carrier continues to hog the limelight for the wrong reasons.

Two weeks ago, Bursa Malaysia warned investors to be cautious about trading in Transmile’s shares after the price spiked 77% to RM1.55 on June 10 from 87.5 sen on June 3. Some 146.9 million shares were transacted within five trading days, a volume equivalent to more than half the company’s share capital of 270.1 million.

Queried by Bursa, the cargo carrier said it was not aware of any development that would make its stock skyrocket.

Coincidentally, the Emerging Market Growth Fund, which held a 5.63% stake or 15.02 million shares in Transmile until June 12, has ceased to be a substantial shareholder. This triggered speculation that a new substantial shareholder could emerge. At press time, however, there has been no announcement.

The sudden surge in Transmile’s share price has raised eyebrows, especially among those who still remember the accounting scandal that shocked the local corporate community. Accounting irregularities involving forged sales invoices to inflate revenue happened when former transport minister Tun Dr Ling Liong Sik was chairman of Transmile and the Kuok group was a substantial shareholder.

This has remained a blot on Transmile’s and the country’s corporate history.

Against this background, it is natural for observers to be wary of the escalating share price of debt-laden Transmile, whose business is still bleeding. Furthermore, the economic downturn and export slump have added to the challenges facing its management.

However a beacon of hope is that the air freighter is close to overcoming its biggest hurdle to a turnaround. After long-drawn-out negotiations, most of the company’s bondholders have in principle agreed to a restructuring of the firm’s debts.

It is learnt that the creditors have granted two years for Transmile to sell off its four units of MD11, a wide-body aircraft. The proceeds from the sales will mainly be utilised for debt repayments.

“The consent given by the creditors will save Transmile from bankruptcy,” says an industry observer. “We know that the company is technically solvent now. That provides more breathing space for Transmile.”

Originally, Transmile was hopeful that it could look for buyers for the four large cargo planes before the end of last year. However, the current harsh economic conditions do not bode well for Transmile’s sales plan. The planes are now sitting idle after the company stopped unprofitable routes to save costs.

The additional two years it has been granted to  look for buyers for its planes is certainly a big relief for the company, which would go bankrupt should all creditors collectively demand repayment.

In its latest update to Bursa on its loan default, Transmile says it is preparing the definitive agreements for the debt restructuring.

In April, it announced that the majority of its lenders had agreed in principle on the terms of the “security sharing arrangement” for the purpose of the company’s debt restructuring. The agreements, however, are subject to the approval of the lenders’ respective managements and other internal approvals and the execution of the definitive agreements.

As for its operations, realistically, it is unlikely that Transmile can churn out profits in the next three years or so considering its huge borrowings and the fact that its past glory was in fact a “hallucination” created by the previous management.

The air cargo industry moves about 35% of the value of goods traded internationally. As a sector that closely reflects the state of the economy, air cargo traffic began falling in June last year as business sentiment waned, sliding 23% y-o-y in December.

IATA, the international airline industry association, has forecast that global air cargo demand would decline 17% and that airlines will carry 33.3 million tonnes of cargo this year compared with 40 million tonnes last year.    Nonetheless, The Edge learns that the saving grace for Transmile is that it has managed to charter out almost all of its narrow body aircraft. “This will at least provide a secure, steady income,” says the industry observer. “However much the cargo volume shrinks, the company will still receive chartered revenue from its customers, including DHL.”  

For 1Q ended March 31, Transmile’s revenue shrank substantially to RM35.5 million from RM119.3 million. The sharp contraction was due to the cessation since March last year of unprofitable routes served by the MD-11 aircraft.

Net loss, however, narrowed slightly to RM43.8 million from RM47.7 million a year ago. The loss included an unrealised foreign exchange (forex) loss of RM20.4 million on the US dollar, which was recognised following changes in the functional currency for accounting purposes. If the unrealised forex losses were excluded, its pre-tax loss would be RM22.1 million, says Transmile.

The air carrier posted a net loss of RM121 million or a loss per share of 44.8 sen for FY2008 versus a net loss of RM285.9 million or RM1.06 per share in FY2007.

Since May last year, Transmile’s two subsidiaries — Transmile Air (SPV) Ltd and TGB (SPV) Ltd — have collectively defaulted on debt repayments of US$132.9 million (RM478 million). Another unit, Transmile Air Services Sdn Bhd, also failed to repay its medium-term notes amounting to RM30 million.

As of March 31, the air carrier’s balance sheet showed short-term borrowings of RM592.8 million, while its bank balance stood at RM114.8 million. Of the amount, about RM106 million was raised via a private placement in late 2006 strictly for debt repayment.

Given the harsh operating conditions, the cargo carrier still has a long journey ahead to turn around but getting the approval of creditors for the debt restructuring is a good start.

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