By VEN SREENIVASAN
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CHINA water treatment specialist Bio-Treat Technology expects earnings for the current financial year to be higher than the previous year, thanks to the absence of bad debt provision and higher revenue stream from its completed wastewater treatment projects.
Just last week, the company announced that its net profit for the full year ended June 30 had plummeted 62 per cent to 125.43 million yuan (S$26.3 million), a key reason being bad debt provision. Revenue slid 11.6 per cent to 1.41 billion yuan as a fall in turnkey project flows and longer credit cycles slowed wastewater treatment revenues by 19 per cent to 1.1 billion yuan.
Meanwhile, the company is toying with plans to set up a business trust to contain water-related infrastructure assets. If this comes to fruition, it will be the second pure water trust to list on the Singapore Exchange (SGX) after Hyflux Ltd's Hyflux Water Trust last November.
The $234 million Hyflux raised via its water trust was a brilliant move to raise boost liquidity, recapitalise, lighten its balance sheet and realise shareholder value.
But Bio-treat is no Hyflux.
This is a company which has been struggling with boardroom problems, project financing issues, slumping earnings and a huge debt which hangs like an albatross around its neck.
Even as it was announcing its FY07/08 results, the company was receiving notices from four creditors for full redemption of convertible bonds (CB) which had come due in January this year.
The current problems have their roots in 2006 when the company issued a $206 million seven-year CB programme that allowed bondholders to cash out two years from the start of the issuance. But with Bio-Treat's projects typically paying back only in 8-9 years, the group soon found itself stuck with inadequate funds to meet the obligations on put options due this January.
Huge current debt
As it stands, Bio-treat has some $106 million in bonds which fell due earlier this year, and another $63 million which will be due in January 2011. In addition, the company has some $70 million in shareholder loans, on top of bank loans amounting to about $80 million. It has also committed project financing to the tune of some $63 million in an effort to boost capacity from 550,000 tonnes/day at the moment, to 1.24 million tonnes/day by the middle of next year.
So its current debt totals some $382 million.
Meanwhile, applying a 10 times price-to-earnings multiple, its $26 million profit translates into an enterprise value of just $260 million.
It doesn't take a financial genius to figure out how this $260 million stacks up against a debt of $382 million.
Faced with the prospect of action by bondholders whom it cannot repay, Bio-treat has looked at various ways to raise cash and capital, including placements and rights issues. But nothing has come of it in the face of a collapsing share price.
Securitisation may be a final best bet. But the odds are stacked against it.
For a start, unhappy bondholders could block any attempt to hive off assets. And even if some assets could be spun off to raise cash, it would take a very brave investor to plough more funds into a company whose earnings visibility is somewhat cloudy.
As the company claims, bad debts could indeed be lower this year, but the fact remains that the operating environment for China-based wastewater treatment companies is getting increasingly tougher amid strictly controlled tariffs and a rapidly slowing Chinese economy.
Myriad of problems
Given its serious problems, it is remarkable that Bio-treat's stock price has even held up at current levels.
Perhaps there is some hope of bondholders taking a massive haircut to save the company. Perhaps the company might gain access to more credit lines.
But the bald truth is that under the current uncertain economic climate where credit tightening is the order of the day, neither bondholders nor other lenders are likely to bail out a business which faces a myriad of problems ranging from falling turnkey project flows, bad debts, cut-throat competition, and the shadow of serious allegations by former chairman Wing Hak Man over share ownership.
Whichever way one slices or dices it, Bio-treat is stuck between a rock and a very hard place.
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