Published November 25, 2008

Time to address a potential problem for investors

By VEN SREENIVASAN

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THE recent batch of earnings results remains generally positive, though weaker than the previous year.

But the trend in the latest quarterly numbers is worrisome.

Total profit for 89 Singapore Exchange-listed companies which reported half-year earnings to end-September was down 14 per cent to $3.2 billion.

More significantly, 51 companies which reported their first-quarter results for the July-September 2008 period saw earnings fall 34 per cent to $336 million.

Of the 11 companies which posted red numbers for their first quarter, nine were profitable a year earlier. And more than half the 40 profitable companies reported lower earnings compared with a year ago. Overall, earnings for the July-September quarter fell some 10 per cent year on year, even as revenues rose some 37 per cent.

Not surprisingly, investment houses have downgraded earnings prospects for Singapore companies.

For example, Credit Suisse has lopped off its FY 2008 and FY 2009 estimated earnings for listed Singapore corporates by 18 per cent and 37 per cent, respectively.

'Across the region, Singapore has seen one of the most significant consensus earnings downgrade, especially for FY09E,' it said in a Nov 18 report.

Depending on which analyst or market expert one speaks with, the earnings crunch could last anywhere from 12 to 18 months.

If so, almost a dozen struggling listed companies could lose their listed status by the end of next year. This is because under Chapter 13, Rule 1311 and 1312 of the Singapore Exchange's Listing Manual, companies which post pre-tax losses for three consecutive years face possible delisting from the mainboard.

SGX started its Watch-list of struggling companies in March this year, whereby quarterly reviews are done to determine if they meet the minimum continuing criteria.

To date, there are 13 companies on the Watch-list: ASA Group; Chinasing Investment Holding; Chuan Soon Huat Industrial; Eastgate Technology; Fastech Synergy; General Magnetics; Ionics EMS; Jets Technics International; Lindeteves-Jacoberg; Rotol Singapore; Stratech Systems; Tri-M Technologies and Unified Communications Holdings.

Given the deteriorating operating conditions, more companies will soon be joining this group in the months ahead. At least half a dozen listed corporates have already issued new profit warnings in recent weeks.

Meanwhile, there is a very real possibility that many of the companies already on the Watch-list may not be able to reverse their declining performance under current business conditions. So going by the rules, as they now apply, these companies face a real danger of being delisted.

But what happens to the hundreds of minority shareholders of these companies if they are forcibly taken private?

Currently, these investors have no clearly defined exit route, thus leaving them with the unappetising prospect of automatically becoming shareholders of companies taken private.

Given the realities of the current operating environment, should the SGX lay out an exit route for these investors? If that is not possible, should the Watch-list criteria be eased?

There are no easy answers.

But perhaps the current circumstances require a re-examination of the SGX's 'three-strikes, and you're out' policy?

Of course, bending the rules opens up a whole new set of problems. Where should the cut-off period be for a return to profitability? Could it lead to a perceived lowering of listing standards - something which the Watch-list was created to prevent?

But this is an issue which will loom larger as the months roll by and business conditions worsen.

If the recent problems associated with the retail bond sales have taught us any lessons, it must be that the potential problems have to be identified early and addressed as soon as possible. Or else hundreds of retail investors holding worthless credit notes will soon be joined by hundreds more holding virtually worthless share scrip.