Transcu Group (KimEng)

Background: Transcu was formed after the 2008 reverse takeover of cinema hall operator Eng Wah Organisation. The RTO was effected via an issue of 1.6b new shares, effectively diluting the original shareholders to less than 10% and giving the new Japanese owner majority control of the restructured company. Today, Transcu can best be described as a life sciences and biomedical company. It focuses on three key areas – transdermal drug delivery systems, specialised cosmetic products and green fuel technologies.

Key development: Our last update on Transcu was in February this year when we gave it one chilli, the lowest rating we have ever had on a stock since we started the Hot Stock series. In June, trading on the stock was suspended on cash flow concerns and it has remained so as the company sought to restructure itself.

Our view

Ample warning signs. In February, we warned that Transcu’s cash flow was under pressure, and as at December last year, current liabilities exceeded current assets by 2.5x. We also said “the company has been in the red and severely diluting minority shareholders since IPO. A recent rights issue has given it a reprieve… until end-1H2011. However, this may be its last chance”. We were proven prescient when the company suspended trading of its shares in June after it warned of immediate cash flow concerns and that it might be placed on the SGX watch list for having recorded three consecutive years of pre-tax losses.

CEO to play white knight but with stiff conditions. Transcu’s substantial shareholder and CEO, Mr Akihiko Matsumura, has proposed a cash reprieve for the company via a US$7m shareholder loan. In return, however, it will have to give up its exclusive distribution rights for its green fuel technology products such as the NEFS fuel system for the markets of China and Russia, the thermal solutions technology as well as the renewable energy technology. Each step of the proposal is subject to shareholders’ approval and the recommendation of the IFA.

Key ratios…

Price-to-earnings: na (loss-making)

Price-to-NTA: na (current liabilities exceed current assets)

Dividend per share / yield: na (no dividends since RTO)

Share price (S$) na (suspended)

Issued shares (m) 2,784.5

Market cap (S$m) na

Free float (%) 75.9

Recent fundraising activities (capital markets only) Jan 11: 1-for-3 rights issue at $0.02 per rights share, and $0.04 exercise for accompanying warrants

Dec 09: Equity line facility of up to S$72m with YA Global Master

Oct 09: 320m new shares @ $0.096

Mar 09: Equity-linked structured notes up to S$80m (due 2014)

Feb 09: 25m new shares @ $0.25

Financial YE 31 March

Major shareholders CEO Akihiko Matsumura (24.1%)