by NUR HANANI AZMAN / pic by TMR FILE
DEPENDING on the Suspended Criteria triggered by the companies that slip into Practice Note 17 (PN17) status, the regularisation strategy needed to remedy the situation will need to be unique from each.
BIMB Investment Management Bhd’s equity analyst Izhar Mosliman said Ireka Corp Bhd, which was condemned to PN17 status after its auditors highlighted a material uncertainty related to it being a going concern due to its shareholders’ equity being below the 50% threshold, requires a different approach than the case of Serba Dinamik Holdings Bhd which slipped to PN17 status after its auditor expressed a disclaimer opinion in its audited financial statement for the financial period ended June 30, 2021.
Notwithstanding, PN17 companies share a mutual underlying concern — they are in some hot water and could be delisted from the stock exchange, he added.
“For the financially distressed PN17 company, on the premise the company’s shareholders remain confident with the management’s ability and optimistic with the business’ prospect, the company may seek fresh financial support from the shareholders to continue operating for the foreseeable future.
“The bottom line is that the company must start generating profit through business restructuring, revenue expansion, and/or cost rationalisation,” he told The Malaysian Reserve.
There are now 29 companies under PN17 and GN3 (Guidance Note 3) status which represent 3.13% of the total number of 926 companies listed on the Main market and ACE Market of Bursa Malaysia Securities Bhd.
Others in the list includes Brahim’s Holdings Bhd that has government-related funds as its shareholder; Perak Corp Bhd, a key subsidiary of Perbadanan Kemajuan Negeri Perak Group; and TH Heavy Engineering Bhd, a subsidiary of Urusharta Jamaah Sdn Bhd — the special-purpose vehicle of the Ministry of Finance.
Listed on the Main Market of Bursa Malaysia on May 27, 1999, tile manufacturer Seacera Group Bhd, a PN17 company is at least 60-owned by Bumiputera shareholders.
According to Izhar, the principal cause for a listed firm to trigger the Suspended Criteria is usually due to its inability to register a profit for an extended period thus concurrently depleting its retained earnings and shareholder’s equity. Shareholder’s equity is a summation of retained earnings and share capital.
The Suspended Criteria might be triggered once the shareholder’s equity is below its share capital threshold level.
The shareholders’ equity also measures the book value/net worth of a firm (total asset minus total liabilities) while the market value of a firm is its market capitalisation (share price multiplies shares outstanding).
“The firm’s market value tends to be in fluctuation as investors attempt to capture the firm’s book value and its future earnings capability, which is lacking in most PN17 companies,” he explained.
Undeniably, a company coming out from the PN17 list could serve as an attractive investment opportunity only if the future earnings are more visible but investors should always be mindful that they are betting against the odds by investing in the financially distressed company, said Izhar.
Under Bursa Malaysia’s listing requirements, listed companies will be classified as PN17 status if they are triggering at least one of these Suspended Criteria:
(i) the shareholders’ equity is 25% or less of its share capital and such shareholders’ equity is less than RM40 million.
(ii) receivers or judicial managers have been appointed over at least 50% of the total assets of the listed issuer.
(iii) a winding up of a listed issuer’s subsidiary which accounts for at least 50% of the total assets.
(iv) the auditors have expressed an adverse or disclaimer opinion in the listed issuer’s latest audited financial statements.
(v) the auditors have highlighted a material uncertainty related to going concern in the listed issuer’s latest audited financial statements and the shareholders’ equity of the listed issuer is 50% or less of its share capital.
(vi) default in payment by a listed issuer, its major subsidiary, or major associated company.
Upon PN17 classification, the company is obliged to submit a regularization plan to Bursa Malaysia and implement the plan within the timeframe stipulated by the authority.
The regulator provides an opportunity window for PN17 company to turnaround its business performance, thus the PN17 classification by itself does not guarantee a death warrant for the company.
For shareholders of PN17 status companies there is hope as historically, numerous companies have successfully survived the scare and graduated from the PN17 list.