London Biscuits (LBB) received a Notice of Demand filed by the Bank of Nova Scotia Berhad (BNSB) due to the company’s failure to repay a RM9.83m facility, for which it cited cash flow constraints. We are troubled by this development, considering its existing debt load of RM355m (as at 31 March 2019) which may open LBB up to further difficulties of this nature going forward. Add to that the on-going re-audit of its financial accounts for certain matters raised by its external auditors, near-term outlook is decidedly hazy. We also question the lateness in the timing of this public disclosure, as the default was on 10 May 2019. While we retain our earnings estimates at this juncture, we caution for potential downside risks subject to the outcome of its re-audit. We are cutting our TP to RM0.24 as we impute a lower 4x PE multiple (6x previously) to FY20 earnings to account for the significantly higher financial-related uncertainties. We expect share price to weaken following this announcement and given a potential downside of 23% to our revised TP, we downgrade our call to Trading Sell.

• Remedy. LBB is currently engaging in active dialogue sessions with BSNB’s solicitors and intends to submit a comprehensive proposal to restructure the loan facility. While the Group may well be able to find a way out from this current predicament, we are troubled at its cash flow constraints which had even led to this, against the backdrop of its total RM355m debt load which may potentially open up the Group to further troubles.

BNSB’s claim on LBB is based on the interest on amount owing under the Bankers Acceptance of RM1.83m and Operating Credit Facility of RM8mil.

Source: PublicInvest Research - 4 Jul 2019