The share price of London Biscuit (LB) was hovering around 60 sen in February 2019 and started to drop to a low of 28 sen before recovering to and hovering at about 40 sen in June 2019. On 9th July 2019, the Board of directors of LB announced that the company has entered the Practice Note 17/2005 status, PN17 issued by Bursa as it has become insolvent due to its inability to fulfil its loan repayment of a tiny sum of RM9.83m. The share price plunged to 16 sen on 9th July 2019, and then continued to drop and later stayed at around 9 sen recently as shown in Figure 1 below.
Figure 1: Share price movement of London Biscuits
Referring to LB’s latest balance sheet as on 31st March 2019 after the announcement of Practice Note 17, LB has a total asset of RM846m, and a total liability of RM465m, giving it a net asset or equity of RM381m. With an outstanding number of shares of about 247m, net asset per share was RM1.54 as shown in Column 1 in Table 1 in the Appendix.
A few more banks claimed their due subsequently. LB was unable to meet its obligation to pay its heavy debts. On 1st November 2019, LB notified that it had appointed an interim liquidator. Subsequently on 29th November 2019, LB announced its final quarter result 2019 ending 30th September 2019. The loss for the quarter alone was a whopping RM443m, or RM1.52 per share!
The loss was attributed to the loss in the ordinary operation of about RM60m, an impairment of RM363m in Receivables, and the total write-off of its investment in its Associate company of RM31m.
That was incredible losses, Holy Shit kind of things, to say the least.
Column 2 in Table 1 in the Appendix shows the disappearance of the bulk of its previous RM322m in Receivables, and the total disappearance of its investment in associates, totalling more than RM350m, just with a stroke of the pen! With the latest quarterly performance and financial position as on 30th September 2019, LB’s net worth is negative now at -RM71m, or a negative book value of 25 sen/share.
Is that the end of the story of the writing-off of LB’s assets?
It is far from over yet. If you look at Column 2 in Table 1 in the Appendix, you can see that the only significant asset left is the Property, plant and equipment of RM461m, which made up 95% of its total asset value of RM484m. Tell me what kind of biscuit making plant and equipment worth RM484m? Are they made up of gold?
Will there be an impairment of the PPE? Definitely, a huge one too, probably in the next quarter. Anyone wants to bet?
So how much of this PPE worth in actual fact, and in a fire sale, 10%, 5%? If this PPE can only be sold at 5% of its value, how much is the net asset value? The company would have further owed more than RM500m to its lenders and creditors after liquidating those assets. Each shareholder will have to foot out more than RM1 a share from his own pocket to pay the creditors!
No, just kidding. The company will just go belly up and investors would lose everything they have invested in LB if the company goes into asset liquidation. That is the limit of loss of their exposure investing in a public listed company. Unlike sole proprietor or shareholders of a partnership, nobody has to come up with more money when a listed company bankrupt.
In fact, the share of potential bankrupt listed company still worth some money even if its net asset is in the negative of more than RM1 per share like that of LB. That is why LB is still trading at 9 sen a share at the time of writing, or a market cap of about RM20m.
Speculators pay for this price with the hope for some miracles to happen, after all the share price has dropped so much and it is so “cheap” now, that someday a kind-hearted noble man will fry up the share price to help them to make money.
The best hope, the way I see it, is if the appointed Liquidator can find a white knight to take over the company and maintain it as a going concern and turn it around, rather than selling off its assets.
That is not an easy task though with the precarious financial position of LB now. Never say never.
LB does worth something. It is not zero value now although its net asset may be more than RM1.00 in the negative. It has an Option Value, just like a warrant. If the share price goes up to RM1.00 in the future when you sell it, it is worth RM1.00. But if the Liquidator fails to find someone to buy it as a going concern and has to liquidate its assets, it is worth zero. Taking these two together, say the probability of the first instant is 5%, and the second 95%, LB may be worth
RM1.00 * 5% + 0 * 95% = 5 sen
This is just a speculation.
“Rule number one: Don't lose money. Rule number two: Don't forget rule number one.”
Read, understand and know how to interpret the balance sheet, besides the income and cash flows statement, is very important when deciding whether to invest in a stock. It will help you to avoid investing in a lemon and lose big. If you don’t get entangled in potentially bankrupt companies, the outcomes of your stock investment will likely to be okay. Besides, balance sheet can also help you to find some quality companies with quality assets at steep discount to invest in.
There is no short cut to investing success. In order to avoid the pitfall of investing which happened to most people, and obtaining satisfactory return for building long term wealth, one has to learn and apply the language of business when investing in the stock market. It is by treating investing in a stock as investing in part of a business that one will have a higher probability of success.
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Table 1: Asset distribution of London Biscuits