5 Reasons Why You Should Own HEVEA (5095)

Part 1 of a 6-Parts Series

1)    A Crisis Proven Management

HEVEA was deeply mired in debts in the year 2009 with staggering outstanding loans in excess of RM 200 million, following the aftermath of the US-led Subprime Crisis of the year 2008. The sudden arrival of the Subprime Crisis 2008 caught HEVEA totally unprepared and off-guarded, just when HEVEA was embarking on an aggressive expansions plan.

To recap, HEVEA only raised RM 30,080,000 through its initial public offer (“IPO”) with the issuance of 15,040,000 ordinary shares of HEVEA at an offer price of RM 2.00 per share, together with 40,000,000 Warrants at no consideration to all entitled shareholders of HEVEA on an one Warrant for every two ordinary shares of HEVEA held. All these were listed on January 12, 2005.

With such low amount of cash raised in its IPO, the management decided to leverage up HEVEA with bank loans when the going was looking good back in 2005-2008. Of course when the Subprime Crisis 2008 strikes, these loans were immediately inflicting maximum pressures on HEVEA to even breath. To make the situation worse, a big chunk of these loans were in the form of short-term commercial papers like Letter of Credit and Banker’s Acceptance which typically have a bullet repayment period of less than 3 months. That means HEVEA is saddled with repayments almost instantaneously.

With the calamity of the Subprime Crisis 2008 engulfing the whole world, HEVEA’s only hope for access to lifeline of cash on products sold were shut almost completely, in addition to the heaps of unsold inventories in its warehouses and on production lines which further strained its cash flow badly.

In the business fraternity, there is a saying that bankers are the cold-bloodied lot when you are down. What’s more when the bankers they themselves were scrambling for cash during the Subprime Crisis 2008, what an irony. In the case of HEVEA, the bankers with a smaller loan exposure to HEVEA were the one with the cruelest whacking bats. Their get-out-of-the-situation mentality was to wind-up HEVEA as soon as possible in order to put behind their own scars on HEVEA.

Consequently, there is no surprise that HEVEA eventually turned to the court of law to save itself through a Scheme of Arrangements provided under Section 176 of the Companies Act, 1965. Had it not because of the decisive and well-thought determinations of the management in 2009 at the height of the calamity, HEVEA would not have been listed and traded today on Bursa Malaysia.

Having secured a winding up protection by the court of law is one thing, overcoming and meeting the stringent conditions and progresses as laid down by the court and administrator is another. This simply mean HEVEA needs to rise itself up in the rubbles and ruins of its past mistakes within a given stipulated time frame. This is all the more daunting as the Subprime Crisis 2008 had just claimed many too-big-to-fail conglomerates worldwide.

Now the management of HEVEA is faced with a do-or-die situation. In order to address the most crucial part of the whole winding up protection and in the race against time to save the interest expense as much as possible, the management of HEVEA has done a marvelous job in convincing successfully the bankers so as to convert those short term commercial papers into longer date term loans. This accords HEVEA the much needed breathing space. At this point, it is learnt that HEVEA’s interest payment alone was nothing less than a million ringgit a month! Try visualizing the hardship and pressures the management of HEVEA has to endure and to emerge itself respectably unscathed, eventually.

Best of all, HEVEA did not ask its shareholders for money to pull itself out of the financial mess. They are determined. They are confident. They know they can do it. And they have done it.

HEVEA eventually came out of the winding up protection on October 10, 2011, victorious.

The latest available financial statements revealed that the debt level has been gradually reducing from RM200 million plus in 2009 to a more manageable RM75 million currently, that’s quite an astonishing feat of a steady RM25 million reduction every year since early 2010 by HEVEA. Plan is afoot by the management to completely retire this RM75 million by the end of 2014, if not in the first quarter of 2015. With the interest expense element completely eradicated by early 2015 the latest, HEVEA should be in a net cash position thereon. The cash piles will then built up much faster than the RM25 million reduction.

On a market note, this is the ONLY reason why HEVEA’s shares price is underperforming its peers in the light of Latitud, Pohuat, Homeriz and Lii Hen. Once this negativity is taken out completely by early 2015, don’t be surprise if we see the shares price of HEVEA in the neighborhood of Latitud, if not Lii Hen at the very least.