Chart 1: SCN's monthly chart as at May 12, 2015 (Source: ShareInvestor.com)
Chart 2: SCN's daily chart as at May 12, 2015 (Source: ShareInvestor.com)
However, this morning SCN rebounded on news report that the company is suing Bursa Malaysia for exercising its duty to classify the stock as a Guidance Note 3 (GN3) issue based rules 2.1(b) and (c) of GN3. Bursa made that decision by referring to SCN's fourth quarter results for 2014.
SCN's suit is probably based on two grounds. The first ground was that the "company has no means to make such announcement as
the company Secretary had resigned on the same day." The announcement in question refers to the announcement that "company had triggered rules 2.1(b) and (c) of GN 3
based on the company 's Q4 2014 results". The second ground is probably the interpretation of rules 2.1(b) and (c) of GN 3. The good news for the shareholders of SCN is that their company was granted an ad interim injunction by the high court
on May 11 to restrain Bursa Malaysia from
implementing the classification of the company". That may explain why the share price is up today.
The first ground for the suit - my Company Secretary has left - should not be allowed to stand and be used as an excuse for all future failure to make announcement to the exchange. And with regards to the interpretation of the rules 2.1(b) and (c) of GN 3 which supposedly state that "company's loss equals to or exceed the amount of shareholders' equity and the shareholders' equity is equal to or less than 50% of the issued and paid-up capital for one full financial year loss", my thoughts are as follows:
1) Rule 2.1 (c) requires that “the shareholders' equity is equal to or less than 50% of the issued and paid-up capital for one full financial year loss”. I feel that the phrase “for one full financial year loss” is not necessary as it is more a P&L item. Shareholders’ equity & issued/paid-up capital are Balance Sheet items. This criterion is met if the reduced shareholders’ equity is equal to or less than 50% of the share capital. For SCN, its shareholders’ equity of RM6.247 million as at 31/12/2014 is only 31% of its share capital of RM20.0 million.
2) Rule 2.1 (b) requires that the company's loss equals to or exceeds the amount of shareholders' equity. Now, I must admit I have not read this rule in full. I assume that it is stated correctly. What’s the meaning of loss? Is it accumulated losses or current year loss?
To get a correct interpretation of this rule, I racked through the internet and stumbled upon a Slideshare presentation by Ch’ng Boon Huat, the Head of Issuers Investigation & Surveillance dated July 10, 2009 (here). On slide #5, the prescribed criteria for classification under GN3 were shown. I believe that rules 2.1 (b) is “L1 > SE1”, which mean last year loss is equal to or more than shareholders’ equity "last year". SCN's last year loss of RM7.1 million exceeded its shareholders’ equity "last year" of RM6.247 million. (Note: I've denoted "last year" shareholders' equity as such because the more accurate description should be shareholders' equity as at end of last year.)
This may be a contestable point. However, it is hard to convince the judge to compare the net loss for FY2014 with the shareholders' equity as at 31/12/2013. I am sure he/she would ask, Why are we comparing with numbers from different periods?
Diagram: GN3 Prescribed Criteria
Table 1: SCNs P&L account as at 31/12/2014
Table 2: SCNs Balance Sheet as at 31/12/2014
Based on the above, I believe that SCN's suit against Bursa is a long shot. If you are stuck in this stock, you may want to take advantage of the current rebound to reduce your position.
Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, SCN.
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