Perwaja: A Painful Restructuring Ahead

One of the top performers in our market in the past 3 weeks is the ailing steel producer, Perwaja. That stock broke above its long-term downtrend line at RM0.08-0.10 in April this year. From Chart 1 & 2 below, we can see that Perwaja's technical outlook is very bullish.


Chart 1: Perwaja's daily chart as at July 10, 2015 (Source: ShareInvestor)


Chart 2: Perwaja's monthly chart as at July 10, 2015 (Source: ShareInvestor)

However, Perwaja's bullish technical outlook does not sit well its gloomy industrial outlook and extremely poor financial position. If you look at Diagram 1, you will see that the company has a negative shareholders' fund of RM1.05 billion as at 31/3/2015. That means the stock has a NTA of negative RM1.88 per share.


Diagram 1: Perwaja's Balance Sheet as at 31/3/2015

When a company's shareholders' fund is in negative position, it can only operate again if it is restructured. The restructuring would entail the followings:

1. the creditors agreeing to write-off a large portion of the amount owing to them (known as debt haircut)

2. the shareholders agreeing to part with a large portion of their capital (known as capital reduction)

3. the creditors agreeing to convert their remaining debts to equity or quasi-equity (in order to reduce the company's borrowings)

4. the shareholders agreeing to subscribe for new shares (in order to reduce the company's borrowings & to replenish its working capital)

Now, I'm only an accountant by training, not an expert in corporate restructuring. When I look at Perwaja's deep hole, I think it would take nothing short of a miracle for any restructuring proposal to successfully implemented. However, since the situation is so hopeless, I believe that the creditors would be agreeable to anything in order to get back some of their money (and as long as they are not required to put up any more money). The real test is whether the shareholders would agree to subscribe for a huge Rights Issue (as large as 12-to-1) after being hit by a huge capital reduction (as large as 10-to-1)!


Table: Perwaja's Possible Restructuring

 
Diagram 2: Perwaja's Creditors as at 31/3/2015

The success of the Perwaja's restructuring would require a fantastic story! This story must have a way of getting the players to look pass the huge hole in Perwaja's Balance Sheet and the extremely difficult operating environment in the steel sector- where even the better players look inadequate! And, Perwaja is at the other end of the spectrum of steel players, i.e. it's one of the weakest players!!

So, despite the very bullish technical outlook, I'm far from bullish on Perwaja.This is a stock that's good only as a spectator sport. If you must get into the steel sector, a safer bet would be Annjoo.

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, Perwaja.