Hexza’s bottom-line to take a hit from RM28.5mil provision

KUALA LUMPUR: Hexza Corp Bhd is making a provision in its first-quarter (Q1) results that will negatively impact its profit by RM28.54mil - more than its total profit for the financial year ended June 30, 2017 (FY17).

In a filing with Bursa Malaysia on Tuesday, the ethanol, vinegar and resin manufacturer said its Q1 FY18 profit was affected by an impairment loss of RM28.54mil due to a client, Tembusu Industries Pte Ltd, defaulting on equipment rental payments.

This is not the first time Hexza has made an impairment loss of finance lease receivable due to the Singapore-incorporated firm’s payment default. In FY17, the Ipoh-based company made an impairment loss amounting to RM6.95mil, being the amount due but not paid by the lessee.

Hexza said  it had on Tuesday served the Singapore-incorporated firm a notice of default for Tembusu’s failure to make payment on the monthly lease rental payable under an agreement dated Jan 30, 2015.

The company is currently weighing its options to recover its investment, including early settlement by Tembusu and via legal actions. 

Hexza said it had also appointed a law firm in Singapore to advise it during the ongoing negotiations with Tembusu.

In addition, the company has issued a letter of demand to Tembusu founder and majority shareholder Pete Tin Muang Kyin, a Singapore citizen who originally came from Myanmar. Tin had provided a personal guarantee in favour of Hexza on the due performance by Tembusu of its duties and obligations.

To recap, on Jan 30, 2015, Hexza inked an agreement with Tembusu to buy part of the equipment for a 8MW heavy fuel oil power generation system located in Myanmar from Tembusu for US$6mil (RM25.3mil), after which Tembusu would lease back the equipment from Hexza at a monthly rental of US$130.205 (RM549,937) for 10 years.

Tembusu is in the business of designing, engineering, project management, and operation/maintenance of power and utility plants. Its expertise lies in conventional and renewable energy technologies.

According to Hexza, Tembusu has subsequently asked for reschedule of payment twice due to the delay in commissioning of the equipment and other external factors. 

Nonetheless, Tembusu failed to adhere to the rescheduled payment timeline, it said.

“Following the delay in payment from Tembusu, representatives of the company have met up with the directors of Tembusu over several occasions to discuss the payment matters but could not arrive at an amicable resolution,” Hexza said.

The company said due to the default by Tembusu and being prudent, its board had decided to make a full provision on the carrying amount of Hexza’s investment in this transaction, being the outstanding principal and interest income recognised (net of payment received from Tembusu). 

Hence, the company recognised an impairment loss of finance lease receivable amounting to RM28.54mil in Q1 ended Sept 30, 2017, it said.

This would impact earnings per share by 14.2 sen, it said.

The group recorded earnings of RM22.23mil for FY17, which translated into earnings per share of 11.1 sen.

Hexza’s FY17 earnings were propped up partly by a one-off gain of RM6.56mil on disposal of assets by unit Norsechem Resins Sdn Bhd, a net gain on disposal of investment in quoted shares of RM5.4mil and a net gain on foreign xchsange of RM2.06mil.