THERE are many reasons why a company loses its competitive edge.
They run out of cash, overgear, sell a product nobody wants, execute poorly or offer no real value to the client or market.
Many times, companies fail simply because they offer no real differentiation in the market.
However, more often than not, it is always an issue of leadership – yes, the failure of the boss or founder of the company.
Many studies and articles have shown that failure at the top is more often the root cause of a business failure.
In business, unlike politics, the bottom line matters.
A company does well because it sold a winning product. That is the decision made by the CEO.
If a company fails because it sold a product that became an absolute flop – that is also on the CEO.
The CEO is accountable for these decisions.
It is true that a company may already have a profitable business model or a poor strategy. But that does not happen automatically. That happens because of something, and that something is typically the boss of the company.
It is true too that a company can only do well if it has a strong team. It is pointless to have a great CEO and lousy staff. Again, this is a people issue.
It has also been pointed out that many CEOS are experts at their trade but not entirely savvy when it comes to financial issues.
Hence, their bad judgement may initially go unnoticed, thanks to the strong financial position of the company. That won’t last though. The music will stop, and soon enough, the flaws and financial holes will start to show.
So, businesses don’t fail. But people do.
Below we look at the four companies that have been pushed out of the RM10bil market-cap family over the last four years.
Mall anchors were in vogue even as recent as 10 years ago. It attracted traffic and drew shoppers. Fast forward today, with technology and e-commerce, and mall base retailing is fast losing its place in the market.
The feel and facade of Parkson retail outlets hasn’t changed very much from 20 years ago. The product offering also appears dated.
Not surprisingly over the last four years, its net profit has dropped from RM238.2mil in financial year 2014 (FY14) to a loss of RM120.9mil in FY17. Look at its four-year price chart and it is almost a straight line headed south. At its share price of roughly 52 sen today, the stock has a market cap of some RM554.95mil.
Parkson Holdings Bhd (PHB) started off as a high flyer. Incorporated in 1982, its initial growth was phenomenal as it opened stores across Asia and benefited from the rise in a growing middle-class consumer.
Then the Internet came. In China, especially, the Chinese retail market has seen an unprecedented evolution and experienced one of its most challenging periods.
Retailers have had to contend with cooling economic growth, the rapid rise of e-commerce, and new spending mindsets and ever changing behaviour of customers
The Internet is not the only culprit, as millennials are replacing boomers as the biggest consumer segment. Not only are millennials lower-income consumers but many would rather spend on holidays than apparels.
PHB was listed on the Main Market of Bursa Malaysia Securities on Oct 28, 1993.
It is an investment holding company with stakes in Parkson Retail Asia (PRA) and Parkson Retail Group Ltd (PGRL), listed on the Singapore Stock Exchange and Hong Kong Stock Exchange, respectively.
PRA operates a total of 69 department stores in Malaysia, Vietnam, Indonesia and Myanmar. Under the Parkson brand, it has 46 stores in Malaysia, seven in Vietnam, two in Indonesia and one in Myanmar.
In Indonesia, it has 13 stores under the brand of Centro Lifestyle Department Store.
Meanwhile, PRGL is one of the premier retail operators in China with 49 department stores covering 36 major cities.
Parkson isn’t giving up though. In its 2017 annual report, it says the retailing business is one which requires continuous reinvention and adaptation to meet consumers’ expectations.
“The group has taken many proactive and innovative steps in executing its transformation strategies, both online and offline, and we have seen some real and very encouraging progress,” it says.
Felda Global Ventures Holdings Bhd
Enough has been said about the world’s second-largest palm oil company, Felda Global Ventures Holdings Bhd (FGV).
There was so much hope when it first made its debut on Bursa Malaysia in June 2012. At that time, both the local and international media were busy celebrating the world’s second-largest initial public offering (IPO) for that year at US$3.1bil, second only to Facebook Inc’s US$16bil.
The listing, with its market capitalisation of almost RM20bil, was the peak for FGV. It has been on a downhill since then, with the plantation giant being clouded by governance issues mainly because of an acquisition spree that started after it was listed.
Now, fast forward five years later, and how things have changed.
While Facebook’s share price is close to its all-time high, FGV is jarringly at the opposite end. FGV has erased nearly RM14bil off its market capitalisation and is now only capitalised at some RM6.28bil. Its cash pile has also dwindled from more than RM5bil to RM1.45bil as of Sept 30, 2017.
Apart from poor financial results, it has been hit by allegations of corruption, management changes, acquisitions that were too expensive and organisational restructuring.
Its expensive acquisitions were one of the main issues. FGV went on an aggressive acquisition trail – between January 2013 and 2016, it completed seven acquisitions. The president and CEO during this period was Datuk Mohd Emir Mavani Abdullah and the chairman Tan Sri Isa Samad. The company has had three CEOs over the last four years.
The poor management in FGV was one of the key issues which ultimately saw its cornerstone investor, Employees Provident Fund, making a full exit in early 2017.
What was most disturbing for investors was that these acquisitions did not translate into a higher profit. In fact, FGV’s net profit has been fast sinking from the financial year ended Dec 31, 2013 (FY13), when it raked in RM982.25mil, to a meagre RM31.47mil in FY16. As of the nine months to FY17, this has improved to RM67.15mil.
But back to its core business of plantations, the root of the problem was in its old trees, or plants that are 20 years old and above. That currently made up some 40% of the group’s total planted land bank of 332,000 ha.
The group’s current average tree age profile is roughly 15.8 years, which also makes it less productive. While management is now addressing this issue, the progress is slow and the results still remain to be seen.
Just as the global oil and gas (O&G) industry is gradually recovering, Sapura Energy Bhd’s dismal earnings this year has indeed surprised many in the market.
In the first nine months of its financial year 2018 (FY18), the integrated O&G services company continued to be in the red for the second consecutive quarter, with a net loss of RM1.4mil.
According to CIMB Research, Sapura Energy’s core net loss was almost four times higher than its previous loss forecast.
Precipitated by the uninspiring results, the share price has fallen to a three-year low currently. In fact, the stock has tumbled by nearly 66% from its year-to-date high of RM2.08 in April 11.
In its heyday prior to the oil price plunge, Sapura Energy, formerly known as SapuraKencana Petroleum Bhd, was Asia’s largest provider of O&G services by market capitalisation.
The company was worth RM30bil then but is now reduced to a market capitalisation of RM4.25bil.
What has gone wrong for the country’s largest O&G service provider?
The group’s two core operations – engineering and construction as well as drilling – have been suffering significant losses, while even the exploration and production division, which should have fared better in a higher crude oil price environment, registered a sharp drop in earnings.
UOB Kay Hian in a report points out that Sapura Energy’s low utilisation of rigs is a concern.
“Although the company is actively pursuing contracts, the likelihood of near-term contract win is unclear and unlikely in the immediate term, even though there is demand for 14 tender rigs up to 2020,” it says.
Moving forward, as Sapura Energy tries to return into profitability, cashflow is an important condition for the company in these trying times.
As no immediate lumpy loan repayments are needed and capital expenditure plans are already budgeted for, the group should be able to navigate through the currently-challenging environment.
Sapura Energy believes profits will recover in time and that its current performance is rather temporary.
For this to happen, the group needs to see a recovery in contract wins and a higher-than-expected drilling rig utilisation.
The low oil price environment in the last few years has not been kind to UMW Oil & Gas Corp Bhd (UMW-OG).
The O&G services company has been in the red since FY15 and its share price has trended downwards to a multi-year high.
Over the last one year, the stock has fallen by nearly 66% and this has effectively reduced its market capitalisation to RM2.5bil.
To recap, UMW-OG’s market capitalisation once peaked at nearly RM10bil in October 2014.
However, the company seems to be gradually exiting the dark clouds following its first quarterly profit in two years, recently.
In the third quarter of FY17, the company’s rig utilisation rates have improved to 90% from 26% in the first quarter. This was on the back of the stabilisation of crude oil prices owing to the Organisation of Petroleum Exporting Countries’ production cut.
The gradual but continuous increase in oil price is pushing UMW-OG above the waters.
With the benchmark Brent oil price stabilising above US$50 per barrel for almost a year and breaching US$60 per barrel in late October 2017, more upstream activities in the O&G sector can be seen.
Given the gradual improvement in the overall sector, analysts are now more positive on UMW-OG’s prospects.
Hong Leong Investment Bank (HLIB) Research says that in 2018, at least 12 jack-up rig contracts would be needed in the Malaysian market.
“This is positive for UMW-OG being one of the only two local players in the industry.
“We believe the company stands a fairly good chance to secure sufficient amount of contracts to replenish its order book,” it adds.
Now, the bigger question is, can UMW-OG’s upward momentum be sustained, moving forward?
This largely depends on the possible strengthening of the crude oil price, apart from UMW-OG’s alternative business strategy to cushion itself from the volatility in the O&G sector.
Perhaps, going the Dialog way, which is to increase footprint in the downstream segment, could help to strengthen UMW-OG both financially and operationally.