LONDON BISCUITS BHD’s recent trigger of Practice Note 17 (PN17) does seem like a bad end to an already gloomy story that had been hovering over the confectionery manufacturer in recent times.
First, it was a qualified opinion issued by its external auditors in February this year.
Then, earlier this month, the company defaulted on a RM9.83mil loan owed to Bank of Nova Scotia Bhd.
Shortly after, London Biscuits was classified as a PN17 company due to its inability to repay its loan.
To add to its woes, the resignation of several London Biscuits directors came untimely, coinciding with the recent downturn of events.
However, are things all that bad? Speaking to the media for the first time in recent weeks, albeit via e-mail replies to StarBizWeek, the management of London Biscuits clarifies some of the issues it is facing.
Recall that in a recent Bursa Malaysia filing, London Biscuits said the failure to pay its loan was due cashflow constraints.
As of March 31, 2019, London Biscuits was in a negative cash position of RM15.17mil.
In comparison, the company had cash and cash equivalents amounting to RM50.75mil a year ago.
“It all started in March this year, when one of our major bankers abruptly terminated their facility after the issuance of our 2018 annual report.
“This abrupt disruption of the banking line resulted in a severe strain to the group’s cashflow position,” the management says.
They added that this bank is not Bank of Nova Scotia.
When London Biscuits first received the notice of demand from Bank of Nova Scotia on June 4, London Biscuits had said that it will not cause any significant impact on its business, financials and operations.
However, a week later, the group announced that it had become an affected listed issuer under PN17.
To this, London Biscuits explains, “The Bank of Nova Scotia exposure is small in terms of its amount relative to the group’s total borrowings.
“If all banking facilities were running smoothly, we would have no issues with meeting the repayment obligation of the loan owed to Bank of Nova Scotia.
“However, we were not able to meet the dues, given our diminished cash reserves following the abrupt disruption of that particular banking line that was terminated.”
London Biscuits had earlier attempted to negotiate a settlement plan with the bank.
However, it was to no avail, despite the long-term healthy relationship of more than 10 years that London Biscuits had shared with the financial institution, the management says.
They add that currently, as a PN17 affected issuer, the board of directors is in the midst of formulating a comprehensive regularisation plan to address all issues in order to get their PN17 status lifted.
Yet another issue cropping up in London Biscuits accounts is its high receivables.
London Biscuits registered a net profit of RM10.87mil for the first half of the financial year ending Sept 30, 2019 (FY19), which doubled from the net profit during the same period of the previous financial year.
This was on the back of increased sales, which generated a revenue of RM230.62mil for the first half of FY19.
Despite the improved earnings, it should be noted that London Biscuits has a large amount of receivables.
As at the first half of FY19, the group’s receivables amounted to a massive RM322mil.
On this issue, the company says: “We are working with our customers to resolve the collection of receivables”.
As for the untimely resignation of four directors, the management says two of the directors – chairman Datuk Seri Liew Kuek Hin and independent and non-executive director Leslie Looi Meng – had indicated their intention to resign much earlier.
It adds that the 80-year-old Liew is not in the best of health over the past few months.
Liew, who has led London Biscuits for 26 years, owns the majority stake of 21.7% in the group, via his private company Meileelanusa Sdn Bhd.
On the other hand, Looi had resigned due to professional work commitments, Bursa filings had showed.
It is understood that Looi had informed of his intention to step down from his roles in London Biscuits as well as the group’s 20%-owned listed associate, KHEE SAN BHD, last year.
On the qualification in the external auditors report, London Biscuits in a Bursa filing dated March 27, 2019, said it had appointed Messrs PKF to conduct an independent assessment of the key audit matters raised by the external auditors.
The assessment is planned to be completed within three months from the date of mobilisation, which began in May.
No updates has been provided since.
It is understood that the independent assessment is in works and is expected to be completed within the stipulated timeframe, given the commencement in May.
In February this year, external auditors Messrs Nexia SSY issued a qualified opinion that highlighted five issues on London Biscuits’ financial statements for FY18.
The first was concerning inventory quantities amounting to RM26.89mil held by the group as of end FY18, which could not be ascertained by the auditors and may result in adjustments to London Biscuits’ financials.
Secondly, the auditors noted a discrepancy in the classification of a related party transaction via its working arrangements with Secret Ingredients Sdn Bhd (SISB), which supplies premix for London Biscuits’ finished goods.
The operational working arrangements with SISB was established to protect the know-how of the manufacturing formulae and ingredients of the group’s products.
Additionally, SISB also purchases the group’s products for distribution and retail.
In Lonbisco’s annual report 2018, the group said the working arrangements with SISB are not classified as a related party transaction due to the non-existence of a legal nexus.
Disclosures of the related party transactions were unavailable in the financial statements, and all inter-company transactions were treated and adjusted as though SISB is a related party.
Thirdly, there were misstatements in account balances in Note 39.
Fourthly, the auditors were unable to ascertain the correctness of the data of trade receivables to calculate and measure the expected credit loss to determine the necessary adjustments made when London Biscuits recognised an impairment loss of RM1.99mil for FY18 and adjusted RM60.39mil accordingly to comply with the impact, in line with MFRS 9.
Lastly, the auditors highlighted that they were unable to obtain sufficient appropriate audit evidence in terms of the acquisition of plant and machinery totaling RM52.47mil that was made in FY18.
This was despite being provided an external valuation report for the group’s major plant and machinery from a professional valuer.
It is left to be seen what will happen next at London Biscuits.
It is likely that the regulators have began their own investigations into the company following the qualification of their accounts.
On the other hand, there are market rumours that the company, whose market capitalisation has been whittled down to RM48mil following the stock selldown, could be subject of some merger and acquisition activities or even being privatised by its owners.
Do note that London Biscuits is the single largest shareholder of Khee San, another confectionery player.
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