Repco Holdings (Repco) was listed in 1991 with trading of automotive parts, manufacturing of exhaust systems and blending of brake fluids as its principal activities. However, to those who had keenly followed Repco or were burnt by its collapse would know that it really took off in 1996 with its foray into the lucrative gaming business in Sabah. The rapid rise of Repco following this expansion was followed by a perplexing and equally rapid fall - see tables 1 and 2.
Unlike the special stock selections previously featured, Repco's fortunes initially surged when changes in management occurred. For Repco, the same management team, which was initially warmly welcomed, ironically rendered the group insolvent, due to some perplexing share trading activities. By June 2000, the shareholders' funds (S/H funds) of Repco stood at a massive deficit of RM321.38 mln. In Feb 2001, Repco was categorized as a PN4 company. How did this come about?
Table 1 : Financial highlights of Repco (RM mln) - year end 30 June
Table 2 : Financial Highlights of Repco (RM mln)
a) Change in Management and Focus
Tell Tale Signs
When Repco was offered for sale in 1991, the management was, not surprisingly, very optimistic of the prospects of the group. However, things did not pan out as expected. Not only did the group miss its profit forecast of RM3.68 mln for 1992 by 34%, its earnings and margins were deteriorating rapidly - see table 2. In 1995, the group tried to strengthen its core auto parts trading and manufacturing operations. But Repco was operating in an industry with low barriers of entry and with little branding. At the same time, its cost was rising and Repco was lengthening its credit lines. The group struggled to compete with its competitors but by 1995, it was suffering losses, revealing the harsh economic realities of its core business even as the Malaysian economy was booming.
In Sep 1994, Tan Hah Sing, the managing director and the majority shareholder with a 28.41% stake, resigned and ceased to have any interest in Repco. This and the resignation of 5 other directors marked the exit of key management personnel. Glancing at the numbers in table 2, their departure was not at all surprising.
Transforming With New Businesses
In Aug 1995, a new team was set up with 4 new directors, including Low Thiam Hock as executive chairman and Choo Chin Thye as CEO. This was an important turning point as Repco subsequently diversified into the gaming and timber industries. In Oct 95, Repco bought the entire capital of Everise Capital S/B (ECSB) for RM7.5 mln with further cash payments of up to RM115 mln, depending on the profit aggregates for the following 3 years. ECSB's 75% owned subsidiary, Everise Ventures S/B, operates 4-digit forecast pools and other gaming-related activities for the Sandakan Turf Club through its 50 outlets in Sabah. As for its foray into the timber industry, Repco acquired Peluamas S/B for RM5 mln to secure long-term supply of timber logs from Sabah Foundation. Subsequently in 1997, the group purchased 2 other logging companies, Hajat Semarak (M) S/B and Teluk Jadi S/B, for RM28 mln and RM2 mln respectively to acquire timber extraction rights worth RM30.53 mln.
Promising Start, Greedy Management
To their credit, the gaming acquisition did marvellously well - see table 3. Repco looked set to succeed in its transformation. By mid-1997, its shares were selling at RM140 each. However, success and greed may have got into their heads as they unexpectedly and aggressively engaged in share trading based on borrowings.
Table 3 : Segmental Reporting (RM mln)
b) The Beginning Of the End
Puzzling Speculation, Disastrous End
Via its subsidiary, ECSB, Repco obtained loans of RM255 mln from a bank and traded in shares through the stockbroking unit of the bank. In fiscal year 1998, the group bought shares amounting to RM411.5 mln and sold them for RM340.77 mln, resulting in a huge loss of RM70.72 mln, wiping out that year's gaming profit of RM47.34 mln.
However, this large loss did not tell the entire story of the group's participation. Also present were claims of RM177.81 mln, arising from disputes concerning releases of funds from the bank to the stockbroker for settlement purposes, in relation to the group's share trading activities. Due to the non-recovery of the claims from its stockbroker, a provision of RM207.88 mln, including interest charges, was made in fiscal year 1999. All in all, the group incurred share trading related losses of RM278.6 mln - up to 10.75 times its shareholders' funds.
Meanwhile, the management's efforts to revitalize its existing autoparts business were not successful. The division continued to register losses, aggravated by an exodus of key management. Its diversification into the timber industry fared no better. The loss-making timber business temporarily ceased operations in 1998. Another shocker came in 1999 when it disclosed that its timber extraction rights might not be extended upon its expiry in Dec 1999. The group had to take a RM22.5 mln hit.
At the end, Repco's problem was not so much its unprofitable autoparts and timber businesses. These could have been offset by its gaming business, which was still profitable even in fiscal year 2002. It was certainly the massive share speculation that did the job of sinking Repco's balance sheet and thus the whole group. With a profitable gaming business, the puzzling question remains : was it pure greed that drove the management into such a folly ?
Appointment of Special Administrators
On 16 Apr 1999, the KLSE made a public reprimand and fined Repco RM300,000 for failure to make immediate announcements on acquisitions and disposals of shares and not obtaining shareholders' approval on the respective acquisitions and disposals.
So, on the back of the huge share trading losses, burdened by its massive short-term debt of RM378.8 mln and no working capital, the group defaulted on its payments to creditors. As a result, on April 1999, Special Administrators were appointed by Danaharta to assume control and management of the assets and affairs of Repco and 7 of its subsidiaries. By Feb 2001, the group was deemed an affected listed issuer under the PN4 category.