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Home > Articles > PN4s - What's Went Wrong?

PN4s - Sateras Resources (M)


Unlike the other special stock selections, Sateras Resources (Malaysia) (Sateras) was set up a long time ago, on 25 Feb 1969, and was granted pioneer status to produce and manufacture polyvinyl chloride (PVC) resins and compounds. Sateras, formerly known as Synthetic Resins, was listed on the KLSE on 12 Feb 1973. In the mid-1980s, Sateras diversified from its core activity into the assembly & marketing of motor vehicles, property investment & development and logging of timber. Unfortunately, poor management meant that Sateras had to exit in the late-1980s from all of its core activities except property investment & development.

Sateras then embarked on various acquisitions to strengthen its position in the property investment & development industry, as well as diversifying into many unrelated businesses ranging from manufacturing of fishing nets and ropes to cultivation of cocoa plantation. Again, its diversification efforts did not work out and Sateras had to dispose or cease many businesses. When the Great Asian Crisis struck in 1997/98, the group's weak management and balance sheet were thoroughly exposed. Sateras suffered a total loss of almost RM120 mln in 1998 and 1999 and by 31 Mar 2002, it had a deficit in shareholders' funds of RM82 mln. Thus, Sateras joined the rising number of PN4 companies on 23 Feb 2001.

1976-1983: The early days

Sales of PVC resins and compounds for the period 1976-1983 were increasing due to a booming economy and increase in production capacities. Profit before taxation peaked in 1981. As there was a slump in the PVC trade in the developed countries that resulted in depressed prices, Sateras embarked on an expansion and modernisation programme which doubled its production capacity. In addition, Sateras constructed a storage terminal facility in Pasir Gudang for storing vinyl chloride monomer (VCM), a principal raw material of compounds and resins. This was aimed at reducing costs by bulk purchases and reduction in handling and transportation costs.

1984-1986: The Musical Chair Starts

Perhaps mindful of the falling margins in its core activity, Sateras diversified into the assembly & marketing of motor vehicles and logging of timber in 1984 by acquiring a 100% interest in Sarawak Motor Industries Bhd (SMI) vide issuance of 30.66 mln new shares. SMI held licenses and franchises to assemble BMW passenger cars, Toyota Land Cruisers & Dyna light trucks and Hino trucks and buses. SMI also owned logging concessions amounting to 181,219 hectares of land in Malaysia. Sateras' venture into property investment and development was through acquiring 99.6% of Development Securities S/B (DSSB) in 1983 vide issuance of 8.315 mln new shares. DSSB owned Bangunan Sateras, an office building in Kuala Lumpur with a land area of 7,664 square metres. It also owned residential houses and a 10-storey commercial building in Kuching. Table 1 shows a summary of the result of its diversification.

Table 1 : Key financial highlights

Sales in 1984 surged from 1983 but subsequent to this, sales dropped as the Malaysian economy went into a tailspin. Profit also plunged, reflecting the lack of profitability of the motor division. High capital expenditure requirements and rising stocks significantly increased its debts, which also resulted in poorer interest coverage. The poor results of SMI forced Sateras to provide for diminution in value of its investment in SMI totalling RM24.2 mln in 1987.

Sateras' failed diversification in the mid-Eighties can be summed up as follows : poor management that expanded aggressively when the Malaysian economy was sliding. The group suffered low rentals in Bangunan Sateras and surplus office space in Kuching due to the soft property market, poor demand for luxury cars that led to the loss of the BMW franchise and expiration of its relevant logging licenses in 31 July 1986 where the renewal was not approved.

1987-1989: A Quick Exit

With the losses from its unsuccessful diversification piling up, Sateras not surprisingly pared down its activities through a series of disposals. The Group sold SMI for RM0.04 mln cash, thus exiting from the assembly & marketing of motor vehicles and logging of timber industries. Sateras also exited from the manufacturing and sale of PVC resins and compounds, its core activity for the past two decades, by selling the entire operation for RM37.5 mln, resulting in an extraordinary gain of RM21.492 mln. In 1989, Sateras also sold Bangunan Sateras for RM22.2 mln, resulting in an extraordinary loss of RM11.089 mln. The main reason for these disposals was to settle the group's liabilities and to try its luck elsewhere. Sateras was now left with property investment and development as its core activity.

1990-1997: Another Merry Go Round

With the cash from the disposals, Sateras then embarked on another diversification spree that not surprisingly did not bear fruit, as shown in Table 2. Norsan Fishing was generating profits but it was declining rapidly due to the reduction of import tariffs. A reason why these attempts did not succeed was because the group was jumping from business to business, did not have the financial resources and management skills to bring the business to fruition.

Table 2 : Sateras' second spree

Sateras also expanded its core property investment and development division. From 1990-1997, it acquired many companies and was involved in many development projects, both locally and overseas, ranging from an 18-hole golf course to a 33-storey office cum condominium to a mixed development project and a 5-storey hotel. Figures 1 and 2 show the result of Sateras' expansion.

Figure 1 : Total Asset

Figure 2 : Turnover and PBT

It is clear that while Sateras' total assets surged, its sales and profit did not follow this trend. Compounding this problem was a significant rise in its borrowings despite issuing 118.9 mln new shares for its acquisitions. Sateras' inability to generate a decent profit was worrying, especially during this period of economic boom. When the economy went bust in 1997/1998, massive provisions and write-downs compromised the group's operations.

1998-2002: Debilitating Losses

When the economic downturn happened in 1998, Sateras' operations were affected badly. Due to cashflow problems, unprofitable projects and its high borrowings, it defaulted on certain loan repayments in 1998. Sateras attempted to settle its outstanding debts by issuing 254.17 mln shares to creditors, banks and the Inland Revenue Board in 1999. However, the proposed settlement was terminated on 24 Apr 2002 due to the low market price of its shares. Its massive holding of investment properties and land & development expenditure (RM140.4 mln as at 31 Mar 2002) was unable to be liquidated, and net losses from 1998-2002 amounted to RM339.2 mln, resulting in a deficit in shareholders' funds of RM82 mln as at 31 Mar 2002. A winding up petition was served on Sateras by AmBank Bhd on 16 Dec 2002 for an amount of RM4.51 mln.


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