This week's selection involves a saga. Promet was set up in 1959 and was listed on the KLSE on 17 March 1961 as Gammon. The group assumed the name Promet after the acquisition of Promet Pte Ltd in Jun 1981, with core activities in construction and civil engineering. A severe downturn in the Malaysian economy in the mid-1980s, together with unsuccessful oil explorations and losses from the property division, led to Promet incurring huge losses. A successful debt-restructuring programme was subsequently carried out. The early to mid-1990s saw Promet consolidating its core activities.
In the mid-1990s, there were new substantial shareholders, leading to a change in the board of directors. The new management proceeded to secure major contracts, both locally and abroad, and aggressively acquired shares in many listed companies. Promet also began its share trading activities using margin financing, which led to huge losses. In addition, investment in an important subsidiary in Singapore had to be written down due to the uncertain economic conditions prevailing at that time. These factors contributed significantly to Promet's downfall, resulting in a drop in shareholders' funds from a hefty RM305.1 mln in 1997 to a deficit of RM63.8 mln in 1998. Promet became a PN4 counter on 15 Feb 2001.
The Eighties: Grow To Collapse
In the early 1980s, Promet experienced steady sales and profits, under the management of 2 Singaporean brothers, Dato' Brian Chang & Dr. Benety Chang. In 1981, the group diversified into the oil & gas sector and hotel industry. Due to the group's expansion, total debts surged from RM39.9 mln in 1980 to RM261.3 mln in 1984. In 1985, Promet collapsed with debts of more than RM300 mln when a severe downturn hit its core property and rig building activities. In addition, the group incurred a loss of RM117 mln due to a write off of uneconomic oil explorations in Sarawak and the Pearl River Basin area in China, losses from the property division and provision for diminution in investments. Promet underwent a major debt reduction process by selling its property assets and concentrated on the marine engineering sector. The debt restructuring process was successfully completed in 1991, and Promet's gearing ratio dropped from a high of 62% in 1985 to 5% in 1991.
A Precious Second Chance
Promet began to streamline its operations into several core areas :
. Marine engineering and steel fabrication. Promet had 2 shipyards, in Johor and Singapore, to carry out repair and maintenance work on ships and barges, and also for steel fabrication and shipbuilding. In 1991, the Telok Ramunia shipyard was upgraded and expanded to double its capacity in the fabrication of oil production platforms. Performance of the marine engineering division peaked in 1991 and was subsequently affected by intense competition due to spare capacity in the region. Steel fabrication recorded strong sales and profits in 1993 & 1994, but later declined due to the completion of orders in hand. Overall, marine engineering & steel fabrication became less of a core activity for the group, with sales from this division amounting to 30-35% in the mid-1990s compared with 75-80% in the early 1990s.
. Property investment and development. In 1990, Promet owned 766,000 sq. ft. of commercial and office space in KL, Kuching and Kota Kinabalu. However, it was the group's plan to exit from this activity. It sold its land and buildings in Langkawi to Idris Hydraulic (M) Bhd for RM66.4 mln in 1993, sold Bukit Naga Development S/B for RM37.4 mln cash in 1993 and the .Exchange Square' property for RM96.7 mln in 1995. Contributions from property investment and development declined, due to loss of rental income previously contributed by the properties disposed.
. Civil engineering and construction. Promet had a 45% interest in the Ipco Group (Ipco), an international group of companies engaged in marine engineering and construction & development of infrastructure projects. Ipco was listed on the Main Board of the Stock Exchange of Singapore in Apr 1993. For this division, Promet secured many lucrative mega-projects such as the construction of an oil export terminal in Nigeria, a power plant in Indonesia and an oil terminal & highways, bridges & flyovers in Pakistan totalling around US$800 mln. Promet contracted a majority of these projects through Ipco, which reflected Ipco's increased importance to Promet's performance.
. Investments. Promet invested in many overseas companies, such as a 16.2% interest in Wah Nam Group, which had a majority stake in a privatised toll road project in China and a 20% interest in Yantai Promet Shipbuilding Ltd Corp, which ran a shipyard in China. However, not all of the group's investments bore fruit. In 1992, Promet had to provide for diminution in value of its investment in Perry Dines Ltd and Summa Promet Energy Ltd of RM32.0 mln. Overall, Promet's investment division did not contribute significantly to the group's profits.
1995 : The Beginning Of The End
Dato' Soh and his associates appeared on the scene in Sep 1995, when they acquired 111.1 mln shares representing a 21% interest in Promet and became the dominant substantial shareholders. The acquisition price was not disclosed, but the mass media reported the purchases at around RM250 mln, or RM2.25 per share. Promet's market price at that time was RM3.10. The old board of directors of Promet left within 2 years after the new management came in. The new management team engaged Promet in 3 activities that had detrimental effects on its viability: . Increased its interest in Ipco to 75%; . Began share trading using margin accounts and . Bought shares in other companies. Let us examine how these activities led to Promet's downfall:
. Acquisition of Ipco shares
In Nov 1996, Promet increased its interest in Ipco to 75% at a cost of RM106.6 mln cash. This was to focus on the group's core activities of marine engineering, infrastructure and construction sectors with more emphasis in the Southeast Asian & African markets. The group had around RM410 mln worth of contracts in mid-1996. However, the difficult economic conditions and currency depreciation in the region adversely affected Ipco's operations. In 1998, Ipco made an operating loss of RM75.6 mln, due to additional costs in a Nigerian project, provision for doubtful debts and deferment & cancellation of projects in Asia. In Nov 1998, Promet's interest in Ipco dropped to 25.5% due to financial institutions in Singapore selling Ipco shares that Promet had pledged as collateral for loans. Table 1 shows the major exceptional losses from 1997-1999, partly contributed by Ipco.
Table 1: Exceptional losses (RM mln)
. Share trading using margin accounts
During the financial year ended 31 Apr 1997, Promet purchased shares in certain listed companies, as shown in Table 2, in which Dato' Soh had an interest in. The purchase of these shares partly contributed to the losses suffered in share trading, as shown in Table 1. In addition, in late 1999, Promet defaulted in payments of around RM478 mln, of which RM147.5 mln was attributable to share margin & trading accounts. Of this amount, RM60.4 mln was extended by Omega Securities S/B, a company associated with Dato' Soh - see last week's special selection.
Table 2: Promet’s purchases in companies related to Dato’ Soh
. Purchase of shares in companies
Promet entered into an agreement to buy a 32.9% interest in Westmont Industries Bhd (WIB) for RM498.4 mln cash in late 1996. In Apr 1997, Promet arranged to sell its entire 32.9% interest in WIB to Swascojuta S/B for the same amount plus costs incurred in the share transactions, thus resulting in no loss to Promet. However, an amount of RM96 mln was deemed uncollectable from Swascojuta S/B and was written off in 1999. In addition, the Group acquired a 41% interest in Nina Investment Holdings Pte Ltd in Feb 1996 for RM105.0 mln, of which RM98.4 mln was paid. The acquisition was subsequently aborted but Promet deemed the amount paid as irrecoverable and wrote off the entire RM98.4 mln in 1999.
In totality, within 4 short years, from 1997 to 2002, Promet suffered heavy losses under the new management, incurring losses attributable to shareholders of a mind-boggling RM1.01 bln. This undid all the efforts made in the early Nineties to put Promet on a sound footing.
Exit Via Rekapacific ?
On 27 Dec 1996, Dato' Soh sold 100 mln shares in Promet to Rekapacific Bhd for RM350 mln cash. Assuming he bought his earlier shareholdings at RM2.25 per share, that would have translated to a gain of RM125 mln. Subsequently, Dato' Soh resigned from the board on 30 June 1999.
Public Reprimand And Fined
On 27 July 1998, Promet obtained a restraining order from the High Court for Promet and 3 subsidiaries to restrain any actions or proceedings taken against them by creditors. The group proposed a restructuring scheme on 31 July 1999 that involved a reverse takeover by Safuan Group Bhd but the scheme was aborted on 23 Feb 2001. On 21 July 2000, the KLSE issued a public reprimand and a RM50,000 fine on Promet for failing to issue a circular to shareholders and to obtain prior approval in a general meeting in relation to two share transactions carried out by the company in 1997 which involved the interest of past directors and substantial shareholders of the company.