What Investors Should Know About Nam Cheong Ltd’s Going-Concern Uncertainty

Investors are panicking over offshore support vessels builder and owner Nam Cheong Ltd (SGX: N4E), judging from how the company’s stock price has changed since last Friday. As of the time of writing (1:50 pm), Nam Cheong’s shares are exchanging hands at S$0.027 each, some 45% lower than last Friday’s close.

Short-term price movements can at times occur for no rhyme or reason. But in Nam Cheong’s case, I think it’s clear why. Last Friday night, the company revealed that its auditors, BDO LLP, had highlighted that “a material uncertainty exists that may cast significant doubt on [Nam Cheong’s] ability to continue as a going concern.”

BDO came to its view due to a few reasons:

1) Nam Cheong’s revenue had fallen by 82% in 2016 and recorded a loss of RM 42.8 million due to some of its customers requesting a pushback on the delivery dates for their vessels. Furthermore, “the current downturn in the oil and gas industry may continue to add pressure to [Nam Cheong’s] financial performance and its operating cash flows.”

2) As of 31 December 2016, Nam Cheong’s balance sheet has debt of RM 948.7 million that are due – or payable on demand – sometime before or by 31 December 2017. Of the RM 948.7 million sum, RM 278.6 million has to be repaid on 28 August 2017 based on the current terms of the debt. As of 31 December 2016, Nam Cheong’s cash and equivalents amount to only RM 162.6 million.

3) Nam Cheong is (a) working with its bankers to restructure its debt, (b) looking for buyers and charterers for its fleet of vessels, and (c) improving its cost controls and cash flow positions. The company also has “sufficient” funds that its bankers has promised to lend to meet general working capital needs when necessary (provided that “certain conditions” are fulfilled).

But, there’s no guarantee that the debt-restructuring will be successful, or that Nam Cheong’s bankers and creditors will continue supporting the company.

To sum up the situation with Nam Cheong in plain English:

1) The company’s revenue and bottom-line have both declined substantially in 2016 and there is a high probability that its business performance will continue to suffer in the current year.

(I think it’s worth noting too that Nam Cheong’s operating cash flow in 2016 was a negative RM 291 million; although this is an improvement from 2015’s negative RM 548 million, it still highlights the company’s huge struggle to produce cash from its business.)

2) It currently does not have sufficient cash on hand to pay its loans and borrowings that are coming due before or by the end of 2017. (And as mentioned earlier, the company has not managed to show signs that it is currently able to generate cash.)

3) It’s hard to say as well whether Nam Cheong’s bankers and creditors will be willing to alter existing borrowing terms to help the company tide through its current predicament and/or lend more money to it.

There’s a lesson in here for investors. Nam Cheong is a solvent company – as of 31 December 2016, it has total shareholders’ equity (total assets minus total liabilities and non-controlling interests) of RM 1.37 billion. But, the company is still confronting a serious risk of failing due to liquidity problems. When assessing a company’s ability to survive, it also pays to look at its ability to meet short-term financial obligations.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.