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Wednesday 3 February 2010
Reflecting on HG Metal’s board tussle
The insurrection at HG Metal Manufacturing appears complete, after shareholders at last Friday’s annual general meeting gave a nod to the new management.
The insurrection at HG Metal Manufacturing appears complete, after shareholders at last Friday’s annual general meeting gave a nod to the new management.
The boardroom drama unfolded in December after non-executive director Sia Ling Sing - who is also the company’s single-largest shareholder - called to remove then-CEO Wee Piew, co-founder of the company Tan Chan Too and executive director Lee Leng Loke.
Blaming the three executives for the five straight quarters of losses posted by the steel stockist, starting from the fourth quarter of fiscal 2008, Mr. Sia proposed to replace them with hedge fund manager Roy Ling, as well as former Members of Parliament Chng Hee Kok and Tan Eng Liang. The latter two are from also board members of Hartawan Holdings, whose chairman, Winstedt Chong, is a shareholder and a friend of Mr. Sia.
The directors who were the subject of ouster had defended themselves by saying that the losses were due to weaker demand and the recession, and that they had taken a ‘prudent and conservative approach’ to reduce inventory levels. They were also against making comparisons with other steel firms, citing the difference in business nature and the type of steel handled.
Mr. Wee and Mr. Lee subsequently resigned a day before the shareholder’s meeting to decide their fate, Mr. Tan Chan Too stepped down as chairman though remaining in the company as an executive director, while Mr. Sia’s proposed replacements were officially appointed last week.
But the new men at the helm have their work cut out for them, as they lead the company through uncertain post-crisis times and review the developments that knocked HG Metal into the red for the first time since its listing in 2002.
Dented
In the eight years of HG Metal’s listing, the firm propelled itself to become Singapore’s largest steel stockist by inventory size, outpacing players such as fellow steel stockist Hupsteel.
This was done at breakneck speed when one considers that Hupsteel has been in the business for more than 60 years and has now gone through three generations in the founding family, BT understands. In comparison, HG Metal was, until recently, still run by its co-founder Mr. Tan and has a more modest legacy of some 40 years.
Between fiscal 2005 and fiscal 2008, the company’s profits had been on the uptrend - though at a rate of increase that narrowed yearly - thanks to strong demand from the construction and marine sectors.
A comparison of HG Metal’s profitability against its sector peers is difficult because steel players such as HG Metal, Hupsteel and Asia Enterprises Holdings have varying fiscal periods. Still, on the surface, HG Metal’s return-on-equity (ROE) of about 16 per cent in fiscal 2007 and 2008 (with September year-end) appears to pale in comparison with that of Hupsteel, despite its speed of growth. The latter posted an ROE of about 40 per cent in its fiscal years of 2007 and 2008 (with June year-end).
The day of reckoning came in fiscal 2008 when HG Metal posted its record net profit of $22.7 million, up about 25 per cent from a year ago - a record sullied by a huge $47 million inventory write-down in its fourth quarter in anticipation of faltering demand.
HG Metal was not only caught naked by the change in economic conditions, but also fell prey to the credit crisis.
HG Metal is reliant on debt. Its gearing as at Sept 30, 2008, stood at 2.76 times and though it was cut to 1.26 times a year later, that level of debt was still staggering when compared to Hupsteel’s gearing of 0.14 times as at Sept 30, 2009.
What compounded the problem was that banks started cutting its credit lines, BT understands.
Like many steel firms, HG Metal accounts for its inventories using a method known as weighted average cost basis, under which businesses buy inventories at both high and low prices before averaging them. ‘If you’re tight on finance with banks running after you, you can’t open new letters of credit, you cannot make new purchases and you cannot average down,’ said an industry source.
And the company’s inventory had to take a big hit, going through the worst steel price swings in history, with prices plunging from its peak of about US$1,400 per tonne around September 2008 to a low of about US$400 per tonne in the first quarter of 2009. Both cyclical and debt-gearing factors by the former board drove the company to eventually report a fiscal 2009 net loss of $67.5 million, nearly wiping out the $76 million earned in the five years between fiscal 2004 and fiscal 2008.
Going in for the steel
Now that the dust has settled, shareholders should ask if the new faces fronting the firm can build up experience swiftly.
The former management might arguably have made mistakes despite its experience in the field, but the new management has to deal with an industry that could face even more volatile price swings in time. To avoid potential pitfalls, experience still counts.
Questions should also be posed on whether the company’s $101 million loan facility is in jeopardy following the board tussle, since one of the loan covenants was for Mr. Wee and Mr. Tan to stay in their posts. HG Metal has been silent on the issue so far.
The presence of former chairman Mr. Tan - whose post has not been replaced - is vital to HG Metal as he holds the relationship with suppliers, BT understands. But how long he’ll stay on, given the uncomfortable tension from Mr. Sia’s ouster bid, is anyone’s guess and another concern for shareholders.
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Reflecting on HG Metal’s board tussle
By JAMIE LEE
02 February 2010
The insurrection at HG Metal Manufacturing appears complete, after shareholders at last Friday’s annual general meeting gave a nod to the new management.
The boardroom drama unfolded in December after non-executive director Sia Ling Sing - who is also the company’s single-largest shareholder - called to remove then-CEO Wee Piew, co-founder of the company Tan Chan Too and executive director Lee Leng Loke.
Blaming the three executives for the five straight quarters of losses posted by the steel stockist, starting from the fourth quarter of fiscal 2008, Mr. Sia proposed to replace them with hedge fund manager Roy Ling, as well as former Members of Parliament Chng Hee Kok and Tan Eng Liang. The latter two are from also board members of Hartawan Holdings, whose chairman, Winstedt Chong, is a shareholder and a friend of Mr. Sia.
The directors who were the subject of ouster had defended themselves by saying that the losses were due to weaker demand and the recession, and that they had taken a ‘prudent and conservative approach’ to reduce inventory levels. They were also against making comparisons with other steel firms, citing the difference in business nature and the type of steel handled.
Mr. Wee and Mr. Lee subsequently resigned a day before the shareholder’s meeting to decide their fate, Mr. Tan Chan Too stepped down as chairman though remaining in the company as an executive director, while Mr. Sia’s proposed replacements were officially appointed last week.
But the new men at the helm have their work cut out for them, as they lead the company through uncertain post-crisis times and review the developments that knocked HG Metal into the red for the first time since its listing in 2002.
Dented
In the eight years of HG Metal’s listing, the firm propelled itself to become Singapore’s largest steel stockist by inventory size, outpacing players such as fellow steel stockist Hupsteel.
This was done at breakneck speed when one considers that Hupsteel has been in the business for more than 60 years and has now gone through three generations in the founding family, BT understands. In comparison, HG Metal was, until recently, still run by its co-founder Mr. Tan and has a more modest legacy of some 40 years.
Between fiscal 2005 and fiscal 2008, the company’s profits had been on the uptrend - though at a rate of increase that narrowed yearly - thanks to strong demand from the construction and marine sectors.
A comparison of HG Metal’s profitability against its sector peers is difficult because steel players such as HG Metal, Hupsteel and Asia Enterprises Holdings have varying fiscal periods. Still, on the surface, HG Metal’s return-on-equity (ROE) of about 16 per cent in fiscal 2007 and 2008 (with September year-end) appears to pale in comparison with that of Hupsteel, despite its speed of growth. The latter posted an ROE of about 40 per cent in its fiscal years of 2007 and 2008 (with June year-end).
The day of reckoning came in fiscal 2008 when HG Metal posted its record net profit of $22.7 million, up about 25 per cent from a year ago - a record sullied by a huge $47 million inventory write-down in its fourth quarter in anticipation of faltering demand.
HG Metal was not only caught naked by the change in economic conditions, but also fell prey to the credit crisis.
HG Metal is reliant on debt. Its gearing as at Sept 30, 2008, stood at 2.76 times and though it was cut to 1.26 times a year later, that level of debt was still staggering when compared to Hupsteel’s gearing of 0.14 times as at Sept 30, 2009.
What compounded the problem was that banks started cutting its credit lines, BT understands.
Like many steel firms, HG Metal accounts for its inventories using a method known as weighted average cost basis, under which businesses buy inventories at both high and low prices before averaging them. ‘If you’re tight on finance with banks running after you, you can’t open new letters of credit, you cannot make new purchases and you cannot average down,’ said an industry source.
And the company’s inventory had to take a big hit, going through the worst steel price swings in history, with prices plunging from its peak of about US$1,400 per tonne around September 2008 to a low of about US$400 per tonne in the first quarter of 2009.
Both cyclical and debt-gearing factors by the former board drove the company to eventually report a fiscal 2009 net loss of $67.5 million, nearly wiping out the $76 million earned in the five years between fiscal 2004 and fiscal 2008.
Going in for the steel
Now that the dust has settled, shareholders should ask if the new faces fronting the firm can build up experience swiftly.
The former management might arguably have made mistakes despite its experience in the field, but the new management has to deal with an industry that could face even more volatile price swings in time. To avoid potential pitfalls, experience still counts.
Questions should also be posed on whether the company’s $101 million loan facility is in jeopardy following the board tussle, since one of the loan covenants was for Mr. Wee and Mr. Tan to stay in their posts. HG Metal has been silent on the issue so far.
The presence of former chairman Mr. Tan - whose post has not been replaced - is vital to HG Metal as he holds the relationship with suppliers, BT understands. But how long he’ll stay on, given the uncomfortable tension from Mr. Sia’s ouster bid, is anyone’s guess and another concern for shareholders.
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