Koda Ltd - MANAGEMENT REPLY: Will it have to issue new shares soon?

2/7/2013 – Furniture manufacturer and retailer Koda Ltd expects to achieve higher capacity utilization, thanks to confirmed orders of US$12.2 mln.

It expects to save significant amount of fixed costs after restructuring its business in New Zealand.

It is also putting more effort into streamlining the retail operations of its Rossano brand in Vietnam.

This should help maintain its operating margin.

The company just announced earnings for Q3 FY13:

Revenue: -0.9% to US$9.6 mln
Profit: (US$1.3 mln) vs (US$1.44 mln)
Cash flow from operations (US$0.9 mln) vs (US$1.4 mln)
Dividend: Nil vs Nil

Q3 revenue was lower due to fewer production days during the holiday-laden quarter, and Q3 has always been its weakest quarter.

In addition, the group had warned in Q2 that it may record a loss in Q3.

This was due to weakening pace of growth of export orders and expected lower capacity utilization in Q3.

But it was able to sustain retail sales in Singapore and keep export sales healthy in the United Sates and the Asia Pacific region.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Will it soon raise money?

Koda used US$0.9 mln more cash to run its business in Q3 than it brought in.

Hence, its cash balance has fallen to US$1.8 mln in Q3 FY13 from US$2.8 mln in FY12.

Short-term borrowings amounting to US$9.4 mln are due in Q4.

Its gearing ratio was 0.42 times but slightly higher compared to 0.40 times as at Q2.

What funding options are open to Koda? Will it be able to roll over those loans, or will it have to raise funds from the market soon?

Management reply: We used some US$7.9m (out of the total US$9.4m) trade finance loans on rolling basis. We could and would roll over such loans for on-going business trade volumes, which also meant, at this level of short-term debts, it was represented by just below 2-month sales. There are about US$6m available banking lines which we could use if we need to, at affordable and sensible cost of fund (average some 2% pa). So, unless our businesses could expand faster than what we would expect over a medium-term, the existing banking facilities appear to be adequate and funding costs remain effective for our working capital requirements.

Question

2. Is the Koh family prepared to dilute their shareholdings?

Currently, the Koh family owns more than half of the company.

A share issuance might make sense not just to raise cash, but also to increase the free float.

Management reply: Considering the current market capitalization (a mere 10% - 15% of that in the peak), it might not be such a bad idea to keep the existing free float of just below 40% until or unless we find viable business plans which we need to raise cash for good strategic reasons and a more balanced capital structure.

Question

3. Is it not able to sell its investment properties at a good price?

In its FY12 annual report, the group highlighted that its investment properties in Vietnam and Malaysia have very good potential to be sold at a premium.

Koda did sell its property in Malaysia in Q2.

But the value of investment properties in Q3 stood at US$2.4 mln, similar to what it was in Q2 which makes us believe that it was not able to sell any property in Q3.

Hence our question.

Management reply: Not so. The US$2.4m represents the total market values of those investment properties in Vietnam (“Vietnam Investment Properties”). One would have to revalue its investment property and record it at fair value if the property is held for recurring rental income or capital gain potential even though the property has not been sold or is not eventually sold. The US$2.4m in question, represents neither the subsequent fetched selling prices of the Vietnam Investment Properties nor the fetched selling price of the property in Malaysia. It however means the market values of Vietnam Investment Properties which we could possibly sell and it remains relatively unchanged since the last reporting date. We will continue to update the market values of Vietnam Investment Properties for full-year financial reporting in 2013.

Question

4. Will its business generate cash this fiscal?

To run its business, Koda has burnt cash to the tune of US$5.5 mln since FY09.

All thanks to the global financial crisis.

But it did generate US$0.4 mln for M9 FY13.

Hence our question.

Management reply: We mentioned in our latest announcement, Note 10 that barring unforeseen circumstances, the Group is cautiously optimistic that the Group will return to Profit in 4Q13 – so, adding to the cash of US$0.4m generated for 9M FY2013, we will have a good chance to see positive cash flows for the entire fiscal year but would like to caution on possible timing difference between transaction recording and cash receipts.

Question

5. Will it stop exporting products to the United Kingdom and Europe?

Koda’s revenue contribution from the United Kingdom fell from 13.3% in FY11 to 7% in FY12, while Europe’s contribution hovered around 9%.

This was due to weak demand from these regions.

In addition, the founder of the group, Koh Teng Kwee, commented that its major market is still the US, and the Asia Pacific is now more important than the UK/EU.

Unfortunately, Koda does not disclose geographical revenues on a quarterly basis.

Hence our question.

Management reply: UK/EU is still the third largest markets, despite dragging debts concern

Question

6. Are cost savings really working out?

In FY12, Koda highlighted that it will continue to expand business segments by trimming administrative costs and decentralizing job functions.

In fact, its managing director, James Koh, cut his pay by 20%.

However, its M9 FY13 selling, distribution and administrative costs fell only marginally by 0.9%.

Hence our question.

Management reply: Yes – it worked well within our operational budgets. Certain operations have since been streamlined, assets have since been rationalized and jobs have since been decentralised thereby resulting in notable fixed cost savings, on annualised basis. However, major operational restructuring exercise was only initiated at end of 1Q13 and completed in 3Q13 – so the recorded financial effects have not reflected that of the full-year. Overall operating costs in Vietnam had also increased due to inflation, which partially offset the cost saving effects.

Question

7. Is Singapore’s retail business performing up to expectations?

Koda launched its new furniture retail concept in Singapore via Commune Retail in FY12.

This has helped to improve its sales.

But the Q3 results announcement just says that it was able to sustain retail sales in Singapore.

Therefore it makes us wonder whether retail business in Singapore is performing up to expectations.

Management reply: It did much better in 6 months ended 31 Dec 2012 compared to the last corresponding period while we managed to sustain that in 3Q13 and thus the overall sales for 9M were still higher – and it did better than our internal targets, in fact.

Question

8. Has it achieved its internal targets in Vietnam and New Zealand?

Koda restructured its Devon business in New Zealand and Rossano in Vietnam for improving operational efficiencies and sustaining market share.

It highlighted that the restructuring will save a substantial amount of fixed operating costs and help to keep sales up with its own internal targets.

So, naturally shareholders will want to know whether it succeeded.

And this also leads to the next question:

Management reply: Please refer to answers to Question 6

Question

9. What were its internal targets for Vietnam and New Zealand?

Management reply: Vietnam operations should continue to contribute at least 60% of the group’s production capacity whereas the restructured New Zealand operations (outdoor furniture sale) will only have a small contribution to overall sales target.

Question

10. What level of capacity utilisation will Koda achieve in Q4?

Koda incurred a loss in Q3 due to lack of growth in export orders book and lower capacity utilization.

However, confirmed orders of US$12.2 mln will help achieve higher capacity utilization in future.

But what is the capacity level that Koda is targeting in Q4?

Management reply: Ideally at optimal capacity utilization rate of some 90% - and the group’s revenues should not be less than US$14.5m, as internally planned or budgeted for, barring unforeseen circumstances

We thank management for its response


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