Sunday, 12 July 2015

Toyo Ink and its Perilous Power Play

The Edge wrote two articles about Toyo Ink's diversification plans (here and here).

Toyo Ink is a smallish company in the ink industry. Its revenue over the last five years has been roughly RM 100 million, on which its net earnings are between 1 and 4 Million. It has not paid any dividends over the same period.

In 2008 it suddenly wanted to diversify in the power industry in Vietnam, with a project that completely pales its existing ink business in Malaysia. Things have slowed down considerably, but it has invested in those seven years about RM 124 Million, a rather large amount which is roughly equal to its shareholders funds.

The auditors have emphasized the matter in the last annual report:

In other words: the future is highly uncertain depending on many agreements which are partially outside their influence.

It seems there are three important issues at stake:

  • Does Toyo Ink have relevant experience in the power industry? I did not find any going through the profiles of the Board of Directors.
  • Does Toyo Ink have relevant experience in Vietnam? Again I did not find any going through the profiles of the Board of Directors. I have written many articles about doing business in China, conditions in Vietnam are worse, capitalism has started much later than in China.
  • Does Toyo Ink have the financial muscle to pull this project off the ground? The total development cost is estimated at RM 13.2 Billion, around 100 times Toyo Ink's shareholder equity (even after a recent rights issue).

The company will ask shareholders to continue with the project by forking out RM 133 Million for consultancy services. Total expenditure would thus increase to about RM 260 Million.

Hopefully the company will clarify the project with a clear budget and planning.

But even if it does, I am still very worried about this whole project, it completely doesn't seem to make any sense at all to me. Is more good money thrown after bad?

No comments:

Post a Comment