London Biscuits: something seems wrong

KiniBiz raised the red flag over London Biscuits latest audited accounts:

"Confectionary maker London Biscuits Bhd (LBB)’s latest annual audited accounts recorded yet another year of significant property, plant and equipment (PPE) acquisition cost, raising questions over its PPE expenditure which now averages RM63.64 million in the last five years.
 .....
 Additionally, the company has seen a net loss from PPE disposals for the past five years, recording a loss of RM1.76 million in 2013. Since it was listed in 2002, LBB has only seen a net gain from PPE disposals once in 2008, recording RM501,284."


I think that indeed the amount in PPE is worrisome. I have made a simple comparison between 2003 and 2013, all amounts in millions RM:

                   2003        2013
Revenue              53         290
PAT                   9          15
Depreciation          6          16
Dividend              2           1


PPE                  80         517
Shareholders Funds   71         299
Cash                 10          27
Debt                 36         263

Some observations:

• Revenue is 5.5 times larger in 2013, but PAT has hardly grown
• Dividend is even cut, to almost nothing
• PPE has grown astonishing, 6.5 times larger
• Shareholders Funds of RM 299 million looks impressive, but only RM 120 million is retained profit, money has been raised with the IPO, with Private Placements, Rights Issue, ESOS, etc.
• The growth in debt minus cash is highly worrisome
• Although the company claims to be profitable, cash flow seems to be consistently negative

Two questions:

• How is it possible that a company that claims to be profitable and hardly pays any dividend needs such a large debt?
• How is it possible that the company needs RM 517 million PPE, to generate a revenue of only RM 290 million?

My guess is that this could all be caused by systematically understating of the depreciation on the PPE. My reasons for this:

• In 2003 depreciation was 7.5% of PPE, but in 2013 only 3.1%.
• In 2003 revenue was 66% of PPE, in 2013 only 56% (I would have expected the reverse pattern due to economy of scale, more efficient machines, etc.)
• Almost all PPE disposals are done at a loss.

Too low depreciation would explain [1] overstated profits and [2] overstated value of the PPE

Ze Moolah has paid attention to London Biscuits, here pointing at the ever growing debt and here pointing at the ever growing PPE.  He wrote the first warnings more than three years ago. Unfortunately (for investors in London Biscuits), it looks like he is right again.

Please also check the following link, a interesting posting by "kcchongnz".