Auditors question ability of Raffles Education to continue operating
There is no denying that Raffles Education's balance sheet is extremely weak, with financial leverage at almost 2.5 times.
A shocking announcement by Raffles Education (REC) that its auditors had highlighted material uncertainty on its ability to continue as a going concern has added another chapter to the ongoing saga of the troubled company.
The announcement, made late Friday night (Oct 8), noted that the group’s liabilities exceeded its current assets by $196.4 million for the financial year ended June 2021.
In the statement, REC cited mitigating factors and suggested it was confident that its “ net current liabilities position will not likely pose material uncertainty on the ability of the group and of the company as a going concern”.
Once a star on the Singapore bourse, REC has been pounded by negative news flows and poor market conditions for the better part of the past three years.
A bitter feud between its chief executive and founder Chew Hua Seng and tycoon Oei Hong Leong - who is REC’s second biggest shareholder with a stake of slightly over 10 per cent in the company - has also been fertile fodder for market watchers.
Mr Oei is miffed at what he alleges is Mr Chew reneging on his promise to procure a buyer for his stake in REC some three years ago, then 12 per cent at 44 cents per share. Mr Oei has since been a shrill critic of Mr Chew, REC and its board.
But Mr Chew and REC also have other serious issues to deal with, not least of which is a RM410 million (S$133 million) writ and statements of claim filed by Affin Bank on May 27 in the High Court of Malaysia on a loan taken by REC’s Malaysian subsidiary, presumably for the development of its Iskandar, Johor, campus well over a decade ago.
REC did not disclose this development to the Singapore Exchange until end-July, brushing it aside as as a suit “bound to fail”.
It also said it was seeking an “amicable” solution to the Affin Bank suit.
But market insiders note that Affin Bank would probably have reached out to REC several months before filing the writ, and that the company should have disclosed this at an even earlier date.
It is not known how much has actually been paid back, or what the “amicable” solution is, but the estimated claim of RM450 million (including interest for late payment), amounts to S$145 million at current exchange rates.
That is higher than the market cap of REC of S$140 million.
After Friday’s announcement, REC’s market cap could fall further if the stock plunges in the wake of this latest revelation.
While the company’s latest full year results ending June showed net profit of $16.7 million and cash and bank balances of $84.9 million, with much of the income from property transactions, it also faces a cash crunch with free cash flow at negative $20.5 million.
Meanwhile, total borrowings exceeded $391 million. REC’s balance sheet also reveals that trade receivables exceeded revenue over the past two years.
All this raises a multitude of questions pertaining to why a firm with a supposedly solid portfolio is struggling with cash flow, liabilities and even collections.
Mr Oei has questioned the corporate governance and even attempted to oust the directors of the company, but to no avail.
Meanwhile, corporate governance specialist Professor Mak Yuen Teen of the National University of Singapore has weighed in on the debt issue.
Besides questioning the two-month delay in disclosure of the Affin Bank suit, Prof Mak also took issue with REC’s claim that the suit would fail.
Affin Bank is a reputable bank in Malaysia and is unlikely to file unmeritorious claims that are “bound to fail”, he wrote recently.
“Investors who have bought shares from May 21 until before the company’s announcement, and arguably before that when letters of demand may have been issued, may understandably feel aggrieved. They may well have a basis for a civil liability action against those responsible for the lack of timely disclosure.”
How the company “amicably” settles the claim remains to be seen.
So far, it has announced it would get 274 million yuan or S$58 million from the sale of its interest in a China-based property Langfang Development Zone Oriental University City.
The company has received 200 million yuan to date and the balance of 74 million yuan will be settled by September 2022.
But there is scant detail on the specifics of this deal, such as when REC expects to receive all the cash in time to settle the entire outstanding amount with the Malaysian bank.
Meanwhile, it has invited expressions of interest for its 51 Merchant Road headquarters, with a price tag of some $200 million. No offer has been received to date, though.
There are questions about whether there are any mortgages outstanding on the property, and what net amount REC can hope to get from the sale.
One might suggest that the “going concern issue” was flagged by the auditors due to reclassification of the Affin Bank loans to current liabilities from non-current liabilities. Perhaps so.
But there is no denying that REC’s balance sheet is extremely weak, with financial leverage at almost 2.5 times.
This is quite a sad change in the fortunes of a company that was once a star in the local share market, with its share price trading at more than $3 in 2007. On Friday, it closed at a mere 9.6 cents.
REC listed in 2002 on the Sesdaq second board, and was promoted to the mainboard in 2005 carrying a promise of becoming a home-grown multinational capable of bringing the Republic’s brand name in quality education to the world. It has a presence in at least a dozen countries.
But how many of these colleges are still operating? What are their student enrolment numbers? How well are they doing financially? How have the challenges facing the company impacted the quality of education provided?
Furthermore, what is the state of REC’s numerous investments and involvements in various property deals in many of these markets, especially China? Is real estate now a primary source of income?
Today, REC faces numerous questions about its business model, strategic focus, corporate governance and, now, its ability to remain a going concern. Yet, regulators here have taken a surprisingly light touch even as shareholder value has been steadily degraded.
Something has to give.
At the moment, it appears to be the reputation of the company and the price of its shares.
Hopefully, REC can be prompted, or prodded, to provide more light on its business dealings, liabilities, challenges, opportunities and plans. At the very minimum, its long-suffering shareholders deserve this.
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