KUALA LUMPUR, July 30 — Unionmet (Singapore) Ltd expects to start its oil-blending business by the end of FY14, as part of a major strategic shift in business.

The company used to sell indium ingots, used in electronics, as well as zinc and related products, and aluminium products.

But margins were low – so low, in fact, that at an EGM on February 25, Unionmet (Singapore) Ltd’s shareholders approved its proposal to review its existing business and to diversify into property development and oil-blending and distribution.

A few days later on March 1, it sold wholly-owned subsidiary Unionmet Holdings Ltd to Divine Season Limited for S$5.5 million (about US$4.35 million).

Unionmet Holdings Ltd owned a 100 per cent stake in Guangxi Intai Technology Co Ltd which was a manufacturer and trader of non-ferrous metals like indium ingots.

Subsequently, on June 24, Unionmet (Singapore) Ltd agreed to buy a 51 per cent stake in Biofuel Research Pte Ltd from SGX-listed OEL Holdings Ltd for S$3 million.

Biofuel Research Pte Ltd has developed a technology to convert waste cooking oil to biodiesel.

In the quarter just ended, it deposited US$4 million for unspecified capital purchases related to its foray into the oil-blending business.

Here are the earnings for Q2 ended May 31:

Revenue: +9.5 per cent to US$6 million

Profit/(Loss): (US$2.2 million) vs (US$0.3 million)

One-off gains/(losses): (US$1.9 million) vs Nil

Cash flow from operations: (US$4.5 million) vs (US$0.7 million)

Dividend: Nil

Order book: Not disclosed

The one-off loss of US$1.9 million is entirely attributable to the sale of Unionmet Holdings Ltd.

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1. Why did divestment result in cash outflow?

In its Q2 earnings report (page 5), Unionmet (Singapore) Ltd recorded a net cash outflow of US$813,000 on the sale of Unionmet Holdings Ltd.

This is surprising, because usually when a company sells another company for cash, there should be cash inflow, not outflow.

This suggests, Unionmet Holdings Ltd had US$5.15 million in cash on its books when it was sold to Divine Season Limited for US$4.35 million on March 1.

At the time of sale, Unionmet (Singapore) Ltd said, “The disposal of Unionmet Holdings and GIT [Guangxi Intai Technology Co Ltd] will therefore reduce the Group’s overheads and losses while also allowing the Group to realize its investment and generate cash to be redeployed into its other businesses. This will allow the Group to apply the sales proceeds into the new businesses approved by shareholders of the Company at the extraordinary general meeting held on 25 February 2014, thus supplementing the Group’s operations and profitability.”

But a look at the cash flow statement shows it seems to have burnt cash on the disposal of its wholly-owned subsidiary Unionmet Holdings Ltd.

We are scratching our heads wondering why a company would sell its subsidiary for less than the cash it had on its books.

So, what did Unionmet (Singapore) Ltd mean when it said in its announcement that the disposal will release cash which would be invested in its other businesses?

2. Who are the three shareholders of Divine Season Limited?

According to Unionmet’s March 15 announcement, Divine Season Limited was incorporated in British Virgin Islands and is owned by three individuals who are not connected to Unionmet’s controlling shareholders and directors.

However, it didn’t reveal the identities of these three individuals.

Any reasonable investor would want to know more about the ultimate beneficiaries of the disposal of Unionmet Holdings Ltd for less than the cash it had on its books.

3. Why raise small amounts of cash when it still hasn’t used its substantial existing cash balance?

According to its FY13 annual report (page 31), Unionmet (Singapore) Ltd had US$31.7 million in cash and short-term deposits on November 30.

That’s more than 90 per cent of its latest audited Net Asset Value of US$34.7 million on November 30.

On February 28, its cash and short-term deposits stood at US$29.5 million (refer page 3 of Q1 FY14 earnings announcement).

Despite so much cash on its books, the company raised a paltry sum of US$2.8 million through a rights issue on March 24.

The rights issue was a clear miss as only about 18 per cent of the rights shares were subscribed by shareholders.

What makes is even more remarkable is the fact that Unionmet (Singapore) Ltd is yet to use the US$3.27 million net proceeds from a previous rights issue in July 2009 (refer page 11 of Q2 FY14 earnings report).

Even at that time, in FY09, it began the year with a cash and short-term deposits of US$17.6 million and ended the year with a US$23.2 million cash balance (refer page 36 of its FY09 annual report).

So, why did it need a rights issue to raise just US$3.27 million in FY09?

According to its FY13 annual report, Unionmet (Singapore) Ltd also had a US$1.13 million bank loan outstanding on November 30.

Repayable on November 13 this year, the bank loan bears an interest rate of 25 per cent plus the benchmark loan rate (refer page 60 of its FY13 annual report).

The loan was fully repaid during Q2.

But the question remains: Why would a company with a more than US$30 million cash reserves borrow a negligible amount at such an expensive rate?

Of US$31.7 million cash reserves on November 30, the company had US$6.7 million cash at bank and the remaining US$25 million were invested in short-term deposits bearing interest in the range of 0.03 per cent to 3.1 per cent per annum (refer page 58 of its FY13 annual report).

In FY13, Unionmet (Singapore) Ltd earned effective interest of about 0.4 per cent on its deposits.

Also, only US$0.3 million cash at bank and US$0.2 million worth of short-term deposits were denominated in Singapore dollars.

As the company has operations in PRC, the remaining cash reserve were presumably denominated in Chinese Yuan.

Therefore, the obvious question is: Why didn’t the company use the cash on its books before raisings funds through a rights issue and an expensive bank loan?

4. Which institutions has it placed the short-term deposits with?

On page 58 of its FY13 annual report, the company said “Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interests at the respective short-term deposit rates.”

According to page 9 of the annual report, UOB Ltd and DBS Bank Ltd are the bankers to the company.

So, has it placed its US$25 million worth of short-term deposits with UOB Ltd and DBS Bank Ltd?

And why are only about US$0.5 million of its US$31.7 million cash and short-term deposits denominated in Singapore dollars?

Currency risks are described on page 65 of the FY13 annual report.

5. Why did it need to borrow funds at such an expensive interest rate?

As already mentioned, Unionmet (Singapore) Ltd’s only bank loan had an interest rate of 25 per cent plus the benchmark loan rate.

According to page 60 of its FY13 annual report, the loan was denominated in Chinese Renminbi and it was secured on the company’s leasehold buildings and land use rights.

It is remarkable that the loan carried such a steep interest cost despite being secured against company assets.

But more importantly, why didn’t Unionmet (Singapore) Ltd use its cash reserves instead of borrowing such costly funds?

And who was the lender of the US$1.1 million loan?

Unionmet (Singapore) Ltd repaid the entire loan during Q2, much before its scheduled repayment on November 13.

6. Why did it change the figures for FY10, a year later?

According to page 61 of its FY10 annual report, Unionmet (Singapore) Ltd recognised US$25.1 million worth of inventories as an expense in cost of sales in its income statement.

But according to page 56 of its FY11 annual report, that figure had changed, and the company recognised US$20.5 million worth of inventories as an expense in cost of sales during FY10.

Now that was about US$4.6 million less than what it said in its FY10 annual report.

Ideally, such a decrease in cost of sales should have led to an increase in the overall profit of the company for FY10.

Also, the closing balance of its inventories on November 30, 2010 should have been increased by US$4.6 million.

But neither of those was restated in the FY11 annual report.

We wonder why the auditor didn’t use the same numbers, and why such a meaningful change in the numbers didn’t lead to a restatement of its income and position statements?

Mr Vincent Toong Weng Sum at Ernst & Young LLP has been the auditor of Unionmet (Singapore) Ltd from FY09 onwards. But our email to this address, to seek clarification, bounced back.

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do. — Investor Central

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