Virus leads PN17 affected firms list to grow to 26 on Bursa Malaysia

Covid-19 has exposed weak balance sheets and business models to stress, leaving many to seek fresh funds 

By NUR HANANI AZMAN / Pic Source tbuilderscap.com 

THE growing list of listed companies falling into the Practice Note 17 (PN17) or Guidance Note 3 (GN3) classification due partly to the impact of the Covid-19 pandemic is a wake-up call for businesses to enhance their business risk management, beef up operational efficiency and improve resource utilisation. 

Top Builders Capital Bhd became the latest to trigger the criteria to be classified as a PN17 company, taking the total number of PN17 and GN3 companies to 26 or 2.87% of the 907 firms listed on Bursa Malaysia. 

Covid-19 has exposed weak balance sheets and business models to stress, leaving many to seek fresh funds, failing which the prospects of a PN17 or GN3 status await on the horizon. 

The local exchange’s Covid-19 blanket relief measures for any listed issuer that had triggered sus- pended criteria saw the number of public-listed companies classified under PN17 and GN3 drop from 25 companies as of Dec 31, 2020, to 23 companies as of Dec 31, 2021. 

Without the relief measures announced in April 2020, 13 listed companies should have been added to the list in 2020 alone, manifesting the real magnitude of Covid-19’s impact on the economy. 

“In general, Covid-19 induced restrictions have condemned businesses from generating sufficient revenue to support their pre-pandemic operational scales as their shareholders’ equity nosedived to trigger the Suspended Criteria; the shareholders’ equity on a consolidated basis is 25% or less of its share capital and such shareholders’ equity is less than RM40 million. 

“Endogenously, the possibility for companies to be placed in the PN17 and GN3 list stacks up for companies with low profitability and efficiency ratios, bloated balance sheet position and poor cashflow,” BIMB Investment Management Bhd’s equity analyst Izhar Mosliman told The Malaysian Reserve recently. 

He said in essence, the stock market has always been a function of expected future earnings dis- counted at appropriate risk premium factors and investors buying and selling interest. 

“Despite the recent aggregate corporate earnings pullback in the third quarter of 2021, which is in line with the economic contraction of 4.5% for the period, the cumulative aggregate corporate earnings for nine months of 2021 still shows positive earnings growth. 

“On the premise of localised and controlled Covid-19 outbreaks backed by Malaysia’s high vaccination rate and households saving rate, we expect the corporate recovery to continue in 2022 at an uneven rate across the sectors with slight favouritism towards consumers and exporters,” he added. 

However, he said it is worth noting the one-off Cukai Makmur in 2022 will slash the big boys’ bottom line. 2022 started with AirAsia Group Bhd classified as a PN17 company on Jan 13, after it failed in its bid to secure an extension of the relief period from the exchange. 

The low-cost carrier had applied to Bursa Malaysia Securities to ex- tend the relief period beyond Jan 7. 

AirAsia triggered the PN17 suspended criteria in July 2020 after its external auditors, Ernst & Young PLT, issued an unqualified audit opinion with material uncertainty relating to going concerned in respect of its audited financial statements for the financial year ended Dec 31, 2019, and its shareholders’ equity on a consolidated basis was 50% or less of its share capital. 

The PN17 classification hit its shareholders dearly with the low-cost carrier’s share price falling back to its lows to close at 58 sen last Friday from 74.5 sen on Jan 13, 2022. 

The PN17 or GN3 classification tends to drive away institutional investors as well as retail investors. 

Top Builders takes the number of PN17 listings to two in January alone compared to the second half of 2021 (2H21) which witnessed two companies slipping into PN17 status — Dolomite Corp Bhd and Khee San Bhd. 

Dolomite was classified as an affected listed issuer on Sept 28, 2021, after it was unable to pay its debts as its liabilities have far exceeded its assets. The group is principally involved in property development, construction and sand mining activities. 

Candies and sweets manufacturer Khee San became a PN17 company on Nov 19, 2021, after its wholly-owned subsidiary was placed under judicial management. 

With interest rates set to rise to contain inflationary pressures and the Omicron variant spreading among the population, more companies falling into the PN or GN3 classification remain a real possibility. 

“Investors are generally easily rattled by uncertainty. One thing for sure, we believe there will be various risk premium readjustment points for investors in the form of Covid-19 developments, political, government policy, reintroduction of Goods and Services Tax, monetary events that will reshape buying and selling interest. 

“Be nimbler in the stock market in 2022 by participating in a the- matic rally, taking advantage of market mispricing or even mining for a hidden gem,” Izhar said.