For Oceanus minorities, relief comes too late

OCEANUS Group, touted as the world's largest land-based abalone producer, may have escaped yet another financial crisis with its latest debt-restructuring exercise.

Three days before Christmas, shareholders of the abalone and premium seafood supplier, which has been on the Singapore Exchange (SGX) watch list since December 2015, approved its debt-restructuring exercise at an extraordinary general meeting.

In this latest exercise, some 19.7 billion new shares will be issued at S$0.00395 a share. It will clear S$71.8 million, or 85 per cent, of the group's total outstanding debt, while providing S$6 million in much-needed fresh capital, including S$900,000 from Oceanus' executive director and chief executive officer Peter Koh. After the exercise, his stake in Oceanus will rise to 10.23 per cent from 0.24 per cent.

The group expects to be debt-free and net cash positive by the end of this year. Mr Koh called the debt exercise "a watershed moment" for the company.

Indeed, the mainboard-listed company has come a long way. It acquired its listing status on the then Sesdaq board through a reverse takeover of TR Networks at S$0.20 a share on April 29, 2008, and later moved to the mainboard of the Singapore stock exchange on May 25, 2009.

In its heyday

Oceanus was consistently among the hottest food-packaging companies. It boasted a staggering 12 sq km of abalone farms stretching from Zhangzhou in China's Fujian province to Guangzhou in Guangdong.

Its share price rapidly doubled to S$0.40 in early 2010, fuelled by its growth plans, despite lurking shadows from risks involving cashflow and capital expenditure needs to expand its population of the prized delicacy. The vulnerability of its core biological asset to diseases was a largely ignored factor amid the euphoria. As China's appetite for abalone grew along with its economy, Oceanus' market value ballooned to more than S$2 billion at one point.

But things began to sour in 2011. The company posted 2.1 billion yuan in losses in FY2011 after a mass demise of its abalone stock. A year later, shareholders showed their displeasure and voted out former chief executive and director Yu De Hua, ending the mainland Chinese national's ties with the company. In 2013, Typhoon Usagi inflicted major damage to its farms.

Foo Kon Tan LLP, independent auditors of Oceanus, highlighted the existence of a material uncertainty which cast a significant doubt on the company's ability to continue as a going concern. They revealed that from Dec 31, 2014, Oceanus' current liabilities stood at 581 million yuan, surpassing its assets, at 529 million yuan.

The group had a deficit in shareholders' funds of 321 million yuan, and had incurred a net loss of about 400 million yuan for FY 2014. It also had a negative net operating cash flow of 32.7 million yuan for FY 2014.

The auditors were unable to verify the value of its biological assets. The absence of documentation also meant that trade and other payables brought forward from 2011 could not be verified.

Mr Koh, the current chief executive who took the helm in December 2014, immediately worked on understanding the low-downs of the business, rejuvenating the jaded pool of employees and restoring creditors' faith.

In his revival plans, Oceanus no longer competes with sea-farmers. Instead of being involved in the life cycle of its abalone stock (from spawning to harvesting), it now focuses on being a hatchery, which mitigates the high risks of abalone deaths.

Faster turnaround

The strategic shift has reduced the gestation period drastically; the company no longer waits four to five years before it can sell each batch of its produce. It now sells juvenile abalones (within a year old) to sea-based farmers, and reaps returns more quickly.

And when the abalones are ready to be harvested two to three years later, Oceanus can choose to buy them from these farmers at prices that are 30 to 40 per cent lower than what land farming offers, a move which has cut risks and eased cash flow; freed-up farm space is now used to diversify into other lines of seafood like shrimps and fish.

Looking at its latest financial results, Oceanus has narrowed its net loss for the nine months to end-September 2017 to 32.9 million yuan, from 92.1 million yuan a year ago. Current liabilities stood at 754.4 million yuan on Sept 30, 2017, compared to 591.8 million yuan on Dec 31, 2016; current assets amounted to 298.9 million yuan, versus 13.0 million yuan.

The debt restructuring has offered Oceanus a new lease of life. It is hoped that the management has identified what went wrong and addressed the issues involved.

But for minority shareholders, investing in Oceanus will go down as one scary roller-coaster ride, which ended in the stock crashing to barely one Singapore cent a share.

Investors keen on agricultural or biological products must also bear in mind that nature and luck play a big role in the success of these ventures.