By Mak Yuen Teen

On 4 July 2018, Datapulse Technology (“Datapulse”) responded to my article “Datapulse Technology: Yet More Questions on the Wayco Acquisition” posted on my website at governanceforstakeholders.com on 15 June, together with detailed supporting information. The article was also published in NextInsight on 18 June (“DATAPULSE: Prof Mak raises more questions on Wayco Acquisition”).

As the title of my article suggests, I had raised further questions relating to Wayco Manufacturing (M) Sdn Bhd, the Malaysian hair care company that the current Datapulse Board bought the day after it was formed, with little due diligence. My article was forwarded by a shareholder to the company. As with many of its past disclosures, the company’s response does not add up.

The company has now confirmed that part of its property in Johor Bahru (Property 2) which is owned by Wayco has been rented out to a company called Riverwalk Composite Sdn Bhd. This fact was only disclosed after I had questioned why the building bears the big letters “RW” (with no mention of Wayco at all) and why the letterbox on the building gate bears the names of two companies, but not Wayco (see photos below).

In Datapulse’s response to SGX queries on 28 December 2017 about the properties, it did not mention that part of Property 2 has been rented out. It only said the following:

“Property 2 consists of a parcel of freehold industrial land, generally trapezoidal in shape with land area of 1,985.5 square metres. It has a frontage width of about 48.5 metres onto JalanDewani 3 and an average depth of 59.4 metres.

Property 2 also has a double-storey detached factory with a mezzanine floor. The factory has production areas, offices, changing rooms and toilets. It also has access to water, electricity supplies and telephone facilities. The factory was occupied at the time of the valuation.”

In its latest response, this is what it has now said: “…part of Property 2 has been rented out by Wayco to Riverwalk Composite Sdn Bhd (previously known as Easy Wood (Johor) Sdn Bhd), a subsidiary of Riverwalk Plastic, and it was this tenant that put up its own letterbox and the letters “RW” at Property 2 as mentioned in the Article….As there is excess capacity at Property 2 which Wayco was not utilizing, Wayco had decided to rent out part of Property 2 to improve its cashflow.”

For Property 1 and Property 2, why did the company say that “the factory was occupied at the time of the valuation” without disclosing that part of Property 2 is rented out, when for Property 3, it disclosed that it was a “shop-office with tenants at the date of valuation”? 

In its response to my article, the company also did not say how long RW has been renting part of this property, what proportion of the building it is renting, and how much it is paying in rental.

I should point out that for the year ending 31 December 2016 (FY2016), Wayco only earned RM36,000 in rental income. This includes rental income from Wayco’s property in Kuala Lumpur (Property 3), which is a shop office with tenants and accounted for as investment property in Wayco’s financial statements. Property 2 and 3 were valued by valuers appointed by the vendor at RM3.1 million and RM1 million respectively.

If Wayco is only renting out part of Property 2 to Riverwalk to utilise Wayco’s excess capacity (and appears to be receiving negligible rental income), why would it  allow Riverwalk to name the building after it, with Wayco’s own name nowhere in sight?

Discrepancies in Book Values of Fixed Assets

In response to my questions about discrepancies in the book values of the fixed assets disclosed in its response to SGX and the book values that should be in Wayco’s books based on its audited accounts for FY2016 (after adjustments for any further depreciation), the company said that “while Wayco had adopted the accounting policy of cost as measurement for the Wayco Properties as stated in the FY2016 financial statements, under applicable accounting standards, Property 1 and Property 2 (being classified under property, plant and equipment) can be measured at revaluation and Property 3 (being classified as investment property) can be measured at fair value.”

Under the accounting standard for property, plant and equipment, an entity shall choose “either the cost …or the revaluation model”.  However, the accounting standard also states that the revaluation model should only be used if fair value can be measured reliably.

Wayco had chosen the cost model for its property, plant and equipment as stated in the following accounting policy:

“All items of property, plant and equipment are initially measured at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment losses” (emphasis mine).

Similarly, for investment property, the accounting policy is based on cost, as follows:

“After initial recognition, investment properties are measured at cost less accumulated depreciation and any impairment losses as the fair value cannot be measured reliably without undue cost or effort due to lack of reliable evidence about comparable market transactions.” (emphasis mine).

In the case of investment properties, Wayco had specifically said that fair value is not appropriate, but yet, Datapulse is now saying (or implying) that fair value is used.

I had in my article already mentioned the accounting policies which Wayco had adopted. However, Datapulse chose to just assert that Wayco can use the revaluation model and fair value for property, plant and equipment and investment property respectively, without explaining why the accounting policies were supposedly changed. As mentioned earlier, the revaluation model should only be used if fair value can be reliably measured.

As I had pointed out in my article, the Directors’ Report signed on 13 June 2017 by Wayco’s directors had confirmed the following: “At the date of this report, the directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities of the company misleading or inappropriate.”  However, the Datapulse Board is now saying that the Wayco Board had changed its accounting policies and restated the book values as at 30 June 2017 – or just 17 days later. Bear in mind that the book values that Datapulse submitted in its response to SGX queries were the book values as at 30 June 2017.

If the Wayco’s directors did indeed change accounting policies, there should be supporting documents substantiating this at the time of the change and relevant disclosures made in Wayco audited accounts for FY2017, which should now be available.

With regard to the difference in book values of other fixed assets mentioned in my article, the company said that Wayco “had indeed acquired certain additional other fixed assets (plant and machinery) amounting to RM275,739 during the six months period” as I have suggested as a possible explanation.

However, I had pointed out that the difference in book values was at least RM486,418, not RM275,739. What accounts for the remaining difference, if there was indeed acquisition of other fixed assets?

Were the book values of the properties as at 30 June 2017 revalued or adjusted to fair value after the valuers appointed and paid by the vendor had valued the properties in late November and early December 2017?  The company should disclose the basis for the revalued and fair value amounts for the properties.

Wayco’s Profitability

In the case of Wayco’s profitability, the company said that “while certain income earned or ancillary to Wayco’s core hair care business may be classified as ‘other operating income’ in Wayco’s books under applicable accounting standards and/or Wayco’s accounting policies, for instance, unrealized gain on foreign exchange (arising as a result of sales/debtors in foreign currencies) or storage and handling fees received (arising in connection with sales made), this does not make it any less of operating income, or should lead one to conclude just from this that ‘the profitability of Wayco’s core hair care business is therefore questionable’”.

In my article, I had stated: “…according to the audited accounts for FY2016, other operating income was RM155,201, and this amount included inter alia a net foreign exchange gain of RM51,537 and rental income of RM36,000. “Other operating income” was larger than the total before-tax profit of RM136,629 and it was “other operating income” that allowed Wayco to report a profit.”

One could hardly consider income such as foreign exchange gains and rental income as “core” to Wayco’s operating activities.

The company said that shareholders should refer to the company’s financial results for the quarter ended 30 April 2018 on Wayco’s contribution to the financial results of the group. The revenues for Wayco for the quarter was just $266,000, while there was a total after-tax loss of $496,000 from continuing operations for the group. For the quarter ended 31 January 2018, which would include the results of Wayco for about 1.5 months, Wayco’s contribution to revenue was $0.2 million (this was the rounded figure disclosed).

Shareholders who looked at the financial statements for these two quarters are unlikely to be particularly excited by the revenues of Wayco. Further, they would not be able to tell the performance of Wayco from reading these financial statements since the profits attributable to Wayco are not disclosed.

The company’s response to my article about the ownership of Property 2 and the discrepancies in the book values of the properties and other fixed assets can be validated through the Ernst & Young financial due diligence and when the audit of Datapulse’s financial statements for the financial year ending 31 July 2018 is conducted. The audited accounts of Wayco for FY2017 (which should now be available) and Wayco’s records should confirm whether what was disclosed and communicated to shareholders both in Datapulse’s response to SGX queries and its latest response to my article are indeed accurate.

I hope that SGX and other regulators would not accept disclosures which cannot be substantiated. Unfortunately, many companies today seem to think otherwise, judging by the tardiness of their disclosures and responses to SGX queries. In my view, this has considerably damaged the trust in our disclosure-based regime.