Is Sigma Pharmaceuticals all but broke and effectively under the control of its banks?
That possibility has to be asked this weekend after the company's statement to the ASX yesterday.
By the time Sigma Pharmaceuticals reports its 2009-2010 results next week; its shares will have been suspended for a month.
They last traded at 90 cents before the first suspension was sought on February 25; the company told the ASX yesterday it expected to report as expected next Tuesday, March 23.
What's the chances of it being a report with much play about the underlying values and performance?
After yesterday's medium sized bombshell, you'd have to say next week's statement will not be very good for shareholders who face a severe loss in value and the possibility of no final dividend.
There's market talk Friday morning of losses of upwards of $500 million in asset write-downs. That would cut the company's asset base dramatically, its market value, and mean its total debts exceed its value.that value, a point that would concern its banks.
Among the December-January balancing companies, Sigma's results could very well turn out to be the worst, topping the shocks from groups like Toll, Gunns and smaller businesses like WDS.
Sigma's results will follow in the footsteps of weak earnings reports from others in the healthcare sector, such as Healthscope and Primary Health Care.
Only Sonic managed to turn in figures that could be characterised as solid and unsurprising.
So yesterday's statement from Sigma should be regarded as an attempt to 'spin' the company's image: shove much of the bad news out first (without the figures) and then follow up with a large dose of red ink, comprised of asset write-downs, stock write-downs and other accounting clean ups.
No wonder it indicated yesterday that it is talking to its lenders about renegotiating its $300 million 2008 bank facility.
And no wonder second half dividend looks like biting the dust.
Sigma's $300 million loan facility is with a group of banks comprising the country's big four lenders: the ANZ, Commonwealth Bank of Australia, National Australia Bank, and Westpac.
Sigma said it expects a “material reduction” in the carrying value of goodwill on its balance sheet.
It has other debts of around $600 million and at 90c a share, market cap of around $1 billion. Should the shares fall 15c or more when trading resumes, its market value will be less than its debt.
Obviously the company will have to raise new capital from the market.
The career of CEO, Elmo de Alwis, might have to be sacrificed, along with one or two members of the board, to get institutions onside and interested in supporting the company.
The biggest shareholder is Sydney funds manager, Maple Brown Abbott.
Here's Sigma's statement, which is from the company's general counsel and company secretary, not the chairman and CEO.
Following its announcement to the Australian Securities Exchange on 25 February 2010 in relation to possible adjustments to earnings guidance, Sigma is in the process of finalising its full year accounts for the year ended 31 January 2010.
As a result of increased recent market pressures (in the generics business in particular) the future cash flow forecasts that support the carrying value of goodwill have declined.
The reduction in the expected cash flows combined with changes in Sigma's estimated cost of capital are likely to result in a material reduction in the carrying amount of goodwill on Sigma's balance sheet. The extent of the adjustments required has not been finalised.
In addition, while further analysis is still required and the extent of adjustments is still being fully assessed, the full-year results for the year ended 31 January 2010 are likely to be impacted by certain adjustments to reported profits.
These adjustments relate in particular to items such as inventory provisioning and write-downs, redundancy provisioning and licence carrying values. Most of these adjustments are non-cash items.
As a consequence of these developments, while the extent of the impact has not been finalised, it appears unlikely the company will be in a position to pay a dividend in respect of the second half of the financial year ended 31 January 2010.
Sigma is in discussions with its lenders to resolve the implications of these expected adjustments for its banking covenants. While the covenants will require revision and renegotiation which will take time, Sigma believes the discussions are both positive and constructive.
While this process will lead to adjustments to the year end accounts, the board and management are confident Sigma’s operational and trading performance remains sound.
Business continues as usual and this process has not compromised Sigma’s ongoing service levels to its customers or its relationships with its suppliers.
The company recognises the uncertainty felt since the trading halt announcement on 25 February 2010 by those suppliers and customers, as well as staff and investors, but it has a duty to ensure that the market is fully informed of the company’s position before its shares resume trading on the ASX.
Sigma expects to provide further information to the market on 23 March 2010, the originally scheduled date for the release of its full year results.
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Now that's a statement that just reeks of big losses and lots of nasties, dressed up as positively as the board and its advisers can make it.
There will be lots of comments about how the Federal Government's changes to generic drug pricing and the Pharmaceutical Benefits Scheme has hurt Sigma, but they have been ongoing now for a number of years.
The major question for shareholders must be, how long has this been going on and why did it erupt now?
In other corporate news, CBH Resources' independent board committee has recommended Toho Zinc Co's new offer for 49.9% of the miner.
"The independent Committee has endorsed the revised Toho proposal and recommends it to CBH shareholders, subject to no superior proposal emerging," Sydney-based CBH said in a statement yesterday.
The committee said it wasn't recommending the proposal from Nyrstar of Belgium, because it couldn't be successful in the current form as Toho, which has 24.1% of CBH, had said it wasn't interested in the Belgium group's latest 19c a share offer.
CBH said it anticipated dispatching a revised notice of meeting by the end of March and holding a shareholders meeting in late April.
Toho, a Japanese zinc processor, also has a 50.6% interest in the miner's convertible notes.
Under the new deal unveiled on Tuesday, Toho made a proportional takeover offer to CBH shareholders at 25c per share, with the aim of gaining a maximum 49.9%.
CBH would sell half of its Rasp project at Broken Hill in NSW to Toho for $57.5 million.
Toho would buy all of CBH's share in lead and zinc concentrates produced at Rasp.
Following completion of those transactions, CBH would make an offer of $500 in cash and 1,800 of its shares per convertible note for all of its outstanding convertible notes.
CBH said the offer by Nyrstar was conditional on buying all of the miner's convertible notes, half of which are owned by Toho, which would be impossible given its opposition.
CBH shares finished at 19c, up half a cent.
And shares in New Zealand-based adventure wear retailer Kathmandu ended up 9.7% yesterday after it revealed a sharp rise in first-half operating earnings which topped prospectus forecasts.
They finished at $1.91, a rise of 17c on the day.
The company which floated late last year after being owned by private equity for a couple of years, said earnings before interest and tax, depreciation and amortisation rose 41% to NZ$18.1 million in the six months ended January 31.
Earnings of about NZ$15.1 million had been forecast.
Sales rose 28% to NZ$106.6 million, beating forecast by NZ$9.5 million. After NZ$16.8 million of costs from the share sale, the company had a net loss of NZ$11.3 million, from a NZ$2.4 million loss a year earlier.
Kathmandu said it was confident that it would meet the full year prospectus forecast of profit after tax of $NZ30.9 million.
Kathmandu said it would not pay a first half dividend, as set out in the prospectus.
The company plans to pay a full-year dividend of 6.7 NZ cents per share, if it meets profit forecasts.
Better than Myer.
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