Hexza masters art of controlling cash flow
Ho Chung Teng 
Hexza Corp Bhd, Focus Malaysia, Best under Billion Awards 2017, market capitalisation, John Ler, cash flow

THE debate on the importance of net profits and cash flow is still on-going. While profit indicates the surplus a company made after deducting all its expenses from revenue, cash flow is crucial for businesses to run their daily operations.

Hexza Corp Bhd, which manufactures synthetic resins and chemical products, ensures growth in both its profits and cash flow with a compound annual growth rate of 40.72% and 109.74% respectively from 2014 to last year.

In recognition of the performance of its cash flow from operations over the three years, Hexza came out tops in the Best Cash Flow from Operations category in Focus Malaysia’s Best under Billion Awards 2017.

The company won the award for companies with a market capitalisation of between RM150 mil and RM499 mil.

HLB Ler Lum audit director John Ler tells FocusM that cash flow is crucial, as it is the lifeblood of a company.

For the financial year ended June 30, last year, Hexza’s cash flow from operations increased to RM23.93 mil from RM14.24 mil the previous year.

The main reason for the increase in operating cash flow is because of the better inventories and receivables turnover ratio.

In FY15, Hexza’s cash flow from operations increased to RM14.24 mil from RM2.9 mil a year earlier.

Based on its cash flow statement, the increase in operating cash flow is mainly due to the increase in net profit to RM14.03 mil from RM8.07 mil in FY14.

Hexza attributes its FY15 net profit rise to the increase in sales and cost efficiency.

A chartered accountant says Hexza’s FY16 working capital improvement is mainly due to better inventory and receivables turnover ratio.

Hexza’s inventory turnover days improved to 92 in FY16, from 111 days the previous year. while its receivable turnover days improved to 73 from 79 days a year earlier.

He says: “A higher receivables turnover for business reflects good credit control as cash is quickly recycled to the business to recoup the upfront capital and cover expenses,” he says.

Nevertheless, Hexza cautioned that it will make a full provision of RM28.54 mil in Q1 FY18, ended Sept 30, this year, which may see it reporting its third consecutive quarterly net loss.

For Q1 FY17, Hexza’s net profit was RM14.81 mil. “The provision has a significant negative impact of RM28.54 mil on the company’s profit after tax.

“Accordingly, the impact on earnings per share is 14.2 sen,” Hexza says.

The caution came due to a default by Tembusu Industries Pte Ltd, as it failed to make payment of the monthly lease rental payable under an agreement signed on Jan 30, 2015.

Hexza had, on that day, inked an agreement with Tembusu to purchase part of an equipment – an 8 MW heavy fuel oil power generation system, in Kawthaung, Myanmar for US$6 mil (RM25.13 mil) on condition that it is leased back to Tembusu for 10 years at a monthly rental of US$130,205.

Hexza says Tembusu twice asked to reschedule payment but it failed to adhere to the new timelines, it said.

In its latest annual report, Hexza CEO Gary Goh says the Ipoh-based company is expecting a challenging year for its ethanol and resin divisions.

This comes as ethanol sees an increase in excise duty, while its resin division saw customers in plywood manufacturing, facing log supply issues.

“Our ethanol division should continue as business as usual, albeit with a lower profitability compared to previous years.

“We expect the business of our resin division to remain challenging until the log supply issues are resolved. But it should remain profitable,” Goh says.

In addition to the excise duty for potable alcohol, Hexza may also be affected by new regulation requiring a minimum bottle size of 700 mil for compounded hard liquor with an alcohol content of 32.5% and above.

“The higher absolute shelf price per bottle due to the minimum size and minimum alcohol content could reduce the affordability of bottle purchases and impact sales of our customers that produce locally bottled alcohol.”

In order to diversify its earnings, Goh says Hexza decided to embark on a diversification plan via mergers and acquisition.

The two-pronged strategy will see Hexza rejuvenate its property development business and acquire other new ones.

“We have also established a framework and expanded our introducer channels for evaluation of merger and acquisition opportunities,” he says.

This article first appeared in Focus Malaysia Issue 260.