DATAPULSE: Prof Mak raises more questions on Wayco Acquisition

On 28 December 2017, Datapulse Technology (DT) responded to a detailed set of queries from the Singapore Exchange (SGX) about Wayco Manufacturing (M) Sdn Bhd (Wayco), the Malaysia hair care company that DT bought, just one day after an almost totally new Board was constituted. The purchase was completed just four days later.

The Board defended the lack of proper due diligence by obtaining an undertaking which requires the vendor to buy back Wayco at the original purchase price if material adverse findings were discovered within a year. It also said that close to 70% of the S$3,433,760 purchase consideration was underpinned by the value of the three properties owned by Wayco Manufacturing. This point was also made at the SIAS dialogue session on 26 March 2018 and the EGM on 20 April 2018. The DT Board also asserted that Wayco is a profitable business and that the hair care business provides reasonable prospects for growth.

The SGX queries on Wayco were relevant and useful. However, DT’s response contained inconsistencies that raise concerns, including inconsistencies with Wayco’s audited accounts for the year ended 31 December 2016 which I obtained from the Companies Commission of Malaysia (CCM).

Wayco’s properties

In its response, DT listed all of Wayco’s fixed assets and their book values as at 30 June 2017 in an Annex A. Note that as at this date, Wayco had not yet been acquired by DT and therefore the book values should be the book values extracted from Wayco’s books.


For the three properties – labelled as Property 1, Property 2 and Property 3 - DT also provided details about the property, address, date of valuation and amount of valuation. Property 1 in Johor Bahru consists of freehold land and a factory building. Property 2, also in Johor Bahru, consists of freehold land and a factory building, but the factory building is used as a warehouse. These two properties are classified under property, plant and equipment in Wayco’s audited accounts. The third property in Kuala Lumpur comprises freehold land and a shop office with tenants. It is classified as investment property in Wayco’s accounts.

DT’s EGM circular dated 26 March 2018 states: “…the Board and management has, inter alia, performed site visit and inspection of the Wayco Properties, carried out continuing review of the monthly performance of Wayco.” At the 20 April 2018 EGM, the CEO Wilson Teng confirmed to shareholders that he had visited Wayco facilities in Johor.

A DT shareholder paid a visit to Property 1 and Property 2 - which are located opposite each other - on a Saturday in May and shared with me photos taken from the outside. To get a sense of these two properties myself, I paid a visit on a working weekday in June to view the properties from the outside.


Property 2 has the letters “RW” on the building. Based on the letterbox outside the building gate, “RW” appears to be a company called “Riverwalk Plastic Sdn Bhd”. The address on the letterbox matches the address for Property 2 provided by DT. A company search shows that Riverwalk Plastic is a Malaysia private company that has no apparent connection with Wayco or the vendor. The last audited accounts for Riverwalk Plastic were filed for the year ended 31 December 2015. The letterbox also carries the name of a second company, Easy Wood (Johor) Sdn Bhd.

Based on information from the LinkedIn profile of the founder of Riverwalk Plastic, Riverwalk Plastic was incorporated in 2013 and shut down a year later, but continues operations through its subsidiary, Easy Wood.

Did Wayco purchase Property 2 from Riverwalk Plastic and if so, when and at what price? (This may be relevant in assessing the reasonableness of the valuation of this property that was undertaken in December 2017). Why does the building still carry the name “RW”? Is this building used by Wayco, Riverwalk Plastic or Easy Wood?

Wayco reported rental income for RM36,000 for FY2016, which should include rental income from the KL property. It would appear unlikely that such a small amount of rental income would include rental income from Riverwalk Plastic or Easy Wood.

Values of Wayco’s properties and other fixed assets

I then compared the book values of the fixed assets as at 30 June 2017 provided in DT’s response with the book values of fixed assets in Wayco’s audited accounts for the year ended 31 December 2016, after making necessary adjustments for depreciation for another six months between 31 December 2016 and 30 June 2017.

According to Wayco’s accounting policies, freehold land is not depreciated, buildings are depreciated at 2% per year on a straight-line basis, while other fixed assets are depreciated at rates of between 12.5 and 33% on a straight-line basis.

The resulting total book value of the three properties was RM3,958,754 in Wayco’s accounts  as at 30 June 2017. However, the total book value for these three properties as at 30 June 2017 in DT’s response was RM7,500,010 – or 89% higher.

Therefore, when the DT board responded to SGX, the book values of these properties have significantly increased from the amounts that should be in Wayco’s accounts.

When the valuers appointed by the vendor valued these three properties in early December 2017, they valued them at RM7,300,000, or 2.67% below the total book value of RM7,500,100 as at 30 June 2017 as stated by the Board. However, the total valuation was 84.4% above the total book value of  RM3,958,754 which should be in Wayco’s accounts for these properties as at 30 June 2017. Note that these percentages do not take into account further depreciation of the buildings between 30 June 2017 and the date of valuation of the properties in late November and early December 2017, but this would result in only minor changes to the percentages.

The Board had confirmed in its response to SGX that to the best of its knowledge, save for the above properties, Wayco had not purchased any properties.

Note that I am not saying that the market values of the three properties should necessarily be close to their book values. However, I would be very concerned if the book values were adjusted upwards to give the impression to shareholders that the valuations provided by the valuers who were appointed and paid by the vendor were “fair” because they were close to the book values.

The book values for the other fixed assets (such as plant, machinery and equipment) in the Board’s response were also much higher than the amounts that should be in Wayco’s accounts. Rather than the total maximum book value of RM86,799 for these other fixed assets which should be in Wayco’s accounts as at 30 June 2017, the Board’s response shows that the total book value was RM486,418, or 460% higher. In fact, the total book value of these other fixed assets submitted by the Board was higher than the total book value of these assets in Wayco’s accounts 6 months earlier as at 31 December 2016, even though these assets depreciate at a minimum rate of 12.5% per year.

In the case of these other fixed assets, there could be additions between 31 December 2017 and 30 June 2017 could explain the higher book value in DT’s response. However, for the entire year ending 31 December 2016, additions to these other fixed assets only amounted to RM51,262 so I would not expect additions in the first six months of 2017 to explain the RM486,418 difference. Further, in the Board’s response, plant and machinery for the factory accounted for RM396,330 out of RM486,419 of the book value of these other fixed assets.  According to the circular, “certain of Wayco Manufacturing’s assets such as plant and machineries have been almost fully depreciated” and the manufacturing facilities were described as being “fully depreciated or expected to be fully depreciated in the near future”. Were there significant additions to plant and machinery when they were almost fully depreciated?

Note that Wayco’s accounting policies for property, plant and equipment and investment properties specifically state that these assets are initially measured at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. There is no provision for revaluation of these assets. In fact, for investment properties, the accounting policy specifically states the cost basis is used as “fair value cannot be measured reliably without undue cost or effort due to lack of reliable evidence about comparable market transactions”.

In total, the book value of Wayco’s fixed assets in DT’s response was at least RM3,940,965 or 97% higher than the maximum total book value that should be recorded in Wayco accounts as at the same date of 30 June 2017.

Further, Wayco directors had on 13 June 2017 signed off the Wayco accounts for FY2016 and stated: “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.” Therefore, one would not have expected any changes in accounting policies between 13 June 2017 when the accounts and existing methods of valuation were signed off by the directors, and 30 June 2017 when the book values were submitted to SGX, that would explain the 97% difference in book values.

Based on the revised book values of RM4,045,553 or about S$1,340,030 as of 30 June 2017,  and the consideration of S$3,433,760, DT paid 2.56 times of book value, not 1.3 times based on the book values in Annex A provided by DT in its response to SGX. These ratios do not take into account further depreciation for the buildings and other depreciable fixed assets between 30 June 2017 and the sale of Wayco in December 2017, which would result in minor changes to the ratios.

On page 35 of the EGM circular, the directors said that as part of its due diligence prior to deciding to acquire Wayco, the Board had taken certain steps or actions to review and evaluate Wayco’s business, including “Review and consideration of the financial performance of Wayco based on the audited accounts for the financial years ended 31 December 2014, 31 December 2015 and 31 December 2016 and the unaudited accounts of Wayco for the financial period ended 30 June 2017.”

The Board needs to explain the differences between the book values of the fixed assets in Wayco’s accounts and the book values of these assets which they provided in its response to SGX. 

Wayco’s profitability

When DT announced the Wayco acquisition, it said: “The Board is of the view that the Proposed Acquisition is opportune for the Company to acquire a profitable business and diversify its core business into the beauty/wellness products or industry, which should have reasonable prospects for growth.”

The directors also made similar statements about Wayco being a profitable business in the EGM circular.

The company’s announcement of the Wayco acquisition on 12 December stated that Wayco unaudited after-tax profit was RM160,632 (or S$53,201) for the six months to 30 June 2017 (the company assumed an exchange rate of RM1:$0.3312) - or RM321,264 (S$106,402) for FY2017 if we annualise it. DT did not provide revenue numbers for this six-month period.

According to Wayco’s audited accounts for FY2016, revenues for Wayco was RM4,113,196 or S$1,362,291 while after-tax profit was just RM125,801, or S$41,670 (assuming the same exchange rate). That is, Wayco’s unaudited annualised profit for FY2017 was said to be more than 2.5 times its audited profits for FY2016. If the book value of the property, plant and equipment is now higher than the book value as at 31 December 2016, this would also mean higher depreciation, which would adversely affect the profitability of Wayco in FY2017 and going forward. 

Based on the effective purchase consideration of $3,433,760 and FY2016 audited profits of Wayco of $41,670, the Wayco acquisition was at a P/E ratio of  82.4 times.

Further, 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. The profitability of the core hair care business is therefore questionable.

We can further assess the profitability of Wayco using certain numbers provided in the EGM circular. According to the circular, sales of Wayco in Singapore are mainly to Way Company, which in turn sells through different channels. The circular noted that Wayco’s sales through Way Company constituted 85% of Wayco’s total sales. However, revenues for Way Company had declined by 9.3% when we compare FY2016 revenues and annualised FY2017 revenues (the circular only provided revenues for the first 11 months of 2017). The decline in revenues was across all sales channels.

This raises doubts as to whether core hair care business of Wayco was actually profitable for 2017 as it is unlikely that any increase in profits for Wayco was due to increased sales to external customers.

If there was indeed an increase in profitability in FY2017, the increase could have come from “other operating income”,  increase in unit sales to other companies in the Way group (Way Company and Wayco Trading) that is ending up as inventories in these companies but not sales to external customers, or increase in prices charged by Wayco for sales to other Way group companies. None of these is likely to result in sustainable profits for Wayco.

The results for the quarter ending 30 April 2018 (3Q FY2018) released on 14 June included the results of Wayco for a full quarter for the first time, with all of DT’s revenue solely attributable to Wayco. The results show that Wayco revenue for the quarter was $266,000. If we annualise this, it comes to $1,064,000, which would be significantly lower than even the FY2016 revenue for Wayco. The profit contribution of Wayco was not disclosed.

The fact that the circular indicated that there is significant under-utilisation of Wayco’s manufacturing capacity and that most of the trademarks are near expiry and/or not currently used would suggest that Wayco likely faces a demand problem for its products, not a supply problem. Given the highly competitive hair care business which is dominated by multinationals and the large expenditures that are likely to be required to raise brand awareness and to replace the aging manufacturing facilities, I maintain my view that the Wayco acquisition is a poor investment decision by the Board.