Frankly Speaking: Room for Volcano to take up new debt

TheEdge Mon, Feb 26, 2024 01:00pm - 3 months View Original

This article first appeared in The Edge Malaysia Weekly on February 26, 2024 - March 3, 2024

Nameplate and plastic injection moulded parts maker Volcano Bhd’s private placement plan to raise up to RM42.77 million from the issuance of up 49.5 million new shares — or 30% of its share base — remains on track as it has been granted an extension of time until July 5 this year to complete the corporate exercise.

The private placement exercise, announced about a year ago, intends for the bulk of the proceeds (RM38 million) to fund the construction of Volcano’s new factories in Penang and Rayong, Thailand, for RM38 million.

Last September, the company issued the first tranche of 16.63 million new shares, raising RM15.13 million based on an issue price of 91 sen per share.

Following the fundraising exercise, its net cash position strengthened to RM22.3 million with gross borrowings of RM4.31 million as at end-December 2023, against RM14.3 million in net cash as at end-June 2023.

The 30% private placement exercise will have a huge dilutive effect on Volcano’s shareholders. As such, it may be a better option for Volcano to take on some debt to fund its expansion plans given its healthy balance sheet.

Furthermore, its recent share price performance suggests that a continuation of its private placement exercise may not be conducive. Since peaking at RM1.27 last August, Volcano’s share price has nearly halved to close at 67 sen last Friday, 26.4% lower than the first-tranche placement price. Year to date, a fifth of its market value has been wiped out.

Volcano made a debut on the ACE Market of Bursa Malaysia in April 2021. In the latest quarterly results ended Dec 31, 2023, it posted a 48% jump in net profit to RM1.24 million from RM837,000 in the same quarter a year ago, on the back of higher sales and foreign exchange gains, which makes its recent share price underperformance somewhat surprising.

In any event, proceeds from the remaining placement shares will be dependent on its share price performance in the next few months.

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