Many good questions were asked at the AGM of SciPack on 17 Dec, and fewer good answers received. We were surprised that the company would respond so cursorily even to questions from the Minority Shareholders Watch Group.
AAF investors will be used to reading more on this site about risks and challenges than winners, but few companies have given us more negative surprises than SciPack. This is the Bloomberg code for the clumsily and confusingly renamed Scientex Packaging (Ayer Keroh) Berhad, formerly known as Daibochi and then rated among the most attractive investment stories in Malaysia. We were not expecting its performance to deteriorate after takeover by Scientex Berhad, nor for that company to depress the share price by suppressing information flow and adopting negative IR. It may be useful to chronicle the AGM proceedings for those investors unable to attend, and the governance issues on which we hope for improvement.
This was the fifth AGM in succession to be virtual-only. Questions were again accepted only through chatbox, with no improvements in methodology despite the suggestions made over the years. Neither the chairman nor the Managing Director spoke, beyond prescribed formalities. Investors typing in questions were again disconnected from the broadcast while typing and for 30 seconds after each submission, discouraging efforts to follow up and seek clarification to the limited responses from the spokesman. In a well-conducted AGM, the chairman will expect some questions to be clumsily worded and attempt to discern and respond to underlying concerns - often with a polite enquiry, "Did that answer your question?" Our experience here was, again, the opposite: many investors had clearly read the annual report with great care, and posed relevant questions with precision. However careful the phrasing, and however important the topic, answers were often a repetition of the bland annual report text, as if uninterested in furthering investor understanding.
This was particularly striking in relation to several questions about sales, marketing, consumer trends, and a strategy to reverse the declines in sales, the mysteriously deteriorating 'product mix', margins and ROE. All such questions were answered with reference to cost-control! with products, sales and marketing ignored. When Scientex first acquired a controlling stake, it recognised the value of our company's collaborative relationships with customers, to find solutions with high value-added. The Scientex CEO noted at the time that this customised, higher-margin business was very different from their own mass manufacturing of commodity products; he hoped that closer customer relationships would generate insights into all the opportunities presented by the switch to more sustainable packaging. MNC customer demand must be evolving rapidly - and a questioner pointed out that Malaysian FMCG sales are still growing - yet the former delight in innovation and customer service is no longer evident, and the alarm bells of declining sales deserve better explanation.
One questioner asked how SciPack is affected by competition from other Scientex group companies. The answer given was that there's no direct competition and no supply conflict. That might sound reassuring, but begs the question of why Scientex rather than SciPack bought Taisei Lamick, the former Malaysian Packaging Industry, in 2022; how its assets are being used now; and if products that could be made or processes that could be handled by SciPack have now been allocated to other Scientex companies.
One investor asked if a datacentre player had approached SciPack for land. Rather than yes, no, or clarification on any contacts / local info / rumours, the answer given was that this is not relevant to the company's business. Huh? Ahem! the optimal use of our assets is most certainly relevant to the shareholders.
The company again chose to delay the publication of first-quarter results until immediately after the AGM, instead of doing the reverse so that it could provide latest data and have a useful discussion of concerns and strategy with the owners of the business. Margins slumped further. Purchases from Scientex rose 53% year-on-year, to 36% of operating costs, a new high. The Q1 results show the urgency of concerns well articulated by shareholders, which the board and management have refused to address.
At the AGM, a resounding 61% of minority investors voted against both directors who were up for reelection, including the chairman Mr Choo Seng Hong who is the head of the Scientex group packaging division, and the chairman of the audit committee Mr Lim Kah Fan. Note that independent shareholders have voted against 'independent' directors in both of the last two years. For details of this year's votes, see our voting analysis.
General corporate governance recommendations arising from the SciPack experience, applicable to all markets include:
In the absence of a transcript, I have summarised other Q&A. Apologies for any inaccuracies or omissions: corrections and observations are welcome at info@apolloinvestment.com.
Shipping costs have indeed been volatile, and we hope that margins may rebound as freight rates normalise and capacity utilisation improves. Despite the poor sales and profit performance, cash flows remain positive, the debts incurred for capex have been repayed, and dividends are growing again. Can Scientex Packaging, and the wider Scientex group, regain its reputation for competent and responsible management? Responsive boards and better IR would surely help.
Claire Barnes, 23 December 2024
Here are links to this year's pre-AGM questions, and our posts on the 2022 AGM in which Scientex voted against the adoption of best-practice Malaysian standards in corporate governance, 2021's Christmastide AGM, and the failed 2021 attempt at a squeeze-out delisting.
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