JSE-listed Faritec has approached its majority shareholder, Shoden Data Systems, in a last-ditch attempt to raise cash to continue operating. This comes as the company's auditors and an analyst express concerns that it may have to close its doors.
Faritec has been trying to raise the cash it needs to implement its growth strategy, pay creditors and ensure there is enough cash to operate, for a few months since saying late last year that it needed to raise the funding.
The company initially expected to have the cash in the bag early last month, but this deadline was subsequently pushed out to the end of last month, and has - so far - failed to materialise.
Delays in raising the capital earned it a rebuke from the JSE because the company's annual report was late. Faritec CEO Fanie van Rensburg indicated at the time that the annual report would be published in January as the company wanted to include details of the fundraising.
The annual report was published in time, saving the company's shares from being suspended, but the report contained concerns from the auditor as to whether Faritec could continue operating.
Worries
Auditor Charles Orbach & Company noted Faritec incurred a net loss of R159.5 million for the year to June. The auditor added that Faritec has continued to incur losses and has restricted cash flows.
“These conditions... indicate the existence of a material uncertainty, which may cast significant doubt on the group's and company's ability to continue as a going concern.”
This morning, the auditors would not comment on the latest delay in securing funding.
Warwick Lucas, an analyst with Imara SP Reid, says Faritec needs to raise the cash to continue operating, or face the risk of folding.
Kaplan Equity Analysts MD Irnest Kaplan says the battle that Faritec is facing in trying to raise the cash is indicative of how difficult it is for companies to raise cash at the moment. “Investors are quite risk-adverse at this point in time and it is harder to get funding.'
Kaplan says the worst is behind Faritec now and the company is making strides in turning around, although it has a long challenge ahead.
New plan
Faritec says it was in talks with various parties to raise the funding, but these have collapsed. It is now talking to Shoden Data Systems, which owns 51% of the company, to partially underwrite a rights offer for the R60 million.
Shoden has already injected funding of R29 million, while shareholders have subscribed for another R20 million in a rights offer that was implemented last year to raise working capital.
Faritec expects to be able to issue further details of its proposed rights offer this week, and urges shareholders to be cautious when trading its shares.
However, he previously said he is confident Faritec will return to profitability again. “I am convinced that this transaction, combined with our focus on executing the basics in our core areas, and our continued drive to improve efficiencies and grow market share, will allow the group to return to profitability over the course of the coming year.”
Fall of a hero?
Faritec was knocked off a high in February last year, when it said costs and the dramatic drop in IT spend had pushed revenue down 19%, to R414 million, for the six months to December 2008.
The downward trend in revenue came only six months after it hit a record amount in revenue. Faritec broke the R1 billion barrier for the first time in the year to June 2008. This was revenue growth of 21%, but operating profit grew much faster, at 109% to R55.5 million.
“In achieving this milestone, we have shown an ongoing improvement in our revenue mix, the resultant margin improvement, as well as significant growth in earnings. The results are especially pleasing in the context of the current economic slowdown,” the company said when it released its results in September 2008.
However, the downward spiral has continued, and was made worse by its inability to raise the R60 million in sufficient time. Because Faritec did not raise the funding it required, a tax asset on its balance sheet, which it could offset against tax on future profit, has been reversed.
The reversal of this deferred tax asset of R37 million impacted its result to June last year, and widened its headline loss per share from 35.8c to 49.6c.
Van Rensburg has been confident he can restore the company to profitability, and expects to announce a narrowing in losses when its half-year results to December are published.
Faritec's share hit a five-year high in June 2007, when it was trading at 168c. It has since then slid to its worst ever low of 4c, and now only has a market capitalisation of R75.7 million.
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