When investing in stocks listed on Bursa Malaysia, it’s crucial to be aware of the classifications that highlight companies facing financial difficulties. Two such classifications are PN17 (Practice Note 17) and GN3 (Guidance Note 3), which flag companies in financial distress or non-compliance. For investors, understanding what these terms mean and their implications can help you make informed decisions.

What is a PN17 Company?

A PN17 company is a company listed on Bursa Malaysia that has triggered specific financial criteria indicating it is facing financial trouble. This status serves as a warning to investors and the market that the company may be at risk.

Triggers for PN17 Status:

• Low Profitability: The company’s revenues are insufficient to cover operating costs, leading to persistent losses.
• Negative Working Capital: The company’s current liabilities exceed its current assets, meaning it may struggle to pay off short-term debts.
• Overdue Debts: The company has outstanding debts that it cannot meet, signaling potential solvency issues.

Obligations of PN17 Companies:

Once a company is classified as PN17, it is required to submit a regularization plan to the Securities Commission of Malaysia. This plan outlines how the company intends to resolve its financial difficulties and return to a healthy financial position. The company has a limited timeframe to implement this plan, or it risks facing further penalties or delisting from the stock exchange.

Example:

A company consistently reporting losses, accumulating debt, and having a negative net worth could be classified as a PN17 company. This signals to investors that the company is in a precarious financial position.

What is a GN3 Company?

A GN3 company refers to a company listed on Bursa Malaysia’s ACE Market that has failed to meet key listing requirements. GN3 status often signals that the company is not in compliance with the rules that govern financial reporting and market participation.

Triggers for GN3 Status:

• Failure to Submit Financial Reports: If a company does not submit its quarterly or annual financial statements on time, it may be labeled as GN3.
• Failure to Maintain Public Shareholding Spread: Companies are required to ensure that at least 25% of their shares are held by public investors. Failure to comply with this requirement could lead to GN3 status.

Consequences for GN3 Companies:

GN3 companies face the risk of delisting if they do not rectify their non-compliance within a specified period. Once a company is delisted, it can no longer trade its shares on the public market, and shareholders may lose their investments.

Example:

A company that has failed to submit its financial statements on time for several quarters may be categorized as a GN3 company. This indicates compliance issues, which could impact investor confidence.

Risks Associated with PN17 and GN3 Companies

Investing in PN17 or GN3 companies carries significant risks, which investors need to be aware of:

1. Financial Risk: These companies are already in financial distress, which increases the chances of bankruptcy or liquidation. A company unable to meet its financial obligations could go under, resulting in total losses for shareholders.
2. Liquidity Risk: Shares in PN17 and GN3 companies may become less liquid, meaning it could be difficult for investors to buy or sell their shares. As investor confidence wanes, trading volume can drop, leading to price stagnation.
3. Volatility Risk: These companies are prone to substantial price fluctuations due to their financial instability. Share prices of PN17 and GN3 companies often swing wildly as the market reacts to rumors, regulatory updates, or financial developments.

Investing in PN17 and GN3 Companies: Proceed with Caution

Investing in PN17 and GN3 companies is inherently riskier compared to other listed companies, but there are cases where some of these companies manage to recover and perform well in the long term. However, before investing, consider the following:

• Conduct Thorough Research: Look beyond the PN17 or GN3 label and dive deep into the company’s financials, business model, and regularisation plan. Examine whether the company has a clear strategy to overcome its difficulties.
• Seek Professional Advice: If you’re not confident in your ability to assess the risk, consider consulting a financial advisor or investment professional. They can provide tailored advice based on your financial goals and risk tolerance.
• Monitor Developments Closely: It’s critical to keep track of any updates or news related to the company’s progress in overcoming its challenges. Regulatory filings, earnings reports, and announcements on regularisation plans can give you insight into whether the company is turning things around.

Important Notes for Investors

• Not All PN17 or GN3 Companies Fail: Some companies successfully emerge from financial distress. With strong management and the right turnaround strategies, it’s possible for a PN17 or GN3 company to return to profitability and regain investor confidence.
• Diversification Can Help Manage Risk: If you’re interested in investing in PN17 or GN3 companies, consider diversifying your investments across other sectors or companies. This can reduce your exposure to the risk of any single company or industry underperforming.
• Stay Informed: Follow the latest news, announcements, and financial reports related to PN17 and GN3 companies. Market conditions and company-specific developments can change rapidly, so staying up-to-date is essential to making sound investment decisions.

Conclusion

PN17 and GN3 classifications highlight companies that are struggling financially or are in violation of listing requirements. While these companies may present opportunities for higher returns, they also carry higher risks. Understanding the triggers and consequences of these classifications allows you to approach such investments with caution, balancing potential rewards against the risks involved.

If you choose to invest in PN17 or GN3 companies, always ensure that you are well-informed and consider seeking professional advice to help manage the potential risks.