MARKET DEVELOPMENT
Edible, But Hard To Swallow
Edible, But Hard To Swallow
07/03/2016 (The Star) - It is not surprising that the market is not enthusiastic about Felda Global Ventures Holdings Bhd’s (FGV) venture into China, especially after the planter posted its first annual operating loss and a shrinking cash pile.
This has put FGV (pic) in a much weaker position to execute its ambitious global expansion plans.
The lack of funds, as well as its difficulties in raising fresh capital from the market, may have forced FGV to drop its original plan in June last year to acquire a stake in an Indonesian planter for RM2.6bil. The deal, however, may still go ahead with some adjustments to the buyers. It is said that FGV may not be the only party involved in the Indonesian deal.
The focus for FGV now is on completing its proposed RM976mil acquisition of a 55% stake in a Chinese cooking oil company. This has valued the Chinese company at nine times its historical earnings.
Some analysts, however, are not buying it.
One analyst pointed out that there is little synergy for FGV, as the target company Zhong Ling Nutri-Oil Holdings Ltd uses peanut oil as feedstock and is not a pure palm oil consumer.
There are also doubts about Zhong Ling’s ability to sustain its profits. The price of edible oil in China is declining, while the market, dominated by large players like Wilmar and China Agri, is extremely competitive.
While sceptics are at best neutral on the deal, it still makes sense for FGV to have a downstream operation it can control, located inside its most important export market.
There is certainly value in the proposed acquisition, but paying close to RM1bil for a majority stake in a business without the intention of running it may be hard to swallow for some.
FGV could do the same with a smaller stake, say 20%, in Zhong Ling. It would also cost the company a lot less in capital outlay.
FGV has a bad track record when it comes to buying downstream business overseas. Last year, the company sold its loss-making oilseeds crushing and refining plant in Canada which it acquired in 2007.
Lesser exposure in Zhong Ling would probably be more palatable for the market.
The trading business can be tricky
The trading business has its advantages. The business model requires an efficient distribution network that is cost-effective. Even the working capital requirements can be minimised if payments to suppliers can be done on long-term credit and cash received immediately upon the sale of goods.
However, margins are thin. Hence, there is no room for mistakes or there cannot be too many receivables because it would result in cash-flow problems.
In this regard, it is interesting to note that Halex Holdings Bhd has entered into a collaboration agreement with Koperasi Majlis Belia Felda Malaysia Bhd (KMBFMB) with the purpose of importing and distributing rice.
This is under the Food Bank Project launched by the Government.
According to the disclosures so far to the exchange, the rice will be sourced from neighbouring countries such as Cambodia, Vietnam, Thailand and Myanmar. Generally, the price is determined based on what Padiberas Nasional Bhd or Bernas offers to the market with a premium added to it. The premium is RM200 per tonne.
Bernas is the incumbent rice importer and distributor of the country. On the face of it, it would seem that the distribution price set by the joint venture will have a small premium compared to what Bernas offers to the market.
So right from the start, it would appear that the already-thin margins earned from distribution will come under pressure. This is unless Halex and KMBFMB can come up with a business model that ensures their distribution of rice is super efficient and more cost-effective compared to Bernas.
This cannot be discounted entirely. With digital technology in place, any company can upstage the incumbent. This is especially so in the area of distribution. We have seen how some small companies such as GD Express Carrier Bhd have taken the shine off their bigger rivals in the area of delivery of parcels.
However, it is a game for those who have the tenacity and financial means to sustain the business. It is not something that will bring a windfall to the bottom-line of Halex overnight.
Taking on the big customer
Very rarely does a listed company take a Government entity to court. And it’s extremely unusual that a Government entity aims to terminate a project that has been well underway for a number of years.
But that is what Scomi Engineering Bhd did when it took Prasarana Malaysia Bhd to court to stop the latter from terminating the expansion of the KL monorail project.
The contract was signed in June 2011 and there was a supplemental contract inked last year in April. The value of the KL monrail contract was RM494mil and would see the upgrading of the KL monorail stations and the electrical and mechanical system, the construction of a new depot, and the delivery of 12 sets of new four-car trains.
Much of the civil work has been done and it must have been a surprise to Scomi Engineering when Prasarana threatened to terminate the contract.
What that action means is that Scomi Engineering is protecting its interest, but at a cost. Prasarana dishes out contracts for the monorail and LRT networks in Malaysia and by initiating legal action, Scomi Engineering knows what the repercussions will be.
The fact that the board of the company has greenlit such an action shows the extent to which it believes it is right. But Prasarana too will make its case in defending its position should the dispute proceed to the next step.
An arbitration will likely commence if both parties are not able to settle their differences and prior to that, both parties will defend their position through affidavits. The reading of such affidavits will be interesting to see just what has gone wrong to have the case enter arbitration.
For Scomi Engineering, the loss of a major customer will hurt, but the company does not wholly rely on Malaysia for much of its work. In fact, over 80% of its business is now overseas, as the group pushes its monorail systems with success abroad. But the outcome of the case will be interesting for corporate Malaysia.
This has put FGV (pic) in a much weaker position to execute its ambitious global expansion plans.
The lack of funds, as well as its difficulties in raising fresh capital from the market, may have forced FGV to drop its original plan in June last year to acquire a stake in an Indonesian planter for RM2.6bil. The deal, however, may still go ahead with some adjustments to the buyers. It is said that FGV may not be the only party involved in the Indonesian deal.
The focus for FGV now is on completing its proposed RM976mil acquisition of a 55% stake in a Chinese cooking oil company. This has valued the Chinese company at nine times its historical earnings.
Some analysts, however, are not buying it.
One analyst pointed out that there is little synergy for FGV, as the target company Zhong Ling Nutri-Oil Holdings Ltd uses peanut oil as feedstock and is not a pure palm oil consumer.
There are also doubts about Zhong Ling’s ability to sustain its profits. The price of edible oil in China is declining, while the market, dominated by large players like Wilmar and China Agri, is extremely competitive.
While sceptics are at best neutral on the deal, it still makes sense for FGV to have a downstream operation it can control, located inside its most important export market.
There is certainly value in the proposed acquisition, but paying close to RM1bil for a majority stake in a business without the intention of running it may be hard to swallow for some.
FGV could do the same with a smaller stake, say 20%, in Zhong Ling. It would also cost the company a lot less in capital outlay.
FGV has a bad track record when it comes to buying downstream business overseas. Last year, the company sold its loss-making oilseeds crushing and refining plant in Canada which it acquired in 2007.
Lesser exposure in Zhong Ling would probably be more palatable for the market.
The trading business can be tricky
The trading business has its advantages. The business model requires an efficient distribution network that is cost-effective. Even the working capital requirements can be minimised if payments to suppliers can be done on long-term credit and cash received immediately upon the sale of goods.
However, margins are thin. Hence, there is no room for mistakes or there cannot be too many receivables because it would result in cash-flow problems.
In this regard, it is interesting to note that Halex Holdings Bhd has entered into a collaboration agreement with Koperasi Majlis Belia Felda Malaysia Bhd (KMBFMB) with the purpose of importing and distributing rice.
This is under the Food Bank Project launched by the Government.
According to the disclosures so far to the exchange, the rice will be sourced from neighbouring countries such as Cambodia, Vietnam, Thailand and Myanmar. Generally, the price is determined based on what Padiberas Nasional Bhd or Bernas offers to the market with a premium added to it. The premium is RM200 per tonne.
Bernas is the incumbent rice importer and distributor of the country. On the face of it, it would seem that the distribution price set by the joint venture will have a small premium compared to what Bernas offers to the market.
So right from the start, it would appear that the already-thin margins earned from distribution will come under pressure. This is unless Halex and KMBFMB can come up with a business model that ensures their distribution of rice is super efficient and more cost-effective compared to Bernas.
This cannot be discounted entirely. With digital technology in place, any company can upstage the incumbent. This is especially so in the area of distribution. We have seen how some small companies such as GD Express Carrier Bhd have taken the shine off their bigger rivals in the area of delivery of parcels.
However, it is a game for those who have the tenacity and financial means to sustain the business. It is not something that will bring a windfall to the bottom-line of Halex overnight.
Taking on the big customer
Very rarely does a listed company take a Government entity to court. And it’s extremely unusual that a Government entity aims to terminate a project that has been well underway for a number of years.
But that is what Scomi Engineering Bhd did when it took Prasarana Malaysia Bhd to court to stop the latter from terminating the expansion of the KL monorail project.
The contract was signed in June 2011 and there was a supplemental contract inked last year in April. The value of the KL monrail contract was RM494mil and would see the upgrading of the KL monorail stations and the electrical and mechanical system, the construction of a new depot, and the delivery of 12 sets of new four-car trains.
Much of the civil work has been done and it must have been a surprise to Scomi Engineering when Prasarana threatened to terminate the contract.
What that action means is that Scomi Engineering is protecting its interest, but at a cost. Prasarana dishes out contracts for the monorail and LRT networks in Malaysia and by initiating legal action, Scomi Engineering knows what the repercussions will be.
The fact that the board of the company has greenlit such an action shows the extent to which it believes it is right. But Prasarana too will make its case in defending its position should the dispute proceed to the next step.
An arbitration will likely commence if both parties are not able to settle their differences and prior to that, both parties will defend their position through affidavits. The reading of such affidavits will be interesting to see just what has gone wrong to have the case enter arbitration.
For Scomi Engineering, the loss of a major customer will hurt, but the company does not wholly rely on Malaysia for much of its work. In fact, over 80% of its business is now overseas, as the group pushes its monorail systems with success abroad. But the outcome of the case will be interesting for corporate Malaysia.