Friday, 24 September 2021

MFCB Into Oleochemicals: Good or Bad?

After its 80%-owned 260MW Don Sahong hydroelectric dam in Laos started operation in 2020, we know for sure that MFCB is becoming and will become a cash cow.

The concession period for the dam is 25 years which is up to 30th September 2045. 

From the most recent FY21Q2 quarter report, the 6-months PBT from its renewable energy segment is RM176.8mil which is almost entirely from Don Sahong with negligible contribution from its solar business.

With the second half of the year expected to contribute more, it's safe to estimate a PBT of RM400mil per year from Don Sahong.

As depreciation and amortization are usually huge for such infrastructure, I guess the operating cash flow from it might be around or even more than RM400mil per year.

What will you do if your company has RM400mil cash coming in consistently every year?

There is no doubt that MFCB's management team will be actively looking for business acquisition to grow the group.

It has already done so with the acquisition of 75% stake in Stenta Film for RM205mil which was completed on 28 July 2021.

There's no surprise at all since we already knew that it will expand its existing packaging business.

I was hoping for an acquisition of technology related company since certain MFCB directors are also in the board of the high-flying D&O.

Nevertheless, last month MFCB announced its diversification into oleochemical business which might have caught many investors off-guard.

Edenor Technologies which is a 50:50 JV between MFCB and 9M Technologies, has proposed to acquire 100% of Emery Oleochemicals (M) Sdn Bhd and Emery Specialty Chemicals Sdn Bhd from Sime Darby Plantation Bhd and its partner.

This Edenor Technologies sounds like a tech company but unfortunately it's not.

Both target companies are involved in the manufacturing and sale of fatty acids, fatty alcohols, refined glycerin, oilfield chemicals, ozone acids, plastic additives, methyl esters and other oleochemicals derivatives. 

The raw material used will be palm oil and palm kernel oil which will be made into products for home care, personal care, food ingredients, pharmaceuticals, plastics, building and construction, lubricants and agriculture industries. 

The Emery Group is a subsidiary of Sime Darby Plantation Berhad which has oleochemicals businesses in Asia Pacific, Europe and North America. MFCB will only acquire the Asia Pacific business of Emery.

The companies to be acquired have 34-acre manufacturing facilities located at Teluk Panglima Garang, Klang.

Recently on the 1st of May 2021, two crude oil tanks in Emery plant caught fire and unfortunately a foreign worker was killed.

One of the condition of the acquisition is that the sellers have to get the damaged plant up and running.

The targeted purchase price is just RM38mil, based on debt free cash free enterprise value of RM243mil less the net debt of RM205mil.

So, MFCB only needs to take out RM20mil (including expenses) for this acquisition.

The price is "cheap" mainly because those companies are loss-making! 

From their latest available FY2019 financial results, 

  • Emery Oleochemicals: Revenue RM2.1bil, ProfitATAMI RM6.8mil
  • Emery Specialty Chemicals: Revenue RM172.7mil, LossATAMI RM40.9mil

This means net loss of RM34mil a year. It will be net loss of RM17mil to MFCB with 50% shares if they were to replicate this result in the future.

At record high crude palm oil price of over RM4000/T now, it will certainly put more cost pressure on oleochemicals companies.

Acquiring a loss-making business will immediately reduce the net profit and EPS of MFCB. Most investors do not like it as reflected in the drop of its share price since the day of announcement. 

Of course MFCB views it as a value buy and is confident to turnaround the companies or else it won't buy them.

It seems to rely on one key person, Mr Yeow Ah Kow who is the founder of 9M Technologies that forms JV with MFCB to acquire Emery.

Mr Yeow, aged 67 now, has been with plantation giant KLK Group from 1991 to 2019, and was a managing director of its oleochemical division since 1998. He was a strategic advisor to CEO in 2019.

Below is the introduction of Mr Yeow taken from KLK's FY2019 annual report.

Mr. Yeow holds a Bachelor of Science in Chemistry from Nanyang University Singapore and a Master of Science in Petro-Chemicals and Hydrocarbon Chemistry from University of Manchester, Institute of Science & Technology, United Kingdom. 

He started his career as an industrial chemist with Sime Darby Edible Oil Pte Ltd and Sime Darby Oleochemicals Pte Ltd, Singapore. Prior to joining KLK, he was with Behn Meyer & Co (M) Sdn Bhd where he was the Group Manager of the Techno-Chemical Division, in charge of specialty chemicals and equipment trading business. 

Mr. Yeow has been with KLK Group since 1991 and was appointed as the Managing Director of the Oleochemical Division in March 1998. He has since been re-designated as the Strategy Advisor to the CEO with effect from 1 October 2019, focusing on new merger and acquisition opportunities, technologies and projects for KLK Group. 

He was instrumental in setting up the cocoa manufacturing business in 1991, and thereafter, was elevated to the position of Managing Director of Palm-Oleo to overlook the Group’s oleochemical business. 

Over the years, the team built by Mr. Yeow have together with his dynamic stewardship, been the main impetus for the transformation of KLK Oleo into the global oleochemical powerhouse that it is today. Mr. Yeow has facilitated the seamless leadership transition of KLK Oleo operations to a younger team, but will remain on the Exco and subsidiary Boards of the Oleochemical Division, in addition to his new executive role as Strategy Advisor to the CEO.

It seems like Mr Yeow who is not with KLK anymore, has presented this acquisition opportunity to MFCB and he will be the main man to lead and turnaround Emery.

He is no doubt the right man to do the job but the only concern to me is his age.

No wonder MFCB alone has to standby RM255mil of credit facilities just in case Emery's lenders do not consent to the change of control, which is unlikely.

Besides, MFCB also mentions in its announcement that the acquisition is consistent with its long term objective of talent recruitment which may help its plantation division when it expands downstream into coconut and other downstream agricultural produce processing in 2-3 years' time.

MFCB currently plants coconut and macadamia nuts in Cambodia and it may take up to year 2023-2025 to bear fruits. Once the time its right, it will start the downstream processing of these two crops.

Mr Yeow together with the team he assembles, should be instrumental to both MFCB's oleochemical and plantation division.

Can Mr Yeow turn Emery profitable in 1-2 years time? If he can, then MFCB has struck a good deal.

At his age of close to 70, why did Mr Yeow spend his retirement time and millions of ringgit to acquire and then run the loss-making companies? He must have seen good value in it.

With expected vast amount of positive cash flow, MFCB's future is still full of excitement to me, even though its share price movement might not excite most investors.

The proposed acquisition of Emery is expected to be completed in Jan 2022. The initial loss from Emery might just roughly cancel out the profit from Stenta Film.

I think the near term growth catalyst will still be the 5th turbine of its Don Sahong hydroelectric dam. However, I'm not sure whether the construction work will affect its electricity sales or not.

Anyway, I view MFCB as a long term investment. I expect it to grow slowly and give good dividends once the borrowings are down.

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