The Asian markets, including Bursa Malaysia, have had a splendid run so far this year, which has reignited interest in the local stockbroking firms. This is reminiscent of the 1990s when transactions involving stockbroking firms were done at huge premiums.
It was also when Datuk Kamal Y P Tan and his brothers left the stockbroking industry after a bitter fight with MUI Group over Pengkalen Holdings Bhd, which controlled Pengkalen Capital Bhd (now PM Capital Bhd). But Kamal and his brothers certainly do not seem to have any regrets about having left the stockbroking business some 14 years ago.
After divesting their interest in Pengkalen in 1996, when its shares were trading at their peak, the Tan brothers ventured into the casino business in Australia and also the food industry — a move that has paid off handsomely.
The flagship vehicle of the Tan brothers is Singapore-listed Etika International Holdings Ltd, which produces and distributes condensed milk and instant noodles. Unlike the cut-throat stockbroking business, says Kamal, there is stable demand in the food business and it “can’t go wrong”.
With the proceeds from the sale of Pengkalen — which owned not one but two stockbroking firms — in 1996, the Tan brothers went on to establish Etika with several ex-Fraser & Neave (F&N) executives the following year.
The company, which was founded during the 1997/98 Asian financial crisis, has since grown into an outfit with a market capitalisation of S$240 million (RM575 million).
The Tans may not be in the stockbroking business during the current market rally, but they have certainly done well for as of last Wednesday, Etika’s share price had gone up some 776% from 5.8 Singapore cents in March 2009 to 45 cents. The stock hit a high of 52 cents in September, giving the company a market cap of S$278 million (RM666.5 million).
Still, this is nowhere near Pengkalen’s market cap of RM1.3 billion in its heyday, or hype, in 1996, when the Tan brothers and tycoon Tan Sri Khoo Kay Peng were embroiled in a takeover battle for the company.
When asked if exiting Pengkalen and hence stockbroking in 1996 was a fortunate move, Indonesian-Malaysian Kamal says: “It was not our choice ... but yes, of course.”
As a result of the hostile takeover, the brothers were forced to cash out of Pengkalen, albeit at a good price, leaving Khoo to deal with the carnage that took place in the stockbroking industry when the Asian financial crisis unfolded in mid-1997.
Coming from a wealthy timber family in Sabah, Kamal, now 57, was a director of Oriental Bank Bhd (which merged with EON Bank in 2000) from 1976 (when he was 23) to 1990. Through his father Datuk Mohd Ali S T Tan, a prominent timber merchant and banker in Sabah, Kamal and brothers Datuk Jaya J B Tan (63) and Tajuddin J H Tan (who died in 2005 at age 49) gained control of Pengkalen in 1987.
Pengkalen, which was involved in a myriad of businesses, including food products and building materials, had two stockbroking outfits — Kimara Equities and Pengkalen Securities.
According to Kamal, while he was running the food manufacturing business, older brother Jaya was managing the group’s cement business and Tajuddin, the stockbroking business.
Though stockbroking was a money-spinner at the time, the brothers had wanted to cash out of the business or at least divest one of the two units in the mid-1990s, sensing that the business environment was getting tough. Their intention was to retain Pengkalen but to turn its focus away from stockbroking.
Among the parties that showed interest were Tan Sri Syed Mokhtar Al-Bukhary, some foreign groups and MUI Group. Headed by Khoo, MUI Group, in particular, was said to be bullish about the potential of the stockbroking business.
Having sold his MUI Bank in 1994 to Hong Leong Group, Khoo had wanted to build another financial service business in the stockbroking industry, market observers say.
To gain control of Pengkalen, Khoo and his flagship Malayan United Industries Bhd (MUI) accumulated the former’s shares on the open market and subsequently launched a takeover of the group in 1996. While Khoo was said to be a passive partner of the Tan brothers in Pengkalen long before the takeover fight, this remained unsubstantiated because his name did not surface in any of Pengkalen’s annual reports until 1996.
It did not take much to guess that the party with the deep pockets would win the game. MUI Group won the battle for Pengkalen but paid a hefty price. Khoo and his vehicle MUI reportedly forked out at least half a billion ringgit for the takeover, only to see the stockbroking industry go into a tailspin a year later.
Following a series of restructuring and injection of hundreds of millions of ringgit, Pengkalen was renamed Pan Malaysia Holdings Bhd (see accompanying story). The company continues to languish to this day, with a market value of RM65 million as of last Wednesday.
The condensed milk business
It cannot be determined how much the Tan brothers pocketed from the divestment of their interest in Pengkalan. But the amount is said to be more than RM440 million. This is based on their holding of 35.35%, which amounted to 69.11 million shares as at Aug 5, 1995, that were divested at RM6.40 each. The brothers might have acquired more shares during the takeover battle but this cannot be confirmed.
Without elaborating on the proceeds from the Pengkalen sale, Kamal says the money was used to start a condensed milk business in 1997 through Etika as well as invest in a casino and online gaming venture in Australia. The casino venture, which subsequently ceased doing online gaming, is held under another of the brothers’ Singapore-listed companies — Lasseters International Holdings Ltd (see accompanying story) — which has a market value of about S$40 million.
According to Kamal, the brothers invested in the casino venture in Australia because it was expected to produce quick returns while the condensed milk business was expected to have a much longer gestation period. But the opposite happened.
Their entry into the condensed milk business was due to their introduction to former F&N top executives Mah Weng Choong, Khor Sin Kok and Ronnie Kwong, who were in charge of the condensed milk operations, Kamal recalls.
“They were looking for investors to do a joint venture with them, to start another condensed milk factory. I thought with condensed milk being a product that sees stable demand, we can’t go wrong. So we did a JV with them,” says Kamal.
Mah, Khor and Kwong are still with Etika and were listed as substantial shareholders in the company’s annual report for 2009, with stakes of 5.5%, 5.29% and 4.76% respectively. Khor is running Etika’s day-to-day manufacturing operations while Kwong is in charge of marketing and distribution.
The Tan brothers and their families collectively own a 50.82% stake in Etika. Jaya owns a direct stake of 16.37% while Kamal has 17.45% and Tajuddin’s widow Tan Yet Meng 11.02%. Jaya is Etika’s executive chairman, Kamal the group’s CEO and Yet Meng a non-executive director. The son of Tajuddin and Yet Meng, Tan San Chuan, is an alternate director to Yet Meng.
To start off the condensed milk business, Etika bought a piece of land in Meru in 1997 and built its factory from scratch. The condensed milk factory’s first test run took place in late 1999 and the venture turned profitable two years later. According to Kamal, Etika is the second largest player, after F&N, in the local condensed milk market.
“It wasn’t easy. At the time, we were competing with giants like F&N, Nestle and Dutch Lady. We became profitable after two years of production because we had the advantage of a good team that knew the product, the market and the industry well. This shortened our learning curve,” remarks Kamal.
The brothers took Etika public in 2004 and listed the company on the Singapore Exchange’s junior board Sesdaq. According to Kamal, they did want to list Etika on Bursa Malaysia as its manufacturing operations and the bulk of its market was here, but given the capital control restrictions at the time, they decided to list on Sesdaq instead. The company transferred its listing to SGX’s Mainboard in 2009.
From generating a revenue of RM150.1 million and net profit of RM10.5 million in FY2005 ended Sept 30, Etika has grown briskly over the past six years, with its top line hitting RM677.7 million and net profit RM66.2 million in FY2010.
Etika also embarked on a series of acquisitions and expanded its business from the manufacture of dairy products to frozen food and packaging.
Geographically, it is in the process of extending its manufacturing activities from Malaysia to Vietnam and Indonesia via cross-border acquisitions. This is to facilitate its plan to produce condensed milk and UHT milk in Vietnam and condensed milk and instant noodles in Indonesia.
Thanks to Etika’s strong growth and its appeal to fund managers and analysts in Singapore as a proxy for the Asean consumer staple story, the Tan brothers are back on the radar screen of the investment community. However, they are still very much out of the limelight on their home ground, probably because Etika is listed in Singapore.
Which is why, says Kamal, he is toying with the idea of a dual listing, possibly a secondary listing in Malaysia.
He is also keen on making Etika better known locally. At the moment, its condensed milk brand Dairy Champ is well used by the mamak stalls.
“If you go down to the mamak stalls, you can see the brand,” remarks Kamal when asked why the brand is not visible in Malaysia.
But then, it was a deliberate move to target the mamak stalls, he says.
From the very beginning, Etika’s strategy has been to target the restaurants and mamak stalls for Dairy Champ to avoid direct competition with the big players like F&N and Nestle. Over the years, the company has established a strong distribution network and controls the bulk of the condensed milk sold to this segment of the market.
“We have beaten the much bigger manufacturers in their own backyard,” Kamal comments.
This may be contested by the bigger players but certainly, the once-shrewd stockbroker and corporate player is no pushover. Kamal and his brothers sure knew when to enter the condensed milk business and exit the stockbroking business.
This article appeared in Corporate page of The Edge Malaysia, Issue 835, Dec 6-12, 2010