This article first appeared in The Edge Malaysia Weekly on August 23, 2021 - August 29, 2021

THE latest surge in Covid-19 cases in the country is a blow to local companies that were beginning to recover some momentum. The ongoing lockdowns have put a damper on Boustead Holdings Bhd’s turnaround plans.

Boustead, which has been loss-making in the last three reported years, in 2020 unveiled a three-year plan to strengthen its core businesses and unlock value. The plan was fine-tuned to emphasise the digital services and technology sector and to venture into new business opportunities under the Reinventing Boustead strategy announced in June.

One of its rejuvenation initiatives was under way when it announced in April a partnership with Next Generation Oil Sdn Bhd to jointly develop an algae plantation and produce carbon neutral crude algae oil.

But the project had to be put on hold due to the nationwide Movement Control Order (MCO), says Boustead managing director Datuk Seri Mohammed  Shazalli Ramly. “Most of the works planned for the project have to be put on hold as they are deemed non-essential. We hope the MCO will be lifted soon so that we can continue with the project,” he says in an emailed response to questions from The Edge.

In the meantime, Boustead is pursuing the sale of non-core assets in an effort to pare down debt and for working capital, with the latest being the disposal of its 66.41% stake in University of Nottingham in Malaysia Sdn Bhd (UNIM) for £23.5 million (RM137.4 million) to University of Nottingham, United Kingdom. The proposed disposal brings University of Nottingham’s total shareholding to 96.32%, while YTL Corp Bhd holds the remaining 3.68%.

The Edge has learnt that Boustead had been in discussion about the sale since early 2020. Shazalli declined to comment.

However, critics point to the low price of the transaction, especially considering the value of the land. UNIM owns three parcels of land measuring 118.8 acres in Semenyih, Selangor, which are currently being used as the campus of University of Nottingham.

A source familiar with the matter notes that the divestment comes after the initial 20-year joint venture agreement was concluded in September last year.

“While UNIM has turned profitable in the past three years, no dividend has been paid out to its shareholders since inception. This situation may continue going forward as the University of Nottingham, as the party managing the university, aims to reinvest any excess cash into UNIM’s operations and its campus.

“The pandemic also puts further risk into the future outlook of UNIM,” the source says.

The selling price of RM137.4 million represents a 10% premium above Boustead’s carrying amount of RM124.98 million as at Dec 31, 2020. Boustead’s filing with Bursa Malaysia shows that the group expects to realise an estimated net gain of about RM7.6 million or about 0.37 sen per share from the disposal, which is expected to be completed by the fourth quarter.

The efforts to pare down borrowings are also part of a wider strategy at Boustead, a 59.42%-owned subsidiary of Lembaga Tabung Angkatan Tentera (LTAT), to create a strong balance sheet. The diversified group has been reducing debt in the past year by selling assets including Royale Chulan Bukit Bintang Hotel, Boustead Cruise Centre, and two pieces of land (measuring 6.59 acres and 2.93 acres) in Jalan Cochrane, Kuala Lumpur.

Total borrowings (excluding perpetual sukuk) stood at RM7.49 billion at the end of March, down from RM7.58 billion at end-December 2020. Its net debt was RM6.98 billion compared with its shareholders’ equity of RM3.7 billion (excluding non-controlling interests), leading to a net gearing of 1.89 times.

“The group is committed to continuously work towards a healthy gearing ratio,” says Shazalli.

“We wish to highlight that the group’s absolute value of outstanding debts has averaged approximately RM7.5 billion over the past few years. However, the gearing ratio has deteriorated given the losses recognised in the past few years, which affected the carrying value of equity.

“The group has embarked on a smart debt management initiative under the Reinventing Boustead strategy in order to manage its borrowings to an optimal level. This is supplemented by the strategic sales initiative involving rationalisation of non-core and low-yielding assets to ensure that the group will have a strategic paring down of its borrowings,” he adds.

The group swung to a RM43.1 million net profit in the first quarter ended March 31, 2021 (1QFY2021) after six straight quarters of losses, thanks to a one-off gain of RM84.6 million from the disposal of Royale Chulan Bukit Bintang. Quarterly revenue fell 7.7% year on year to RM2.09 billion.

During 1QFY2021, its plantation and pharmaceutical divisions managed to deliver higher profits, while its trading, finance and investment division returned to the black on the back of a stockholding gain by its 42%-owned subsidiary Boustead Petroleum Marketing Sdn Bhd (BPM) on higher average fuel prices.

Shazalli says Boustead is built on bricks-and-mortar businesses that have been the foundation of the group and they will continue to be its pillar of strength.

“Core divisions such as plantation, pharmaceutical, heavy industries, properties, trading and finance remain vital to the group and they will be further developed and optimised with the integration of digital technologies.

“Nevertheless, we continuously evaluate the viability of our assets. As the asset value for potential divestments is constantly evolving, coupled with the economic condition that is currently very dynamic in nature, we will consider any asset divestments as and when it is viable for the group to do so,” he adds.

However, a market observer points out that stripping out exceptional and one-off items, revenue generation from most of its core businesses have been poor. Its loss-making heavy industries division continues to be a significant drag on Boustead’s profitability.

“It’s not enough to rely on asset disposals as these are low-hanging fruits. It still needs to focus on its debt position and cash flow generation,” the market observer says.

As part of its Reinventing Boustead strategy, Shazalli says the group has identified potential digital and high technology-based companies to explore technologies and will be announcing its partnership with them soon.

Last month, Boustead teamed up with Angkatan Koperasi Kebangsaan Malaysia Bhd and an independent insurance broker to form a consortium to apply for one of the five digital banking licences to be awarded by Bank Negara Malaysia.

Boustead’s share price plunged to a low of 56 sen after LTAT decided to abort a plan to privatise Boustead in February. The stock has fallen about 6% year to date to close at 58 sen last Thursday, bringing a market capitalisation of RM1.2 billion.

“The intention to privatise Boustead was made by our largest shareholder, LTAT. Since LTAT last announced that they were not proceeding with the privatisation proposal, there has been no further announcement on this matter, and the group is unaware of any privatisation proposal that is currently being considered. If there [are] any updates on this matter, we will make necessary announcements pursuant to the listing requirements,” Shazalli says.

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