This article first appeared in The Edge Malaysia Weekly on May 24, 2021 - May 30, 2021

AGRI-based group Sin Heng Chan (Malaya) Bhd’s (SHC) stock hit a multi-year high of 76.5 sen on May 10 and gained 50% year to date at last Wednesday’s closing price of 69 sen. Its market capitalisation stood at RM165.7 million, which means it is a relatively small company.

The stock, however, has come on investors’ radar following its acquisition of Tunas Selatan Pagoh Sdn Bhd (TSP), a facility management and construction outfit. Concluded earlier this month, the RM145.9 million deal was fulfilled by RM70 million in cash, RM36.3 million via the issuance of 110 million shares in SHC at 33 sen apiece and the remaining RM39.6 million via the issuance of 120 million new irredeemable convertible preference shares (ICPS) at 33 sen each.

“The moment you see the word ‘Pagoh’, there is bound to be excitement, political play,” a market watcher says, referring to the parliamentary constituency of Prime Minister Tan Sri Muhyiddin Yassin in Johor.

While the existence of political play is a moot point, SHC’s prospects nevertheless look bright.

To recap, TSP has a 40% stake in Sime Darby Property Selatan Sdn Bhd (SDPS), which holds a 20-year concession until May 2037 to provide asset management services for campus facilities and infrastructure in Bandar Universiti Pagoh, located on a 4,099-acre tract. The remaining 60% in SDPS is held by Sime Darby Property Bhd.

Sime Darby Property’s annual report for FY2020 shows that Bandar Universiti Pagoh is made up of four institutions of higher learning and is slated to have more than 10,000 students at full capacity. It currently has more than 7,800 students.

A check on the Companies Commission of Malaysia shows that SDPS as at end-December 2019 registered a net profit of RM33.29 million on revenue of RM53.2 million. It is also noteworthy that SDPS changed its financial year to December from June in 2019, which means that its current financials are for an 18-month period.

From FY2016 to FY2018, SDPS chalked up net profit of between RM207.96 million (FY2016) and RM49.43 million (FY2018). Revenue, meanwhile, fluctuated between RM780.35 million (FY2016) and RM125.645 million (FY2018).

At the end of 2019, SDPS had total assets of RM1.17 billion and total liabilities amounting to RM1.16 billion. Retained earnings stood at RM516.45 million.

Mercury Securities, the independent adviser for minority shareholders in the acquisition of TSP, had said that as the construction of the Pagoh educational hub is already completed, SDPS’s role is merely to provide asset management services for the 17 years left of the concession, valuing the total receipts from that at RM3.3 billion. A back-of-the-envelope calculation shows that the RM3.3 billion amount translates into RM194.12 million a year for SDPS.

In the financial year ended Dec 31, 2020 (FY2020), SHC registered a net profit of RM4.21 million from RM37.15 million in revenue, which means that a substantial jump in revenue and profits is likely post-acquisition of TSP. For FY2020, SHC’s net cash from operating activities was RM7.87 million.

SHC had to resort to borrowings to pay the RM70 million cash portion of the acquisition. As at end-December 2020, SHC had fixed deposits, cash and bank balances of RM21.86 million. On the other side of the balance sheet, the company had long-term debt commitments of RM91.55 million while its short-term borrowings were at RM4.39 million. Finance costs for FY2020 stood at RM4.41 million.

Last December, SHC announced an issuance of RM80 million in Islamic debt papers, which is part of a larger RM200 million Islamic medium-term note programme.

Plans for the SDPS joint venture (JV) can be traced back to November 2012 when Sime Darby disposed of 506.07 acres of land in Pagoh to Pesuruhjaya Tanah Persekutuan for RM50.61 million, which was undertaken simultaneously with the JV agreement with TSP. While TSP’s role in the SDPS JV is not clear, TSP had given cash advances to the JV company amounting to RM20.4 million between 2014 and 2017, which have been returned.

According to independent valuer Asia Equity Research, based on a free cash flow to firm valuation, SDPS is priced at RM413 million, valuing TPS’ 40% stake at RM165.2 million and indicating that the RM145.9 million price tag was at an 11.68% discount to TPS’ actual valuation.

Mercury Securities goes on to say that the acquisition of TPS represents a discount of 30.7% to TSP’s audited net assets of RM210.5 million as at end-2019, which allows SHC to recognise a one-off gain of RM64.6 million from the acquisition price of RM145.9 million.

The acquisition of TPS is a related-party transaction as shareholders of TPS have equity interest in SHC, but the shareholders obtained an exemption from making a general offer.

TSP is wholly-owned by Tunas Selatan Construction Sdn Bhd, which in turn is 70% controlled by Tunas Selatan Sdn Bhd, the investment vehicle of architect Tan Sri Esa Mohamed; 20% by Seng Hoe & Choong Corp Sdn Bhd, which is controlled by managing director Datuk Choo Keng Weng; and 10% by Kuala Lumpur Medical Centre Sdn Bhd, which is Datuk Mohd Salleh Yeop Abdul Rahman’s company.

Following the acquisition, Tunas Selatan now has a 31.84% stake in SHC, while Seng Hoe & Choong Corp has 9.1% and Kuala Lumpur Medical Centre 4.55%.

After the acquisition of TSP, Esa Mohamed — directly and via Tunas Selatan, Goldquest Properties Pty Ltd, Tunas Enterprise Sdn Bhd and Sungai Cerah Sdn Bhd — has a 38.76% stake in SHC. Choo, meanwhile, owns 25.05% of SHC shares directly and via Macronet Sdn Bhd, Goldquest Properties and Seng Hoe & Choong Corp. Mohd Salleh holds 5.19% of SHC directly and via Kuala Lumpur Medical Centre.

Esa Mohamed who hails from Batu Pahat, Johor, is chairman of MyHSR Corp Sdn Bhd, which is wholly-owned by the Finance Ministry and tasked to develop and promote the high-speed rail project linking Kuala Lumpur and Singapore.

Choo, meanwhile, has had substantial stakes in Java Bhd (formerly Aokam Perdana Bhd), a company with interests in timber and plantations. He has been the managing director of SHC since June 1995.

Former merchant banker Mohd Salleh was linked to engineering and construction company Ark Resources Holdings Bhd, where he was non-executive chairman and had a 10% stake. He had a long stint with Bank Bumiputera Malaysia Bhd.

It is also noteworthy that there are two companies with substantial shareholdings in SHC, Wan Jin Resources Sdn Bhd and Samudera Sentosa Sdn Bhd, which own 14.55% and 6.07% respectively. Both companies’ shares are pledged to Sabah Development Bank Bhd.

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