Wednesday 24 Apr 2024
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This article first appeared in The Edge Financial Daily, on November 21, 2016.


KUALA LUMPUR: Sandakan-based Priceworth International Bhd sees its new logging concession, dubbed forest management unit No 5 (FMU 5), which will start logging from January next year, as a game changer for the integrated timber operator.

According to the group’s managing director Andrew Lim Nyuk Foh, the FMU 5, a timber concession of 101,161ha in Trus Madi Forest Reserve, Sabah, is going to be a transformative game changer for Priceworth, which made a net profit of merely RM1.3 million out of the RM165.8 million in revenue in financial year ended June 30, 2016 (FY16).

“FMU 5 will be the single-largest FMU of Priceworth. It will provide us a sustainable supply of timber, which enables us to fully utilise and increase the efficiency of our log harvesting and production assets to break through our existing near break-even position of a small profit of RM1 million to RM2 million,” he told The Edge Financial Daily in an interview recently.

“We can start logging from January. We will build a factory to process the logs there to save on transportation costs. Normally, two cu m of logs can be produced into one cu m of product,” said Lim, who has 28 years of experience in the timber industry.

Priceworth has been in the timber industry since 1992, before it was listed on Bursa Malaysia in 2001. Currently, it has a 50-year concession over 28,000ha in Sabah. The group is involved in the upstream, mainly sustainable forest management and harvesting, as well as the downstream including the processing, manufacturing, moulding and trading of processed wood.

Lim acknowledged that about two years ago, he worried about where to source for raw materials, as most of Priceworth’s existing businesses came under pressure due to the economic downturn. He then conceived the idea of acquiring FMU 5, which has a concession period of 100 years commencing from 1997 to 2097.

“In fact, we had a meeting with the vendors [of FMU 5] some six years ago to discuss a possible merger, but eventually it was called off because we couldn’t reach an agreement. This year, we approached them again and they finally agreed to it, but even then it took us 10 months to come out with a final agreement,” Lim recalled.

He said Priceworth is already well-equipped with a factory, equipment, manpower and marketing team.  The only thing it lacked is raw materials.

“Our track record speaks for itself, as we achieved about RM600 million [in revenue] in the previous years. Now, with the raw materials, I don't see why we cannot revisit that level again. I’m confident that our company can fly high with this new concession,” said Lim.

Currently, Priceworth is in the midst of buying FMU 5 for RM260 million via its wholly-owned Singapore subsidiary, GSR Pte Ltd.

Priceworth plans to raise RM6.5 million via a private placement and RM13.5 million through a special placement. The proceeds will be used to pay for the deposit for FMU 5.

Subsequently, Priceworth will undertake a two-call rights issue with bonus shares to raise RM84 million in a move to pare down its bank borrowings. The company will then be de-geared from 0.6 times to 0.18 times, but more importantly, realise savings in interest payments of about RM20 million a year.

Finally, the newly-formed GSR will acquire its sister company, Sinora Sdn Bhd, which is the plywood manufacturing arm of Priceworth, as part of the overall arrangement to fund the acquisition of FMU 5 via a listing of GSR on the Singapore Exchange (SGX) in the second half of 2017.

GSR director Paul Chong said Priceworth intends to retain a 75% stake in GSR upon the completion of its initial public offering, which is estimated to raise about RM200 million.

“Sinora and FMU 5 will be injected into GSR and then listed in the SGX. Based on a price-earnings ratio (PER) of eight times, GSR’s targeted market cap will be around RM800 million,” he said.

Including the contributions from Sinora and FMU 5, said Chong, it is targeted that GSR will generate a profit of RM100 million in 2017, on targeted revenue of RM394 million (see table).

“Priceworth plans to control the majority stake in GSR, so that we can continue to enjoy the wealth of GSR,” he said, adding that GSR’s net profit is anticipated to more than double to RM227 million by 2021.

Lim opined that 2017 is the year for Priceworth to shine, as the company’s net profit and market capitalisation are expected to rise to RM80 million and RM600 million, respectively.

“Once we deliver the results, investors should be able to work out the PER, and logically, Priceworth market cap will grow. But again, our share price performance also depends on market forces,” he said.

Lim explained that GSR’s profit will be reflected in Priceworth’s account, but the market cap of GSR will not be automatically translated into the market cap of Priceworth.

“Having said that, if the investors were to read into our business, they would see it that way [Priceworth’s market cap to grow in line with GSR’s market cap],” he added.

It is worth noting that despite the proposed acquisition of FMU 5 that was announced in October, Priceworth’s counter has yet to perform, as investors seem sceptical about its financial impact on the group.

Year to date, the counter has fallen 34% to 10.5 sen last Thursday, giving it a market capitalisation of RM67.4 million.

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