This article first appeared in The Edge Malaysia Weekly on June 17, 2024 - June 23, 2024

Tex Cycle Technology (M) Bhd (KL:TEXCYCL) is in acquisition mode to expand its business. In the latest announcement, it has proposed to acquire a company involved in chemical processing and wastewater treatment for RM55 million cash.

In April this year, it announced a venture in Sabah that will cost some RM100 million. To fund the venture, Tex Cycle has proposed a rights issue to raise up to RM32 million.

On top of the business expansion, Tex Cycle has also subscribed for a total of RM20 million of perpetual medium-term notes (MTNs) issued by Chin Hin Group Bhd (KL:CHINHIN) in February and March.

The rationale for the subscription of the MTNs is that the debt paper offers a yield of 7.5% with a step-up of 1% every year starting from 2029. It should be noted that there is an element of common interest between Chin Hin Group and Tex Cycle as one of the members of the founding family of the former sits on the board of the waste recycling company.

For a company that was focused on all kinds of recycling businesses and profitable even in the tough years of the pandemic, Tex Cycle is on a rapid expansion spree.

The latest acquisition of RM55 million cash comes with a two-year profit guarantee of RM12 million for this year and next. But the target company that it proposes to acquire also has debts of RM8 million. To fund the proposed deal, Tex Cycle will take up bank borrowings of RM18 million.

Tex Cycle is actually paying cash of RM55 million and absorbing borrowings of RM8 million. As a result of the latest acquisition, Tex Cycle’s gearing will go up from 0.23 times to 0.42 times.

So, what happens after the end of next year when the profit guarantee expires? Can the target company, whose shareholders comprise individuals and private companies, continue to grow the profits?

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.