This article first appeared in The Edge Malaysia Weekly on October 28, 2024 - November 3, 2024

ALMOST five months after Paragon Union Bhd (KL:PARAGON) submitted a proposal to buy a 51% stake in Johor-based recycling company Metahub Industries Sdn Bhd for RM51 million, it has received the green light from Bursa Malaysia to proceed.

According to a circular to shareholders, the RM51 million will be paid via 17.29 million new Paragon Union shares at RM2.95 apiece — a 3.6% discount to its closing price of RM3.07 last Friday.

Independent valuer Asia Equity Research Sdn Bhd (AER) said the 51% stake in Metahub is fairly valued at between RM45.1 million and RM51.5 million, the circular stated. This works out to an implied forward price-earnings ratio (PER) of 6.8 times to 7.8 times, based on a forecast profit after tax for financial year 2025 (FY2025) of RM13 million. This is below the market average of 11.4 times and compares with Tex Cycle Technology (M) Bhd’s (KL:TEXCYCL) implied PER of 15.9 times and JAG Bhd’s (KL:JAG) 150.5 times, as well as Singapore-based 5E Resources Ltd’s 6.8 times.

“The board proposes to undertake the proposed acquisition to enable the group to increase the revenue stream of its recycling business in addition to its other business segments, which may enhance the overall earnings potential of the group moving forward,” Paragon Union’s board of directors said in the circular.

It should be noted that the proposal is a related party transaction as both Paragon Union and Metahub are controlled by Koon Hoi Chun, a member of the Koon family who controls Press Metal Aluminium Holdings Bhd (KL:PMETAL).

Koon has a 50% stake in Paragon Union — 2.31% directly and 47.69% indirectly through AKK Capital Sdn Bhd (ACSB). Post-acquisition, his direct and indirect equity interest in the company will increase to 55.14%. He is also the majority shareholder of Metahub with an 80% stake.

Koon emerged as a major shareholder of Paragon Union in 2021 after buying a 57.8% stake in an off-market deal at 55 sen per share for a total amount of RM21.99 million.

The 44-year-old has been involved in the business of recycling industrial waste. He worked with Press Metal before starting KYH Trading Sdn Bhd, which was involved in collecting, sorting and cleaning industrial waste and metal scraps. In 2021, he ventured into reprocessing industrial waste and metal scraps into ingots through Technovate Holdings Sdn Bhd.

Paragon Union will hold its shareholders’ meeting this Wednesday to vote on the proposed acquisition. The proposal needs a simple majority to go through. As interested parties, Koon and ACSB will abstain from voting.

Over the last three years, Paragon Union has seen a significant rise in its share price. From trading between 20 sen and 40 sen in 2020, the counter closed at RM3.07 last Friday, giving the company a market capitalisation of RM257.36 million.

Paragon Union, which makes automotive and commercial carpets, diversified into the metal recycling business in 2022 to broaden its revenue stream. In 2023, the group set up its recycled metal trading business, which contributed 35% to its revenue in the first year of operations. The remaining 65% was mainly from car components and automotive and commercial carpets.

For the six months ended June 30, 2024 (1HFY2024), Paragon Union narrowed its net loss to RM564,000 from RM1.81 million in the previous corresponding period, on the back of higher revenue of RM50.78 million from RM37.02 million previously. It was in the red from FY2020 to FY2022, but it managed to register a profit after tax of RM9.15 million in FY2023.

With Metahub, Paragon Union will move further upstream in metal recycling. The deal to inject Metahub comes with a profit guarantee of RM6 million for FY2024 and RM8 million for FY2025, translating into an aggregate audited profit before tax of RM14 million.

“If there is a shortfall in the first year, the profit guarantee will accumulate in the second year. Also Paragon Union can claim the shortfall sum from the vendors,” says an executive familiar with the deal.

Metahub is loss-making, having posted a net loss of RM1.6 million as revenue fell 36.86% from the year before. For the first seven months of FY2024, it posted a PBT of RM973,000 and profit after tax of RM740,000 on the back of RM20.3 million in revenue.

A source points out that Metahub is expected to see better revenue and profit growth in the coming years as it has completed upgrading works and is in the midst of expanding its wastewater processing capacity. It is also in the process of constructing a copper processing plant in Skudai, Johor, which is expected to be completed in the fourth quarter of this year.

“Metahub has already obtained approval to increase its wastewater plant capacity from the Department of Environment (DOE) and is in the midst of obtaining approval to increase its aluminium reprocessing capacity,” the source adds.

Upon obtaining the DOE approvals, Metahub plans to increase its wastewater plant capacity from 200 tonnes to 2,500 tonnes a month, while the processing capacity of its aluminium plant will increase from 200 tonnes to 3,000 tonnes a month.

It is worth noting that Koon bought into Metahub in December 2022, a year after buying into Paragon Union.

“Following the acquisition of Metahub, Paragon Union will be a different company altogether. With Press Metal as a global integrated aluminium producer, the company will be able to tap into its contract to market its recyclable aluminium and copper, especially with the increasing importance of preserving resources and addressing environmental concerns,” says a market source.

Metahub collects electronic scraps from electronic companies and subsequently sorts and processes the waste to recover recycled metals such as aluminium, copper, tin and nickel by smelting the scraps. Currently, the bulk of Metahub’s recycled metal products are sold locally, with about 30% exported to Taiwan.

Meanwhile, its wastewater processing segment treats wastewater and removes unwanted particles, for which it charges a fee for each tonne of wastewater treated.

In FY2023, Metahub’s wastewater reprocessing business contributed revenue of RM820,000 while operating at a capacity of 85 to 100 tonnes a month. Starting this month, it expects to process 1,000 to 1,300 tonnes of wastewater, and eventually rise to the full capacity of 2,500 tonnes a month.

With the acquisition of Metahub, Koon will have his hands full at Paragon Union to turn around two loss-making companies. Looking at Paragon Union’s share price performance, investors are taking a huge bet on its potential to tap into the recycling business that has yet to show results. 

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