KPS finds comfort in King Koil investment
Fariz says the business is making an annual profit of RM4mil to RM5mil
A BETTER way to evaluate Kumpulan Perangsang Selangor Bhd’s (KPS) investment of 60% stake in King Koil mattress licensing business for RM115.9mil is through earnings before interest, tax, depreciation and amortisation (EBITDA) multiples, according to chief executive officer Ahmad Fariz Hassan.
“I think a better way to put the valuation into context is looking at the EBITDA multiples. The transaction was valued at 13 times EBITDA, which is at the lower range of recent transaction multiples for the sector of between 11 times and 18 times,” he tells StarBizWeek recently.
KPS entered into a share sale agreement with Yeoh Jin Hoe or the vendor to acquire 60% equity stake in the King Koil licensing business via Kaiserkorp Corp Sdn Bhd on May 13. Kaiserkorp is the ultimate holding company of KKLC.
This “willing buyer, willing seller” investment by KPS has raised some questions as the announcement did not clearly mention the profitability aspects of the business.
And to put the deal into perspective, paying RM115.93mil in cash for a 60% stake values the business at some RM193.2mil.
But to be fair, the company’s filings with Bursa Malaysia reveal that the business being acquired has been consistently generating profits with double-digit Ebitda margins of over 25% from 2010 to 2014. The business also has been paying out around 80% of profits as dividends.
Fariz says that the business is making an annual profit of RM4mil to RM5mil but it will get better under KPS.
“We have prepared our value creation plan (VCP) to be implemented in the company which we believe would enable us to create and enhance more value in the company.
“The VCP would include enhancing existing licence operations, entering new markets, focusing on its brand positioning and improving its supply chain process,” he says.
Although Kaiserkorp posted a loss after taxation of RM2.02mil in 2015, KPS says it is buying into a profitable company that generates licensing revenue of RM29.2mil last year from its businesses in 80 countries.
Kaiserkorp’s loss was due to interest expense of its bank borrowings.
Kaiserkorp completed its acquisition of King Koil licensing business in the first quarter of last year. Prior to that, Kaiserkorp was a dormant company.
KPS chairman Raja Datuk Idris Raja Kamarudin says it is also important to note that while KPS is not directly involved in the management or operation of the businesses it acquires, the interest of the company is represented by highly-experienced people from within the sector .
“King Koil is an established brand, ranked seventh in the international mattress market. It has over 31 licensees worldwide across 80 countries with 42 manufacturing facilities generating over US$1bil in global retail sales,” he says at the company’s AGM recently.
KPS says that the target company has an attractive business model. “The brand licensing business model represents high growth potential as revenue is mainly derived from the collection of royalty payments based on the terms of the licence agreements. The business also requires minimal capital expenditure in the future,” it says.
Another KPS investment this year is via a 51% stake in Smartpipe Technology Sdn Bhd, which has been granted a licence from Netherlands-based Wavin Overseas BV (Wavin) to market, sell and install plastic pipe systems and other patented products in Malaysia.
In line with this investment strategy, KPS is also increasing its stake in Aqua-Flo Sdn Bhd to 51% which is the highest performing investment in its portfolio, with room to grow.
Recently, Aqua-Flo secured three contracts, worth a combined RM98.11mil over two years, for the supply and delivery of chemicals to water treatment plants operated by three companies.
The new investments by KPS are following its exit from the water concession business in Selangor.
KPS exited its water concession business when it disposed of 90.83%-owned unit, Titisan Modal (M) Sdn Bhd, to Pengurusan Air Selangor Sdn Bhd for RM78.05mil late last year.
KPS is also letting go of its 30% stake in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd which is expected to be completed soon.
On future targets, Raja Idris says KPS plans to invest RM300mil to acquire controlling stakes in mature and immediate income generating business this year.
KPS is not limiting its targets according to specific sectors but the company would be recalibrating its portfolio of companies based on several investment criteria.
This includes placing active focus on optimising yield generating business divisions as well as exploring targeted investment opportunities in new business sectors to gain balanced exposure to multiple sectors and to increase greater profitability as a whole.
Additionally, KPS will be targeting business that are already market leaders, or have the potential to become market leaders in their specific industries.
“One of the high potential sectors we are looking at is the franchise licensing industry, which provides lucrative revenue generating capabilities, as the manufacturing distribution or delivery risks associated with the products or services provided are taken on by the franchisees,” says Raja Idris.
KPS exit from the Selangor water concession business has lowered the company’s gearing level to about RM1.04bil.
As at the end of last year, KPS debt has been reduced to RM30.13mil reflecting a gearing ratio of 0.02 times making it easier to access funding either from the financial or capital markets.
“King Koil is an established brand, ranked seventh in the international mattress market. It has over 31 licensees worldwide across 80 countries with 42 manufacturing facilities generating over US$1bil in global retail sales.” – Raja Datuk Idris Raja Kamarudin