Uphill task in convincing MFM shareholders to cough it up
MALAYAN Flour Mills Bhd (MFM) joins the chorus of listed companies facing an uphill task in convincing their shareholders to cough it up for their cash calls.
After announcing a massive rights issue in the middle of last year, MFM’s rights and loan stocks were listed on Dec 28, 2018 at 14 sen and 28.5 sen, respectively.
However, the units were sold down extensively. At their trading close on Jan 4, the rights and loan stocks fell to 1.5 sen and one sen respectively.
This indicates that shareholders of the company are more interested in selling their allocations rather than exercising them.
MFM, whose earnings had suffered in the nine months of financial year 2018 (FY18), is hoping to raise up to RM275.14mil from the cash call.
MFM’s two main business segments are in the trading of flour and grains in Malaysia, Indonesia, and Vietnam, and integrated poultry business in Malaysia.
As for the cash call, there are two main elements – one is a rights issue and the other is a redeemable convertible unsecured loan stock (RCUL).
The rights are at an issue price of 50 sen a piece on the basis of two rights shares for every five existing MFM shares with sweeteners.
There is one bonus share and free detachable warrants for every four rights shares subscribed.
There is also a renounceable rights issue of five-year 5% redeemable convertible unsecured loan stocks (RCULS).
This is on the basis of three RCULS for every 10 MFM shares with bonus shares and free warrants.
So why the dual offerings to raise money? MFM chief financial officer Cheang Kiat Cheong explains: “We structured the corporate exercise in a way that shareholders can choose depending on their risk profile.
“We understand that some shareholders would want certainty in terms of returns during the gestation period of the investment.
“Hence, the RCULs would be a better fit for investors who seek long-term, consistent dividend or returns.
“Inclusive of the bonus shares and warrants, the RCULs have effective returns of 6%. Taking the value of the entire corporate exercise into account, shareholders will get an immediate upside of some 20%, not including the free warrants,” says Cheang.
However, that return may be negatively impacted if MFM’s share price dips.
Prior to MFM’s third quarter ended Sept 30, 2018 results were posted, the stock had traded at 70 sen a piece.
On a one-year basis, MFM shares have dipped 66.8% to 51.5 sen, as of Thursday’s close.
The group posted a net loss of RM5.19mil during the third quarter, lowering its ninemonth net profit to RM1.18mil.
This is a stark contrast to the net profit of RM64.57mil it posted in the same period last year.
The lower net profit for the nine months was predominantly attributed to lower live bird prices, lower day-old chick production volume due to disease and insufficient contract farms, as well as the sharp depreciation of the Indonesian rupiah against the US dollar.
Cheang explains that in November, the livebird price sank to its lowest in two years and the rupiah/US dollar exchange rate fell from 13,500 rupiah to 15,400 rupiah.
“These factors have since recovered. With the trade war resolving itself, we expect things to improve going forward and the flour and poultry industry should continue to do well,” he says.
MFM also has relatively high borrowings, with total debt at RM1.06bil, while its cash and cash equivalents stand at RM199.56mil.
MFM managing director Teh Wee Chye, who is the single largest shareholder and persons acting in concert, are committed to taking up a portion of rights shares and RCULs, which will amount to RM70.6mil in funding.
In addition, three financial institutions, namely Hong Leong Investment Bank Bhd, Affin Hwang Investment Bank Bhd and KAF Investment Bank Bhd have underwritten to take up RM149.4mil worth of rights shares and RCULs.
Combined, this will bring in RM220mil from the exercise, which will be the minimum amount scenario.
MFM is an old company, having been listed in 1968.
It plans to use the cash from the exercise for capital expenditure and repayment of loans drawn to finance capex and working capital.
The total amount allocated for capex for the minimum scenario is RM192.76mil, which has been earmarked for the ongoing expansion works of MFM’s existing poultry processing plant, ongoing construction of a new aqua feed milling plant, as well as the extension of the group’s existing jetty and upgrading of ship unloaders, all of which are located in Perak.
As of Nov 29, 2018, MFM has drawn down RM217.85mil from its revolving credit facilities to partly fund the capex.
Teh says the company’s prospects remain intact despite the poor performance last year.
He says poultry demand in Malaysia has been growing, particularly from the quick service restaurant segment, which has seen an annual growth rate of 6% to 7%.
“The investments made for the expansion of our poultry processing plants will triple our capacity.
“Currently, the production capacity of our 30-year-old plant is 80,000 slaughtered chickens per day.
“With the new plant, our capacity will grow to 240,000 chickens per day.
“If we did not face the limitations of a maxed-out production capacity, we could have taken on businesses that will make up a production of 120,000 birds per day,” says Teh.
He adds that with poultry being the cheapest form of protein, Malaysia is one of the top three countries in the world in terms of poultry consumption.
He also points out that the new processing plant will meet the standards of the BRC global standard for food safety, which will allow MFM to export its poultry products to Singapore, and potentially, the Middle East. MFM also has its own private jetty. Following the expansion of its jetty, the group will be able to cater to larger vessels like the Panamax, which has a capacity of 80,000 dead-weight tonnage – beefing up its flour and grain trading business and lowering supply chain costs.
MFM has a local market share of about 20% for the flour segment and is among the leaders in the poultry business.
The group entered Vietnam in 1998, and is the largest flour trader in the country at the moment.
However, it is left to be seen if all the factors are enough to convince investors to participate in the company’s cash call, which closes on Monday at 5pm.
The investments made for the expansion of our poultry processing plants will triple our capacity.
Teh Wee Chye