Up­hill task in con­vinc­ing MFM share­hold­ers to cough it up

The Star Malaysia - StarBiz - - Companies & Strategies - By TOH KAR INN [email protected]­tar.com.my

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

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