Hap Seng ‘underestimated’ due diligence needed for Kretam buy

This article first appeared in The Edge Financial Daily, on May 31, 2018.
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KUALA LUMPUR: Hap Seng Consolidated Bhd’s bid to acquire a 55% stake in Kretam Holdings Bhd is facing a delay as the group appears to have underrated the due diligence needed for the acquisition.

“We are still in the process of doing the due diligence, [for which] we have received an extension until end-June,” said Hap Seng group managing director (MD) Datuk Edward Lee Ming Foo.

“We actually underestimated the amount of time that we needed to plough through the various due diligence exercises,” Hap Seng executive director Cheah Yee Leng added.

“We thought we could get everything done within three months but quite unfortunately, things didn’t turn out the way we had expected,” she said. The due diligence for now is a work-in-progress, Cheah added.

Hap Seng's 53.04%-owned subsidiary Hap Seng Plantations Bhd, on Monday, announced a second extension for its due diligence from June 4 to June 30, 2018.

It was initially supposed to have completed the due diligence within three months of the conditional share sale agreements with Kretam group MD Datuk Freddie Lim Nyuk Sang, and Santraprise Sdn Bhd on Feb 21, 2018.

It had made an offer of 92 sen per share or a total of RM1.18 billion for 1.28 billion shares or a 55% equity interest in Kretam, which analysts have cited as pricey as it represented a 62.5% premium to Kretam’s 12-month average share price of 56.6 sen when the deal was announced.

Yesterday, Kretam shares were down two sen or 2.44% at 80 sen each, extending its decline after the group reported an 88.08% decline in net profit to RM1.52 million in the first quarter ended March 31, 2018 (1QFY18) last Friday.

A “downtrend in refined commodity prices” had squeezed quarterly earnings, Kretam said, despite revenue for 1QFY18 rising 13.43% to RM160.89 million on the back of higher fresh fruit bunch production.

However, Hap Seng executive director Lee Wee Yong told The Edge Financial Daily that this drop in net profit, a result of inefficiencies in Kretam’s refinery, did not make Kretam any less attractive as an acquisition target.

Kenanga Research, in a note yesterday, recalls the Kretam acquisition as being earnings-

dilutive, making it one of the factors for downgrading Hap Seng to “underperform” from “market perform”.

CIMB Research is also negative on the deal, as “the potential financial impact, including higher gearing and earnings dilution due to higher interest expenses, will outweigh the synergies of integration in the first few years”, according to its note yesterday.

Hap Seng’s requirement for its shareholders’ approval for a proposed mandatory general offer depends on the share sale agreements becoming unconditional.