This article first appeared in The Edge Malaysia Weekly on February 26, 2018 - March 4, 2018

AT first glance, the planned diversification by SCH Group Bhd — an ACE Market-listed quarry machinery and equipment supplier — into the event equipment supply and rental business seems nothing out of the ordinary. However, the move will see several prominent names becoming shareholders, and potentially provide about 25% of future earnings.

To recap, SCH on Feb 2 agreed to buy 100% of TK Tent & Air-Conditioning Rental Sdn Bhd from Hextar Holdings Sdn Bhd for RM50 million — a sizeable purchase for a company with a market capitalisation of RM90 million at its close of 22 sen last Thursday. The counter had been hovering at between 16 and 29 sen since its listing — at 23 sen apiece — in February 2014.

SCH intends to fund the purchase with borrowings (70% or RM35 million), internal funds (RM4.5 million) and part of the proceeds (RM10.5 million) from a share placement of 103 million shares announced on Jan 8, which will raise a total of RM19.06 million.

SCH plans to sell 60 million shares , or about 60% of the share placement, at 18.5 sen each (a 16% discount to the market price) to Hextar and/or parties related to its acquisition of TK Tent, which comes with an aggregate profit guarantee of at least RM15.5 million for the financial year ending June 30, 2018, to June 30, 2020.

Hextar, which is expected to surface as a substantial shareholder of SCH, is an agrochemical firm ultimately controlled by Datuk Ong Soon Ho and his son, Datuk Eddie Ong Choo Meng, who are the directors of Halex Holdings Bhd.

TK Tent is not the first business injected into a listed company by the father-and-son duo.

Last December, Hextar announced plans to hive off Hextar Chemicals Ltd (HCL) to Halex for RM550 million. This came nine months after the Ongs surfaced as substantial shareholders of Halex.

Hextar, the Ongs’ flagship, is the country’s largest pesticide producer. It also manufactures other agrochemical products such as chemical fertilisers and industrial chemical products. Hextar acquired a manufacturing plant to produce fertiliser in 2010.

Eddie joined Hextar as executive director in 2002 and took the helm three years later.

While SCH is actively looking for opportunities that complement its quarry machinery and equipment business for organic growth, it is also keen on more merger and acquisition (M&A) activities, according to a source.

“Going forward, SCH is likely to acquire more businesses because M&A will allow it to grow faster,” he tells The Edge.

Between 2011 and 2017, Eddie and his father were involved in Denko Industrial Corp Bhd, a plastic injection mould and high precision parts manufacturer. They exited Denko in February last year after Singaporean businessman Foo Chee Juan launched a conditional voluntary takeover bid for the company.

Back to SCH, the Ongs will join low-profile businessman Tan Sri Richard Koh Kin Lip and business partner Liew Fook Meng as substantial shareholders.

Koh and Liew became substantial shareholders after their private vehicle, Thianjing Holdings Sdn Bhd, bought a 10.47% direct stake on March 2 last year. Thianjing Holdings mopped up another 25 million SCH shares on March 30, raising its total shareholding to 16.5%. The transacted price was not disclosed.

It is estimated that Koh and Liew will hold 13.2% equity interest in the enlarged SCH, while the Ongs will have 11.65%. Koh, 70, is said to be among the more prominent businessmen in Sandakan, Sabah. His flagship company, Rickoh Holdings Sdn Bhd, is involved in oil palm plantations, property development and quarry operations. His partner, Liew, is executive director and one of the founding brothers of Cocoaland Holdings Bhd.

For the last 25 years, SCH has been supplying products, including jaw crushers, cone crushers, hydraulic crawler drills, rock tools, conveyor belts and impact springs, to the quarry industry. The equipment is imported mainly from Japan, South Korea, China and India.

SCH has a local market share of 18% and distributes its products to more than 500 domestic customers, mainly quarry operators, as well as to clients in Singapore, Indonesia, Thailand, Myanmar and Cambodia.

The group’s revenue almost halved, from RM65.4 million in its financial year ended Aug 31, 2014 (FY2014), to RM37 million in FY2016. Earnings also dropped from RM7.2 million in FY2014 to a mere RM1.6 million in FY2016, while net margin shrank from 11% to 4.4%.

For FY2017, SCH posted a net profit of RM1.8 million on revenue of RM44.2 million. In the first quarter ended Nov 30, 2017, it made RM1.66 million in profit on revenue of RM11.67 million.

Incorporated in 2010, TK Tent rents and trades event-related equipment such temperature control systems, energy products, as well as furniture, portable toilets and decorations. Its equipment is mainly used at trade fairs, exhibitions, office buildings, conventions and national-level events in Malaysia and other parts of Asia.

SCH is paying 9.7 times earnings for TK Tent, based on the average annual profit after tax of RM5.17 million derived from the guaranteed sum over the three years through June 30, 2020. TK Tent had an audited net asset value of RM17.83 million as at June 30, 2017.

Time will tell if more value will emerge from its enhanced substantial shareholder base.

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