This article first appeared in The Edge Financial Daily on June 8, 2018

KUALA LUMPUR: Straits Inter Logistics Bhd is acquiring a 55% stake in Tumpuan Megah Development Sdn Bhd, which has similar core business activities as Straits, from Raja Ismail Raja Mohamed for RM35.75 million.

Tumpuan Megah is principally engaged in the oil bunkering services business and has operations in eight ports in Malaysia. It carries out its bunkering services via its seven vessels.

In a filing with Bursa Malaysia yesterday, Straits said the acquisition will be satisfied via a combination of RM7.8 million in cash and RM27.95 million via an issuance of 116.46 million new shares at an issue price of 24 sen per share.

Straits also said the cash consideration for the proposed acquisition will be financed via a placement of 36.79 million shares, or 10% of its issued shares, at 24 sen per placement share to raise RM8.83 million, to its executive director Captain Tony Tan Han.

This will result in Tan holding 7.1% of the total enlarged shares in Straits under the minimum scenario, or 5.2% under the maximum scenario, in which he will emerge as the substantial shareholder of the group.

“The acquisition comes with an aggregate profit guarantee totalling RM10 million by Raja Ismail for two financial years ending Dec 31, 2019 and 2020. Based on the 55% stake to be owned by Straits, the group will be entitled for a yearly profit guarantee of RM2.75 million for each financial year,” said Straits.

In a separate statement, Straits group managing director Datuk Seri Ho Kam Choy said the total profit guarantee provides assurance on the earnings potential of Tumpuan Megah, which is expected to contribute positively to the future profitability of Straits on a consolidated basis.

He added that the proposed acquisition is a horizontal acquisition by Straits to acquire its peer with the intention to expand its existing business activities of bunkering services and oil trading, which is expected to enhance the revenue and earnings of Straits and its subsidiaries moving forward.

“The proposed acquisition would enable Straits to have an immediate expansion with respect to its fleet size and asset base from the current two vessels to nine for its operations. With such an expansion of asset base, Straits is capable to undertake a higher volume of bunkering services, thereby increasing its operational capacities,” he said.

“The proposed acquisition will also enlarge the customer base of Straits by tapping into the existing customer base of Tumpuan Megah,” Ho said.

For the past three financial years up to financial year 2016, Tumpuan Megah recorded a revenue of RM215.44 million, RM154.89 million and RM148.69 million respectively. The company registered a net profit of RM3.16 million, RM1.02 million and RM960,000 for the same periods respectively.

Barring any unforeseen circumstances, the proposals are expected to be completed by the fourth quarter of 2018.