This article first appeared in The Edge Financial Daily, on November 2, 2015.

KUALA LUMPUR: SHH Resources Holdings Bhd, which has been touted as a potential acquisition target for bigger rival HeveaBoard Bhd since it was first reported by The Edge weekly in March this year, has come out to say that it is not for sale.

Its executive deputy chairman Ling Hee Keat said any tie-ups with HeveaBoard will merely be collaborative in nature and will not involve a disposal or exchange of shares.

“There is no plan to sell SHH Resources to Heveaboard. We are not buying and selling shares [to each other] or partnering Heveaboard with a share swap,” he told The Edge Financial Daily in an interview.

“Most businesses want to grow bigger, yet any merger or acquisition (M&A) will have internal issues to sort out. So unless something fantastic comes along, we don’t want to rock the boat too much,” said Ling, who held a 4.13% stake in SHH Resources as at Oct 6.

On Sept 3, HeveaBoard group managing director Yoong Hau Chun told a media and analyst briefing that the group remained actively engaged in discussions with SHH Resources on various issues, including an acquisition.

“Yes, we are in discussions with HeveaBoard, but the talks centre on how we can collaborate with each other because we cater to different market segments. Any collaboration will only involve sharing customer base or marketing of products to our customers,” explained Ling.

HeveaBoard is a particle board-related manufacturer that exports to China, Japan and Australia, while SHH Resources is a Johor-based solid wood furniture manufacturer that exports to the United States and Canada.

Ling said HeveaBoard sells ready-to-assemble furniture, also known as flat-pack furniture, while SHH Resources sells bedroom and dining furniture sets.

To recap, Tan Sri Vincent Lee Fook Long, a director and formerly a substantial shareholder of SHH Resources, has been paring down his stake in the company, igniting speculation about a possible takeover by HeveaBoard (fundamental: 2.1; valuation: 1.4). He ceased to be a substantial shareholder of SHH Resources on July 24.

As at July 28, Lee had one million shares or a 2% stake in SHH Resources compared with a 5.56% stake as at Oct 7, 2014.

Meanwhile, SHH Resources’ founder and managing director Datuk Teo Wee Cheng and his wife Datin Teo Chan Huat, who is the deputy managing director, have been accumulating shares in the company.

According to filings with Bursa Malaysia, the couple acquired a total of 5.58 million shares or an 11.6% stake at RM1.40 apiece from Lee’s advertising agency Naga DDB Sdn Bhd through an off-market transaction on June 15.

As at Oct 6, their collective shareholding in SHH Resources stood at 28.66% from 17.51% as at Dec 22, 2004, remaining as the company’s largest shareholder.

Year to date, SHH Resources shares have gained RM1.44 or 182.28% to RM2.23, significantly outperforming the FBM KLCI’s 5.42% decline. The counter closed 14 sen or 6.7% higher at RM2.23 last Friday, bringing a market capitalisation of RM104.5 million.

On the reason for Lee’s disposal of shares, Ling said: “We understand that he had expressed his interest to dispose of his shares, but I cannot speak on his behalf.”

Ling also said he is not aware of any new major shareholder entering the company.

On its part, SHH Resources is continuing its acquisition drive, with a focus on smaller, unlisted furniture players in the country. As at June 30, its cash and cash equivalents stood at RM24.08 million.

Ling said SHH Resources has initiated talks with several unlisted furniture players and expects to finalise an acquisition in the next three to four months.

“We are looking at [acquiring] smaller players in the industry who manufacture products that we are not manufacturing at the moment. For example, if they offer products like sofa sets and chairs made from materials different than our own, then we can set up an outdoor furniture division and immediately supply to our customers,” he added.

The company is also looking to expand its business overseas, including the Middle East, Europe, Australia and the United Kingdom.

Ling said to meet increased demand, SHH Resources is allocating RM5 million as its capital expenditure for the financial year ending June 30, 2016 (FY16), to expand its capacity by 20% to 30%.

“We still have 40 acres (16.19ha) of unused land at our existing facility in Pagoh, Muar, Johor, for expansion,” he added.

SHH Resources saw its net profit drop 20% to RM6.58 million in FY15 from RM8.23 million the previous year, partly due to a one-off RM2 million gain on disposal of property in Muar in FY14.

Ling said excluding the one-off item, the company posted a better profit in FY15.

On a quarterly basis, the company’s net profit more than doubled to RM3.76 million for the three months ended June 30, 2015 (4QFY15), from RM1.71 million in 4QFY14, on higher revenue and as it benefited from a strong US dollar against the ringgit.

Looking at its performance in 4QFY15, Ling said SHH Resources may well register strong double-digit earnings growth in FY16 with the recovery in the US economy and the strong US dollar, which are more than enough to offset rising labour and raw material costs.

This in turn will support “better” dividend payouts, he added.

Indeed SHH Resources (fundamental: 2.5; valuation: 0.8) is well placed to benefit from the strong US dollar against the ringgit, Ling said, expecting the company’s earnings and dividends to remain strong for at least the next three years.

Ling noted that the company’s dividend payout of 10 sen per share for FY15 was its highest to date. “Going forward, we should be able to maintain this dividend payout to our shareholders, if not higher.”