KUALA LUMPUR: Loss-making Chemical Co of Malaysia Bhd (CCM) plans to turn around in the next 24 months, according to its recently appointed group managing director Leonard Ariff Abdul Shatar (pic).

The turnaround will involve returning the loss-making fertiliser division back to the black, as well as improving the profitability of its chemicals division. The group also has a pharmaceuticals division which is currently profitable.

“My view is that the turnaround for CCM cannot take more than 24 months. I am placing a more predictable profit delivery number with an effort to minimise, if not eliminate, the cyclical nature of our business, which is basically driven by the percentage of commodity products to speciality products,” he said in an interview.

Leonard, 50, who has been at the helm of CCM (fundamental: 0.35; valuation: 1.80) since Jan 9 this year, succeeded Amirul Feisal Wan Zahir, who is now heading the global banking division at Malayan Banking Bhd.

Last week, CCM announced a net loss of RM43.85 million for its financial year 2014 ended December, (FY14), compared with a net profit of RM647,000 a year ago. 

Revenue slipped 15.5% to RM1.09 billion, from RM1.29 billion in FY13.

On a segmental basis, profit at CCM’s pharmaceutical division grew 12.2% to RM34.6 million while earnings at the chemicals division slid 7.8% to RM15.3 million on lower sales. 

The group’s fertilisers division continued to bleed, with losses widening by nearly five times to RM59.8 million. During the year, CCM closed its manufacturing plant in Indonesia, incurring an impairment loss of RM36.8 million.

In FY14, the fertiliser business contributed 44.9% to the group’s total revenue, followed by the pharmaceutical division (29%) and chemical segment (25.9%).

Leonard said the pharmaceutical business commands a profit margin of 40%; the chemical business 20% and the fertiliser business a single-digit percentage profit margin.

Leonard said the fertiliser business is currently “the sore thumb” within CCM, with plant utilization hovering between 30% and 40% in Lahad Datu, Sabah.

“My assessment of the fertiliser business is that the market has changed quite substantially. Fertiliser manufacturing has the smallest value-add to the final product, while variable cost is almost at 80% to 85%. You could say that CCM did not predict the change in the past, and now [it is up to us] to restructure the division back to profitability,” he said.

He noted that the stronger US dollar also poses a challenge for the turnaround of the fertiliser division, as most of its raw materials are sourced in the currency.

“We don’t take a hedging position but we lock our prices beforehand, normally on a one year forward contract. We hope the reduction in electricity tariffs (effective March 1, 2015) will buffer the foreign exchange impact on the purchase of raw materials in US dollars,” said Leonard.

As for its chemicals division, Leonard said the group will focus on growing its polymer coatings segment and chloralkali business.

CCM’s polymer coating business caters to surgical glove manufacturers in Malaysia, Thailand and Indonesia. It plans to expand to China, Vietnam and Sri Lanka.

Meanwhile, Leonard said the group’s 73.37%-subsidiary CCM Duopharma Biotech Bhd (CCMD) will grow the pharmaceutical business through identification of “new pipelines”, which consist of new products in biotherapeutics and niche therapeutic areas, as well as regional expansion via acquisition strategies.

Last November, CCM had announced that it will be disposing of its pharmaceutical assets to CCMD (fundamental: 2.6; valuation: 2.10) for RM133.33 million cash.

“We believe the disposal of the pharmaceutical business will provide CCMD with immediate access to capacity which it needs. If CCMD were to start from scratch, it would have taken at least another 36 months before the new plant can be operated,” he said, adding that he will continue to steer CCMD for the time being.

On capital expenditure, Leonard said CCM has budgeted RM50 million this year, of which RM20 million has been allocated to the pharmaceutical division, followed by its chemical division (RM20 million) and fertiliser division (RM10 million).

As for its expansion strategy, Leonard said CCM targets to acquire pharmaceutical manufacturing companies in the Asean region. 

As at March 31, 2014, CCM’s largest shareholder was Permodalan Nasional Bhd with a 71.35% stake. 

The stock rose 3 sen or 3.16% to close at 98 sen last Friday, giving it a market capitalisation of RM431.90 million.

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This article first appeared in The Edge Financial Daily, on March 9, 2015.