THE winds of change could be blowing through the local paper packaging industry again with another round of mergers and acquisitions.

According to industry sources, Japanese paper product giant Oji Paper Co Ltd is still exploring the acquisition of Ornapaper Bhd while Thai Containers Group Co Ltd — the largest corrugated container maker in Southeast Asia — is eyeing Muda Holdings Bhd.

Oji Paper, the sixth largest paper manufacturer in the world in terms of revenue, is looking to expand out of Japan while Thai Containers wants to diversify its operations out of Thailand, which is in political turmoil.

Rumours that Oji Paper is keen on Ornapaper have been circulating for the past three months and not surprisingly, the latter’s shares have hovered at their current high level despite management’s denial of a potential takeover.

If the deal materialises, Ornapaper will be Oji Paper’s fourth acquisition in Malaysia in less than five years. The Japanese company took over United Kotak Bhd and Paperbox Holdings Ltd (which controls GS Paper & Packaging Sdn Bhd) in 2010 and HPI Resources Bhd in 2011.

Sources say Ornapaper, which manufactures and supplies corrugated boards and cartons and is profitable, is an easy takeover target. Its market capitalisation is small, at less than RM90 million, and it has a loose shareholding structure with a free float of 67%.

Sai Chin Chock, the company’s managing director for three decades now, is its largest shareholder with a 31.19% stake.

The production capacity of the company’s existing facilities is 84,000 tonnes per annum. In its latest quarter ended March 31, 2014, the company posted a net profit of RM2.62 million or 3.53 sen per share on revenue of RM65.42 million. Last year, it posted a net profit of RM8.03 million on revenue of RM245.63 million.

The stock closed at RM1.17 last Thursday, significantly below its net tangible assets per share of RM1.63. As at end-March 2014, Ornapaper’s total borrowings stood at RM55.1 million against its shareholders’ funds of RM125.92 million.

If Oji Paper’s generous takeover offer for the three local firms — over 10 times price-earnings ratio and 1.8 times book value — is taken as guidance, Ornapaper’s shareholders could expect a compelling offer from the Japanese firm.

Interestingly, Oji Paper had also targeted paper mill and packaging company Muda Holdings not long ago, sources say. However, this time around, its suitor is Thai Containers, which has three regional facilities, one each in Malaysia, Singapore and Vietnam, with an integrated production capacity of 700,000 tonnes per year. It also has at least six plants in Thailand.

Tan Sri Lim Guan Teik, 78, is the biggest shareholder of Muda Holdings with a deemed interest of 41.17%. Based on the company’s closing price of RM1.85 last Thursday, its market capitalisation was RM564.3 million.

The stock has been climbing steadily over the past year, gaining 134% year on year to almost reach its net asset value per share of RM1.93. The company’s shareholders’ funds stand at RM800 million.

A larger company than Ornapaper, Muda Holdings posted a net profit of RM43.27 million or 14.20 sen per share in the year ended Dec 31, 2013, on revenue of RM1.04 billion. Its earnings were up 170% from RM16.02 million a year ago due to a one-off gain from the disposal of equity in KL Resources Pte Ltd, which runs a waste-paper recovery business in Singapore.

Muda Holdings manufactures high-grade industrial brown paper, paper boards, corrugated boxes, multi-wall paper bags, PE laminated paper for industrial and food application, self-opening-style paper bags for food and non-food retail outlets, paper pallets and honeycomb for the packaging and furniture industries.

The company is also involved in the trading of imported paper and paper-related products in the domestic and export markets, which makes up about 10% of its revenue.

The one-off gain aside, Muda Holdings saw a decline in gross margin to 17.4% in 2013 from 18.8% previously due to softening paper product prices.

“Subsidy rationalisation by the government since 2010 has increased the cost of doing business in the country. Muda Group will be impacted by rising costs, a keener business landscape and reduced margins,” it says in notes accompanying its 2013 financial results.

It adds that its profitability in 2014 will be partially cushioned by improved production efficiency and higher export sales to Europe and the US, which showed signs of recovery in the last quarter of 2013.

Industry sources say thinning margins and consolidation driven by foreign players such as Oji Paper and Thai Containers in the local paper packaging industry may prompt the remaining family-run entities to consider selling their business. One thing is for sure, only a few players will be left standing.

This article first appeared in The Edge Malaysia Weekly, on May 26, 2014.