This article first appeared in The Edge Malaysia Weekly on August 2, 2021 - August 8, 2021

The boom in online purchases has increased the demand for storage spaces. In this respect, warehouses are in demand, especially by companies involved in the trading of goods. In fact, compared with office blocks and commercial space, warehouses command much better value.

Brahim’s Holdings Bhd, a company that has been badly affected due to the collapse of the aviation industry, owns bonded warehouses through wholly-owned Tamadan Industries Sdn Bhd. The warehouses are located in Port Klang on a piece of land that measures 15 acres.

However, its warehouse business has not been doing well and the company wants to turn it around and grow its operations.

Towards this end, Brahim’s went into a three-year outsourcing agreement with MHC Trading (M) Sdn Bhd, whereby the latter will manage and operate the warehouses. The profits generated would be used to reduce Brahim’s loan with a bank.

MHC has undertaken to settle RM75 million of the RM155 million loan on a best-effort basis. There is no guarantee involved in the outsourcing agreement. Subsequent to settling the amount stipulated, the profits from the warehouse business will be split on a 60:40 ratio between MHC and Brahim’s.

Brahim’s contends that the arrangement was the best solution for it as it was unable to service the debt with the bank.

But is going into an agreement where there are no firm obligations from the counterparty the right strategy?

Would it be better for Brahim’s to work on an outright disposal of the warehouses instead of outsourcing the operations and management to MHC? At least, disposing of the asset can guarantee that the debts will be reduced.

Recently, Pelikan Holdings Bhd sold off some of its warehouses in Europe and earmarked the proceeds to reduce debt and return some money to shareholders.

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