Chew: We hope to either sell off our stake in TCH Marine or wait for its managing partner to offer to buy us out. Photo by Mohd Izwan Mohd Nazam/The Edge
FREIGHT Management Holdings Bhd plans to exit the marine transport business, which has been a drag on its performance in the past few years.
Group managing director Chew Chong Keat hopes to sell the company’s entire 49% stake in Singapore-based TCH Marine Pte Ltd, as well as a pair of tug and barge parked under a 50:50 joint venture with Scomi Energy Services Bhd, this year.
He says talks with the respective partners on withdrawing from the business are ongoing.
“We hope to either sell off our stake in TCH or wait for its managing partner to offer to buy us out. We are still working on a solution,” Chew tells The Edge.
He points out that the share of losses from TCH has been squeezing the earnings of the multimodal freight service provider by RM2 million to RM3 million a year.
“But we have no regrets [about investing in TCH] because it helped to supplement the group’s earnings in the initial years. However, it has now come to a stage where it is negatively impacting the group and I feel it is time for us to look beyond it,” he says. Chew and his wife Gan Siew Yong, who is an executive director of Freight Management, collectively owned 28.51% of the company as at Oct 5, 2018.
Chew blames the oversupply of vessels for the reversal in TCH’s fortunes as it resulted in freight rates falling to unsustainable levels.
“The tug and barge business has also been impacted by a slowdown in the oil and gas industry while sales of gypsum (a major commodity export for TCH) are down following the completion of the two integrated resorts in Singapore,” he explains. Gypsum is used in building and construction.
“And even though capital investments are returning to the oil and gas industry, I don’t think things will ever get back to where they were before. That’s because the current price of oil does not justify further investments. Thus, the long-term prospects present a less attractive opportunity for marine service providers like us.”
TCH owns six barges and seven tugboats that are servicing the Straits of Malacca between Singapore and southern Thailand.
Based on Freight Management’s balance sheet as at June 30, 2017, TCH’s book value stood at RM11.43 million. The company had acquired a controlling 51% equity interest in TCH for S$2.05 million (RM4.7 million) in 2006 but trimmed its stake by 2% later that year.
Chew believes it will be easier for the group to exit the marine business with Scomi as it only involves one pair of tug and barge. In 2013, the two companies had entered into a JV to own and operate marine vessels for the purpose of leasing or chartering them to the oil and gas industry in Southeast Asia.
Still, Freight Management is expected to continue to see the impact of the poor performance of TCH’s business and the impairment of advances in its JV with Scomi in its financial year ended June 30, 2019 (FY2019). (It has yet to release its results for 4QFY2019.) Net profit fell 19% year on year to RM12.53 million in the cumulative nine months ended March 31, 2019, while revenue rose a marginal 1% year on year to RM402.4 million.
Going back to basics
Chew is more upbeat about the group’s performance in FY2020 as he hopes it would have put the marine business behind it. He also anticipates the business climate to have improved by then, and the sea freight segment to remain the group’s biggest earnings contributor — it accounted for 64% of revenue in FY2018.
He says Freight Management is going back to its roots in logistics — sea, air and land freight, warehouse and distribution, and logistics supporting services.
According to Chew, the group has stopped managing rail freight between Malaysia and Thailand. This is because the majority of main lines in Thailand are still single track and in need of improvement, thus affecting the reliability of rail transport service.
“Nevertheless, we have grown our land freight segment to replace the lost business from rail. But if we can improve the reliability (of the Thai rail network), I still believe that rail is the transport mode of the future. One locomotive, for example, is capable of pulling as many as 50 to 60 twenty-foot containers,” Chew explains.
Today, Freight Management has a presence in all Southeast Asian countries except Myanmar and Cambodia, as well as in Australia, India, Dubai and Sri Lanka.
“My desire is to see our overseas business accounting for a bigger portion of our revenue, from 30% now. That’s not to say we are sitting still in Malaysia. We will continue seeking to capture a larger share of the domestic freight market as well, but we hope that the overseas business will grow at a faster pace,” says Chew.
He says the trade war between the US and China has not had a direct impact on the group’s growth as its exposure to the American market constitutes less than 5%.
“The industry view is that Malaysia is actually one of the key beneficiaries of the ongoing US-China trade war. So, if more manufacturers relocate here or we are used as a base to re-export products to the US, which will ensure cargo comes in and out, we hope to be able to benefit from it.”
On acquisitions, Chew says the group is always open to possibilities. “But we are also cautious. In the Malaysian market, if we can find good candidates to boost a certain part of our business, we will definitely do it.
“However, an acquisition of potential overseas companies is something I would be more cautious of because you are talking about taking on a company that you are not familiar with. We would be keener to put good people in our overseas units.”
Freight Management’s cash position as at March 31 was RM28.73 million while its total borrowings stood at RM77.83 million.
Chew says the group is sticking to its cautious expansion plan for its warehouse and distribution business segment, which was its second largest earnings contributor, accounting for 11% of revenue in FY2018, as “we don’t want to end up like a property company”.
“We will invest in new warehouses but only to replace those that we are currently leasing,” he says, adding that the group’s capital expenditure for FY2020 is about RM20 million for this purpose, higher than the RM5 million to RM10 million in the previous years.
The company’s share price closed at 60.5 sen last Thursday, giving it a market capitalisation of RM168.93 million — down 15% year to date.