This article first appeared in The Edge Malaysia Weekly on December 17, 2018 - December 23, 2018

WHEN the name Kumpulan Perangsang Selangor Bhd (KPS) is mentioned, many would associate it with its recent divestment of 30%-owned Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH).

This is not surprising, given that SPLASH has been the subject of much discussion amid the Selangor water asset deadlock that started over a decade ago. SPLASH is the concession holder of Sungai Selangor Water Supply Scheme Phases 1 and 3, which controls about 45% of the treated water supply in Selangor, Kuala Lumpur and Putrajaya.

Now, without SPLASH stealing the thunder, KPS is resolved to let the market know that it has a lot more to offer than the common perception that it is merely a Selangor-centric company.

“Historically, our business has always been confined to Selangor as all the Selangor assets were placed under KPS or KDEB (Kumpulan Darul Ehsan Bhd). But our operations are different now. The investments are different and the way we manage is different as well. We want the market to acknowledge that and value us for who we are,” says KPS CEO Ahmad Fariz Hassan.

“People think we are all over the place. We’re not. We’re really focused on certain things,” he tells The Edge in a recent interview.

He says it has been a busy three years for the company since it embarked on a business transformation plan in 2016 that sought to reposition the KPS brand in the market.

The board of directors had a very clear mandate for Fariz, who came on board as head of investment in 2015. He was to find businesses that would prepare KPS for its future once the water restructuring exercise was completed upon the sale of SPLASH.

“Obviously, SPLASH gave quite a big sum of paper profit to us. It was around RM100 million every year. So, we had to look for businesses that covered the gap. From then on, the whole company was geared towards that objective.”

Acquisitions since 2016 include Century Bond Bhd, CPI (Penang) Sdn Bhd, Smart Pipe Technology Sdn Bhd and King Koil Manufacturing West LLC.

In addition, KPS increased its stake in both road and highway construction company KPS-HCM Sdn Bhd and water treatment chemical supplier Aqua-Flo to 51% from 40%.

As KPS was canvassing the markets to find companies that would suit its mandate, it dawned on management that the manufacturing industry appeared to provide the right fit.

“You have companies that are already exporting, strong companies with proven products ... most of the founders are old money and they are looking to cash out and willing to give us a majority stake, so it’s a nice fit,” Ahmad Fariz says.

Although KPS’ new subsidiaries have been growing at double-digit rates over the last year, he is quick to concede that it will be some time before the RM100 million profit hole left by the divestment of SPLASH can be plugged.

“We will miss that RM100 million but I’m quite happy that we planned early [three years ago] and started to make acquisitions as required to cover the gap. We are realistic enough to say that we’re not going to be able to cover the full RM100 million soon but I’m happy to say that we are heading in that direction.”

The time frame to do so would depend on several factors. While KPS is working actively at growing the company organically, it is also looking for more targets to acquire in order to expedite growth.

“We are looking at companies that can synergise and leverage off each other. We are in a hurry to do that, but we are quite diligent in our evaluation process. So if it doesn’t tick all the boxes, we won’t do it. We are quite clear on the type of companies we want.”

Ahmad Fariz reveals that there are some really “strong candidates” that fit the mandate and KPS would “most likely” be making its move next year.

More specifically, KPS, which considers itself an investment holding company focused on manufacturing, is looking at companies that can provide synergies to its Century Bond packaging business as well as those that can add value to subsidiary CPI’s engineering thermoplastics business.

“What we aspire to do is to create monsters from these base companies. We have one good company here and we want to add more good companies to it that can add value and synergies to each other,” he shares.

This is where the RM570 million cash plus the RM195 million nine-year cash instalments from the divestment of SPLASH could come in handy.

Cash from the divestment of SPLASH

Ahmad Fariz says three options are being considered by the board: pay off debts, dole out special dividends to investors and save some cash for future expansion.

KPS’ gearing currently stands at 0.52 times — a level it is comfortable with. But if possible, it is planning to use some of the cash to reduce debt levels while any excess can be used to reward shareholders or for future acquisitions.

“The board hasn’t decided but we have given our proposal. But having said that, we’ve got to be very balanced [and] responsible in thinking about the future approach on how much we allocate for these three buckets.

“But we are also always aligned with optimising shareholders returns. If you look at KPS, historically, whenever we have divestments, there will be special dividends,” he assures.

As the completion of the sale is expected at the end of January 2019, KPS could then be receiving the RM570 million one-off payment for its 30% stake in SPLASH.

2019 growth drivers

In the year ahead, Ahmad Fariz says one company likely to make a significant impact on KPS’ financials is likely to be Century Bond as it is moving into other segments next year such as offset printing and shrink plastic where margins are higher.

Century Bond contributes the highest revenue to KPS.

Ahmad Fariz is also excited about the potential of CPI. KPS recently acquired a 4.5 acre plot for CPI’s expansion and construction of a factory will begin next year.

“It already has a very strong brand name among the clients. It is actually limited by capacity, which is why we bought the land in the same area in Bayan Lepas. By next year, we will start construction of the new factory and we have ordered about 25 machines that will come in the next two years,” he says, adding that CPI gives the highest profitability to the group.

Besides that, he is also keeping an eye on its King Koil manufacturing operations in Arizona, US. He believes 2019 will be a stronger year for King Koil given that it plans to increase the number of mattress retailers.

As for targets, Ahmad Fariz believes that KPS will be able to continue to show double-digit revenue and net profit growth in 2019.

“It’s doable, we’ve done it this year and I’m confident that we can replicate it next year,” he says.

For the cumulative nine months ended Sept 30, 2018, KPS fell to a net loss of RM223.05 million, dragged down by the one-off and non-cash impairment losses recognised on the intangible assets and receivables of SPLASH.

Over the same period, revenue almost doubled to RM410.76 million from RM238.31 million a year ago.

KPS’ largest shareholder is the Selangor government through the 57.88% stake held via its investment arm Kumpulan Darul Ehsan Bhd. Lembaga Tabung Haji owns 5% of KPS.

KPS closed at RM1.26 last Thursday, up 5% from a year ago.

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