KUALA LUMPUR: Kuantan Flour Mills Bhd (KFM) has proposed a reverse takeover (RTO) exercise with water filtration systems provider NEP Holdings (M) Bhd, whose products are sold under the “Diamond” brand.

In an announcement yesterday, KFM (fundamental: 0.3; valuation: 1) said it had entered into a heads of agreement with NEP’s vendor Lim Chang Huat for a number of proposals to facilitate the RTO, which include the creation of a new entity (NewCo), and securities exchange between NewCo and KFM.

Under the securities exchange exercise, KFM shareholders will swap each existing share in KFM for one new NewCo share, and each existing warrant in KFM for one new NewCo warrant. KFM shareholders are also entitled to an additional one new warrant in NewCo for every two existing shares held in KFM. 

Following this, the listing status of KFM will be transferred to NewCo, which will then acquire NEP for a purchase consideration to be determined later. Nevertheless, the acquisition shall be satisfied by the issuance of such number of new NewCo shares at an issue price of 45 sen each to the vendor, together with new NewCo warrants on the basis of one NewCo warrant for every three NewCo shares issued to the vendor.

KFM said the rationale behind the acquisition of NEP was to improve its long-term prospects, as KFM had reported net losses over the past five financial years.

“In view of the declining financial performance of the existing core businesses of the KFM group, the board has been actively searching for suitable business ventures to improve the prospects of the KFM group in the long term,” it added. 

The unfavourable performance of KFM over the period was attributed to the low average selling prices of flour and the fluctuating prices of wheat.

For the financial year ended March 31, 2014 (FY14), the group posted revenue of RM41.7 million for the year, with a net loss of RM2.2 million. For its six months ended Sept 30, 2014 (6MFY15), revenue fell to RM17.96 million from RM20.82 million previously, while net loss had narrowed to RM1.26 million from RM3.38 million.

“The proposed acquisition will provide an opportunity for the existing shareholders and warrant holders of KFM to capitalise on NEP group’s growth potential in the distribution of water filtration system products and stable financial performance,” said KFM.

According to KFM’s announcement, NEP posted a net profit of RM17.26 million in FY13, ended June 30, on revenue of RM133.03 million. Net profits for FY12 and FY11 came in at RM14.98 million and RM12.74 million respectively.

At the end of the trading session yesterday, KFM closed one sen or 2.27% higher at 45 sen, with a market capitalisation of RM29.8 million.

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This article first appeared in The Edge Financial Daily, on January 22, 2015.