This article first appeared in The Edge Malaysia Weekly on September 13, 2021 - September 19, 2021

MEGA First Corp Bhd — which is engaged in the renewable energy (RE), resources and packaging businesses — surprised the investing community recently when it announced plans to enter the oleochemical market through the acquisition of Oleochemicals (M) Sdn Bhd and Emery Specialty Chemicals Sdn Bhd.

The proposed acquisition will see Mega First and 9M Technologies Sdn Bhd join forces as equal partners in Edenor Technology Sdn Bhd, which will take up the entire issued share capital of the oleochemical group for RM38 million. The exercise is expected to be completed in January next year.

Mega First independent director Yeow See Yuen tells The Edge that the group did not deliberately seek to go into the oleochemical sector, but the opportunity presented itself. “It was an impromptu opportunity presented to us and it is quite a good platform where about RM1 billion has been invested, and we got it for near to nothing. But if we were to do it alone, we wouldn’t have done it,” he says.

He credits Yeow Ah Kow (better known as AK; they are not related), former managing director of the oleochemicals division at Kuala Lumpur Kepong Bhd (KLK), for the opportunity. “The person who presented this opportunity to us is the person who is going to run the show. AK has a strong track record of building up the oleochemical business, especially during his years with KLK,” he says.

Yeow says the proposal to acquire the Emery Group of Companies is a great opportunity, coupled with AK’s knowledge of the industry and capabilities to turn around loss-making businesses.

“It is a profitable business. If you look around, you’ll notice that all the big players are profitable. The input cost is the commodity (palm oil and palm kernels) and the output price is quite standard as it flows in accordance with the input cost,” he explains.

Notably, the Emery Group of Companies, which has a December financial year-end, has been loss-making for the last three years, according to the filing on the proposed acquisition with Bursa Malaysia.

Based on the announcement, the audited accounts show that Emery Oleochemicals suffered a net loss of RM8.32 million in FY2018, but it turned in a net profit of RM6.83 million in FY2019. Meanwhile, Emery Speciality Chemicals suffered a net loss of RM50.7 million and RM40.92 million in FY2018 and FY2019 respectively.

The audited accounts for FY2020 have not been finalised for both companies.

Yeow opines that nothing is wrong with the Emery platform, but it is about how the manufacturing process and cost are managed. “Operating and managing a vertically integrated facility is not an easy task. Productivity and efficiency have to be perpetually high, making sure that the quality control and manufacturing process are controlled very tightly, where rejects or wastage are minimal. With an experienced management team, they will be able to do the job.”

He says the basic oleo business, being Emery Oleochemicals, is the low-hanging fruit. He is confident that the joint-venture company headed by oleochemical industry veteran AK will be able to turn it around within 12 months.

“Basic oleo is really a commodity. As long as you can produce the right specifications, the offtake shouldn’t be too difficult. We are hoping to turn around within a year,” he adds.

However, with the specialty chemicals business, it may take two years before it becomes profitable as there are more aspects to be taken into account such as getting the plant in shape and building its marketing and distribution channels, says Yeow.

It is worth noting that Mega First currently does not have any exposure to the oil palm plantation business. This means it would have to source raw materials from third parties.

Yeow does not see this as an issue, given the availability of raw materials where the Emery Group is located at Teluk Panglima Garang in Klang, Selangor, in addition to its experienced team.

“In order for this to work, you have to monitor very closely the fluctuation in commodity prices and selling prices. So, you would need to have a strong team of people doing the hedging and trading activities, which we believe we can do with AK and his team,” he says.

Mega First is financing its share of the acquisition via internally generated funds and has standby credit facilities of RM255 million to repay the lenders of Emery Group in the event that they do not consent to the change in control. Although viewed as a good buy, the new owners may have to invest in upgrading Emery’s assets, say industry players. But this shouldn’t be an issue for Edenor Technology.

While Mega First is excited about its newest venture, it is also working hard to build its RE segment, which will continue to be its mainstay, says Yeow.

Currently, the RE segment derives the bulk of its revenue from the Don Sahong hydropower plant in Cambodia. The segment made up 66.5%, or RM510.21 million, of the group’s revenue and 95.7%, or RM372.09 million, of the group’s pre-tax profit in FY2020.

Mega First has long shared that it wants to grow its earnings beyond the Don Sahong project, but also said new projects in the RE space take time to materialise while opportunities do not come around every day.

Yeow says Mega First is currently working on a few RE projects in the region. “If you look within a short period of time, it would appear that the RE segment is neglected, but it is not. We are working hard to build our RE earnings space.

“It just happens that in the last six months, we have been making investments in the non-renewable side [of the business]. Just bear with us, these kinds of projects take time.”

“The fifth turbine [for Don Sahong] is one of our projects, where the construction is likely to start at the end of this year.”

The group has made progress with its solar commercial and industrial projects, having secured cumulative commercial and industrial projects commissioned to date to 14.5mw. The latest solar project secured was a 6.4mw project in May, which will be progressively completed and commissioned between October 2021 and March 2022.

As for its packaging segment, it recently acquired Stenta Films (M) Sdn Bhd, a flexible packaging film manufacturer, which will complement its downstream business under the Hexachase group.

For now, Mega First will focus on organic expansion of its packaging division, unless a good opportunity arises. Meanwhile, its resources division, which is involved in the quarrying of limestone and manufacturing lime products, anticipates some challenges when it comes to freight cost.

“We sell burnt limestone, which is heavy and bulky. And unlike gold, the price per tonne is pretty much close to cement. To remain competitive, we may not be able to pass on the freight increase to customers because customers always have a choice. If they don’t import from this country, they can import it from somewhere else,” says Yeow.

He adds that freight rates have not gone up consistently across all shipping routes, with some increasing more than 10 times while others less than that. In instances where freight cost jumps more than 10 times, the cost of the increase cannot be passed on to customers.

The group has rejigged its sales portfolio, shipping to countries where there has been less impact on freight cost and declining to sell to customers where freight has gone up more than tenfold.

That said, Mega First is expecting FY2021 to be another year of record net profit. For the cumulative six months ended June 30 (1HFY2021), it recorded a net profit of RM160.66 million, up 15.81% from RM138.73 million a year ago. Revenue was up 17.44% year on year to RM401.56 million from RM341.94 million.

Last Thursday, Mega First’s share price closed at RM3.51, down 1.96% since the start of the year. This values the company at RM3.47 billion.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.