KUALA LUMPUR (March 27): Paints products manufacturer Mercury Industries Bhd (Mercury) has proposed to acquire a 70% stake in construction outfit Paramount Bounty Sdn Bhd for RM42 million cash and to venture into the construction industry.

In a filing with Bursa Malaysia, Mercury (fundamental: 2.05; valuation: 1.20) said the company has entered into a conditional share sale agreement today with its executive director Datuk Tiong Kwing Hee to acquire 700,000 shares or 70% interest in Paramount Bounty, which is involved in civil and building construction works.

Tiong is a substantial shareholder in Mercury, holding a 7.26% stake. Tiong is also currently the group chief executive officer and executive director of EcoFirst Consolidated Bhd.

Through the proposed acquisition which is deemed a related party transaction in view of Tiong’s interest, Mercury would venture into the construction industry, enabling the group to have a new source of income, it said.

Moving forward, the group expects the construction business to grow and subsequently become a major contributor to the group’s earnings.

In the same statement, Mercury said Paramount Bounty recorded an audited profit after tax of RM6.5 million for the financial year ended Dec 31, 2014. As at Dec 31, 2014, Paramount Bounty has an audited net asset of RM16.2 million.

Mercury said it will be carrying out a due diligence review on Paramount Bounty, within the conditional period.

The conditional share sale agreement also came with a profit guarantee of RM6.6 million per annum, for each of the financial year ending Dec 31 2015; Dec 31, 2016; and Dec 31, 2017.

The parties also agreed Tiong would pay the company, should there be any shortfall.

Meanwhile, “the company intends to procure bank borrowings of approximately RM30 million to finance the purchase consideration, whilst the remaining balance will be funded via internally-generated funds.”

Mercury also said the group’s revenue for the past three financial years have been adversely affected due to the dampened income and capital expenditure of the local economy, due to uncertainties in the global economy and external-related sectors.

“Higher operating costs and impairment loss on the group’s inventories and receivables in recent months, added further pressure on the profitability of the group.

“[Hence] the board had identified the proposed acquisition as a new business opportunity for the group to obtain a new source of income, diversify its revenue contribution and to reduce the group’s dependence on the auto refinish industry,” it added.

Apart from Paramount Bounty’s current outstanding orderbook, the management of Paramount Bounty is in active negotiations with developers for new construction contracts.

“Nonetheless, the board (Mercury Industries) together with the management of Paramount Bounty, will continuously seek for opportunities to secure new construction contracts.”

The proposals are expected to be completed in the second quarter of 2015.

Shares of Mercury closed unchanged at RM1.43 today, with a market capitalisation of RM57.46 million.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)