This article first appeared in The Edge Malaysia Weekly on December 21, 2020 - December 27, 2020

CURRENTLY in the red, copper wires and rods manufacturer Ta Win Holdings Bhd is counting on its acquisition of a 32.5% associate stake in Royce Pharma Manufacturing Sdn Bhd to give it a shot in the arm. Even so, the pharmaceuticals business is unchartered waters for Ta Win, and Royce Pharma is loss-making.

The latest available financials show that Royce Pharma made a net loss of RM682,653 on revenue of RM24.13 million for the financial year ended Dec 31, 2018. Its retained losses stood at RM2.6 million.

Ta Win reported a wider net loss of RM2.75 million in the first quarter of its financial year ending June 30, 2021 (1QFY2021), from a net loss of RM2.08 million in 1QFY2020, owing to the impact from the Movement Control Order. However, revenue for the quarter increased 27% year on year to RM85 million.

The group had earlier registered a net loss of RM13.72 million for FY2020, compared with a net profit of RM1.16 million for the 18 months ended June 30, 2019.

Nevertheless, Ta Win group managing director Datuk Seri Ngu Tieng Ung is confident that Royce will add value to the group, and has secured a profit guarantee for two years. “As part of our proposed acquisition of Royce Pharma, we have a profit guarantee provided by Jelita Serbaneka Sdn Bhd (one of the shareholders of Royce Pharma), which guarantees that Royce Pharma shall attain and achieve a profit after tax of RM10 million each for the periods of July 1, 2021, to June 30, 2022, and July 1, 2022, to June 30, 2023.

“We believe the proposed investment is an attractive business proposition, as the group will recognise its proportionate share of Royce Pharma’s future profit under the profit guarantee,” he tells The Edge.

Another reason Ngu is confident of the proposed investment is the supply agreements contracted to Royce Pharma by the government. They involve the manufacture and supply of 25 drugs registered with the National Pharmaceutical Regulatory Agency to hospitals, health offices, health clinics, dental clinics, health institutions or any other similar facility in Malaysia that is operated and controlled by the government through Skim Anak Angkat, Skim Panel Pembuat Bumiputra and the Medical and Laboratory Store Privatisation Concession Agreement.

Ta Win will fork out a total of RM20.85 million for the 32.5% stake, including RM14.64 million for 2.74 million Royce Pharma shares or a 22.8% stake under a share sale agreement between its subsidiary Ta Win Copper Biohealth Sdn Bhd (TWC Biohealth) and Poly Lab Sdn Bhd, which is a shareholder of Royce Pharma.

Ta Win will also pay RM6.21 million for the proposed subscription of 1.16 million new Royce Pharma shares, or a 9.7% stake, as part of a subscription agreement between TWC Biohealth, Royce Pharma and its shareholders Poly Lab and Jelita Serbaneka.

A company search shows that Poly Lab’s directors are Datuk Chandrasekar Suppiah, Zainal Ariff Mahmood and Syed Mohd Hapes Sallehhudin; and the directors of Jelita Serbaneka are Chandrasekar, Tan Sri Prof Dr James Alfred A David and Datuk Mohd Fauzi Zakaria.

Chandrasekar, Zainal and Syed are directors of Royce Pharma.

On whether the acquisition price of RM20.85 million would be a stretch for Ta Win, given that its balance sheet as at Sept 30, 2020, showed a cash position of RM48.22 million but borrowings of RM61.4 million, Ngu says the group’s copper business is strong and can help support the new segment. “Of the total of RM20.85 million, RM7.85 million is deferred payment, which is not required to be satisfied immediately after the proposed investment.”

The acquisition will be funded via internally generated funds and/or bank borrowings, after taking into consideration, among others, the group’s gearing level, interest costs as well as internal cash requirements for working capital and capital expenditure.

Being an associate would mean that Ta Win will not have control over Royce Pharma but only the power to exert significant influence. The group is content with that, as it has no plans to acquire an additional stake in Royce Pharma. Ta Win is entitled, however, to appoint two representatives to the board of Royce Pharma to ensure that it keeps abreast of the latter’s business development plans.

The acquisition of Royce Pharma is not a case of Ta Win jumping on the healthcare bandwagon — unlike some of its listed peers that have diversified into healthcare to capitalise on the gains to be made from the Covid-19 pandemic.

Ngu believes there are synergies to be made between the group’s copper business and Royce Pharma’s pharmaceuticals business. “Clearly, there is a need to be met, owing due to the Covid-19 pandemic. At the same time, we have the ability to explore the significant potential for the use of copper in the healthcare and pharmaceutical industries, given its natural antimicrobial properties.”

The group set up TWC Biohealth to explore the downstream copper segment via the application of antimicrobial copper and copper additives as well as the biochemistry and chemistry of copper and copper proteins in the products, devices or services of the healthcare and pharmaceutical industries.

Meanwhile, copper prices have been on an upward trend. Compared with three months ago, copper prices have risen 15% to US$7,823 per tonne, according to the London Metal Exchange.

“As we have seen in the past, generally, in the event of an upward trend in copper prices, if we can secure new orders for our products using inventories that were stocked prior to the price increase, there should be a positive impact on our financial performance,” says Ngu.

Following news of the acquisition last Monday, Ta Win’s trading volume spiked on Tuesday morning to 61.79 million shares, nearly four times its 200-day average trading volume of 15.61 million shares. So far this year, its share price has increased 71% to close at 18 sen last Thursday, giving the company a market capitalisation of RM81.1 million.

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