Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on February 20 - 26, 2017.

 

LOGISTICS firm TASCO Bhd may divest some stakes in its ­future cold chain logistics arm as it eyes strategic partnerships to unlock value.

Managing director Freddie Lim Jew Kiat tells The Edge that the group is still seeking further mergers and acquisitions (M&A) opportunities, which include possible equity divestment.

“We are ready to explore options if there are any players (with available cargo in hand) interested to team up,” says Lim, adding these may be entities such as food and beverage companies. “We are still looking for opportunities to grow the cold chain business.”

TASCO is in the process of making acquisitions worth RM329 million, which are set to catapult the group into a leading market position for the cold chain niche.

It is acquiring Gold Cold Transport Sdn Bhd (GCT) for RM186.09 million cash. It is also buying MILS Cold Chain Sdn Bhd for RM29.9 million in cash and six land parcels in Pulau Indah for another RM113.8 million. The Pulau Indah land mainly houses ambient warehouses for dry logistics.

Overall, the cold chain acquisition value will be RM217.2 million for GCT and MILS.

“It is not necessary for us to retain a 100% stake in the cold chain business,” says Tan Kim Yong, deputy managing director.

He adds, ­however, that TASCO would seek to keep a ­majority stake.

A 49% divestment at cost may fetch RM106.4 million, before considering expected value enhancements from integration with TASCO’s current network.

Established in 1997, Gold Cold has a warehousing capacity of 25,600 temperature-controlled pallet shippers, with a gross floor area of about 300,000 sq ft. It has a fleet of 174 reefer trucks.

According to data provided by ­TASCO, Gold Cold is the second largest cold chain logistics player in Malaysia, with an overall market share of 8%.

MILS Cold Chain’s cold chain storage capacity is currently at 10,500 pallet shippers at its Pulau Indah facilities.

While offering higher margins, cold chain logistics is also more ­demanding. It commonly involves temperature-sensitive cargoes such as pharmaceuticals and food.

According to TASCO’s directors, its margins are around 8% while GCT’s margins are in the early teens.

The acquisitions will be funded by a combination of bank borrowings and shareholder advances. TASCO expects to complete the acquisitions in the second quarter ending June 2017.

 

Gearing surge

As shareholders prepare for a likely vote on the deals by mid-April, potential concerns may be the strain on TASCO’s balance sheet as well as GCT’s valuation.

The RM329 million price tag exceeds TASCO’s market value of RM308 million as at Jan 23, when the second deal was announced.

As at last Friday, the stock has risen to RM1.70 apiece for a market capitalisation of RM340 million.

What could alarm shareholders is that gearing will surge from 0.14 times as at March 31, 2016 to 1.34 times once both deals are done.

Addressing this issue, Tan says the group is gearing up to acquire a profit-generating asset, adding that while finance costs will rise, the impact will still be net cash.

“Of course, going forward, we may look at various ways to reduce the gearing,” says Tan, adding that while there are no specific plans to do so, “no options are off the table”.

Ideally, the gearing will later be brought down to at least 0.9 times, he says.

Shareholders may also be concerned over a perceived premium being paid for Gold Cold.

For the financial year ended Nov 30, 2015 (FY2015), GCT registered RM67 million in audited revenue — up 16.8% year on year — and RM6.84 million in profit after tax, up over 51% y-o-y.

With a share base of two million shares, the deal values GCT at 27 times FY2015 earnings, much higher than TASCO’s own price-to- earnings ratio of about 10 times.

Tiong Nam Logistics Holdings Bhd — TASCO’s closest competitor in the cold chain niche, according to Kenanga Research — was trading at just below eight times PER.

In response, TASCO says cold chain M&A are rare and it had to benchmark against several publicly traded cold chain players in Japan and India, which yielded an average PER of 22 times.

Tan says GCT’s unaudited FY2016 earnings became available after the January announcements.

He tells The Edge that the company’s revenue had improved to about RM80 million, while profit after tax was about RM10 million, so that would yield a revised PER figure of 18 times.

Tan also expects the new assets to begin contributing to earnings by the first quarter ending June 30, 2017.

 

Regional hub push

While the group had mulled starting its own cold chain arm years ago, it found the M&A path to be more sensible.

“We will have faster access to the market (via M&A) and can become one of the major players rather than having to build up from scratch,” Tan explains.

In addition, TASCO’s cold chain expansion is part of a regional push under its majority shareholder ­Nippon Yusen Kabushiki Kaisha (NYK Group).

Japan-based NYK Group controls 64.97% in TASCO both directly and via subsidiary Yusen Logistics Co Ltd. The Tokyo-based group has 55,000 employees, with logistics operations spanning 40 countries.

“Our cold chain expansion is not only on the domestic front, but is also geared regionally,” says Lim, adding that the plan is to form a regional cold chain network in partnership with other Yusen subsidiaries across Southeast Asia.

This will provide an advantage over most cold chain players, whose networks are commonly limited to a specific country, he adds.

Key to this aim will be the Pulau Indah land parcels, strategically located near Westports. About 45% of the 39.52-acre land is currently vacant and there are many possibilities for future development, TASCO says.

The group has been receiving numerous queries from its clients on potential collaboration, especially in terms of customised cold chain facilities, according to executive ­director Andy Lee, who also heads the contract logistics segment.

“There is a shortage of cold chain facilities locally compared to demand,” says Lee. “And as opportunities emerge regionally, we will want to look into how we can make Malaysia a regional cold chain hub.”

 

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