Triple trouble in and around Lysaght

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This article first appeared in Corporate, The Edge Malaysia Weekly, on May 30 - June 5, 2016.

LYSAGHT Galvanized Steel Bhd’s history traces the familiar success story of how a small business grows over the decades into a listed company with a market capitalisation of over RM150 million.

For the most part, the low-profile traffic pole maker was competently managed. Year after year, it turned in profits and dished out steady dividends to shareholders. 

But developments over the last two years have seen Lysaght get into a bind on three fronts: business, management and shareholders. 

These three issues are inter-related, especially since a shareholder dispute led to recent changes in top management and put a big question mark over who will run the company in this increasingly challenging operating environment. 

The most crucial question of all is whether Lysaght’s major shareholders will have to make a mandatory general offer (MGO). That, in a nutshell, is what the entire shareholder dispute hinges on.

These disputes have been unfolding over the last two years (see timeline) since the passing of Lysaght’s founder Chew Kar Heing and the controversial sale of an 11.63% stake in Lysaght’s single largest shareholder Lysaght (M) Sdn Bhd (LMSB), which owns 55.14% of the listed entity. 

First off, while Lysaght has been profitable, it has been warning that the market outlook “remains very challenging”. 

“The competitive environment, coupled with rising costs, poses a serious challenge to the group’s profitability. This is substantiated by the reduced enquiries and lower pole requirements year on year,” Lysaght chairman Datuk Wan Razali Wan Muda said in the company’s 2015 annual report. 

In FY2015, Lysaght’s net profit rose 45.13% to RM16.3 million from RM11.23 million a year ago, thanks to the disposal of an investment property for RM6.4 million. Revenue fell 2.07% to RM63.88 million from RM65.24 million the year before.

Lysaght’s latest results announcement reflects ongoing concerns about fewer enquiries and stiff competition. 

In its first quarter ended March 31, 2016 (1Q2016), Lysaght’s net profit almost halved to RM3.72 million, 44% lower than the RM6.76 million in the same period last year. The improved earnings in 1Q2015 represent a one-off gain from the sale of a property investment. Revenue fell 11.55% to RM15.06 million from RM17.02 million a year ago.

It is learnt that at last week’s annual general meeting, some shareholders voiced concerns over Lysaght’s future profitability and dividend payouts after the board pointed out the need to be prudent and conserve cash for the tough times ahead.

Some shareholders are eyeing the cash pile that has almost doubled to RM62.39 million in FY2015 from RM33.16 million the previous year.

“One of the directors reassured shareholders that they are trying their best to manage things even though the outlook does not look too good. They also explained how margins are being affected by higher steel prices. We hope for the best-lah,” a minority shareholder tells The Edge on the sidelines of the meeting.

 

Management transition

Apart from the external operating environment, another source of uncertainty for Lysaght are the recent changes in top management. 

Longtime managing director Liew Hoi Foo resigned in late April after 13 years of running the company that was founded by his father-in-law. In the interim, Lysaght’s board has appointed executive director Chua Tia Bon as acting CEO. 

At the moment, there is no indication whether Chua will be made the permanent CEO or if another candidate will be appointed. Chua declined to speak to the press after the recent AGM.

To be sure, Chua is no stranger to Lysaght or the business. 

The trained engineer was among the Lysaght group’s first batch of employees, according to filings with Bursa Malaysia when Chua was appointed to the board in June 2015. He had joined Lysaght Corrugated Pipe Sdn Bhd in 1972 as a production supervisor and over the years rose through the ranks until he became director of operations for the group. 

Liew’s sudden resignation has re-ignited talk that a recent family feud is far from over. To recap, the family feud became apparent after Kar Heing’s death in February 2014. 

The shares that he had held went to his estate in July 2015. The family vehicle, Chew Bros (M) Sdn Bhd, which owned a 40% interest in LMSB, is now controlled by Kar Heing’s daughter Meu Jong. 

Central to the complication is the 11.63% stake in LMSB that was put up for sale by Singapore-based United Engineers Ltd (UEL). The latter had apparently signed a deal to sell the stake to Chew Bros in April 2014. Liew then took Chew Bros, UEL and LMSB to court, claiming that the transfer of shares was “invalid”. 

Liew has a 17.1% interest in LMSB by virtue of a stake in WTWT Sdn Bhd and a 15.46% stake in Lysaght via his vehicle, Ingli Sdn Bhd. 

Liew’s side is said to view this as an upstream takeover of Lysaght whereas Meu Jong’s camp maintains that the changes in shareholding at the private companies do not trigger an MGO.

These shareholder tensions culminated in a very heated AGM last week, where some shareholders took the opportunity to grill the board on whether it was aware of the upstream changes. 

Liew, who was at the meeting as a proxy for Ingli, read out a three-page list of questions to the board and asked that his questions be placed on record.  

On May 11, Lysaght informed Bursa that there had been a change in its ultimate holding company from LMSB to Chew Bros due to the latter increasing its equity in the former.

However, Chew Bros stated that it had received legal advice that its purchase of additional shares in LMSB does not trigger an MGO pursuant to the Malaysian Code on Takeovers and Mergers 2010.

“[In] any event, they [Chew Bros] are now in the midst of preparing the necessary application for confirmation/ruling on this matter and/or alternatively, application for exemption of the same pursuant to the Code.

“The company [Lysaght] has not received any notification of any intended mandatory general offer for its shares by any party,” Lysaght said in its filing. 

Sources say both Bursa and the Securities Commission Malaysia are aware of the dispute that has boiled over at Lysaght and are looking into the matter. 

Chew Bros will need to make its case to the SC for confirmation that its acquisition of additional shares in LMSB does not trigger an MGO. “They have to hand in all the necessary submissions before the SC can make a decision either way,” a source tells The Edge. 

And once that happens, the ball will be in the court of the regulators. 

TIMELINE OF RECENT EVENTS AT LYSAGHT

February 2014

Lysaght founder Chew Kar Heing passes away

April 2014

Chew Bros (M) Sdn Bhd and Singapore’s United Engineers Ltd sign a sale and purchase agreement for the former to buy the latter’s 11.63% stake in Lysaght (M) Sdn Bhd

May 15, 2014

Lysaght board proposes corporate exercise to address public shareholding spread requirements via share subdivision, bonus issue and free warrants

Sept 30, 2014

Chew Meu Jong emerges as substantial shareholder via deemed 55.26% interest by virtue of her being sole managing director of Chew Bros (M) Sdn Bhd which holds 40% in Lysaght (M) Sdn Bhd as well as the interest in shares held by her spouse Ho Lam Fook and her father Chew Kar Heing

October 2014

Chew Meu Jong tells The Edge in an interview that Singapore-based United Engineers Ltd’s 11.63% interest in Lysaght (M) Sdn Bhd was for sale but declines to say if Chew Bros (M) was eyeing the stake

Oct 17, 2014

Corporate exercise to address liquidity concerns aborted after Lysaght’s major shareholder Lysaght (M) Sdn Bhd informs that its corporate representative has been directed to vote against the proposed bonus issue and free warrants

Nov 26, 2014

Lysaght announces that it is not in compliance with public shareholding spread requirement as it has fallen below the minimum 25%

July 10, 2015

Chew family obtain grants of probate after Kar Heing’s death and his shares go to his estate

Dec 1, 2015

Lysaght announces that it complies with 25% public shareholding spread requirement after disposal of shares by associate of directors

April 19, 2016

Chew Meu Jong informs Bursa Malaysia that she is no longer a substantial shareholder in Lysaght as she “realised” that her position as Chew Bros (M) Sdn Bhd managing director “does not deem her” to hold interest in Lysaght (M) Sdn Bhd

April 27, 2016

Liew Hoi Foo resigns as managing director and is appointed CEO until June 1 to facilitate “smooth” transition and handover

May 9, 2016

Lysaght board informs stock exchange of changes to its ultimate holding company to Chew Bros (M) Sdn Bhd which now holds 51.63% of the immediate holding company Lysaght (M) Sdn Bhd

May 11, 2016

In reply to query from Bursa Malaysia, Lysaght confirms change in ultimate holding company to Chew Bros (M) Sdn Bhd which upped its stake in LMSB to 51.63% from 40%. LMSB holds the controlling 55.14% stake in Lysaght.

May 12, 2016

Lysaght board announces executive director Chua Tia Bon to be made acting CEO from June 1

May 26, 2016

Lysaght’s annual general meeting gets heated as some shareholders grill the board on recent changes in the ultimate holding company and timely disclosures of material information