What’s the game plan for Green Ocean?

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AFTER injecting more than RM10.6 million into Green Ocean Corp Bhd in the past one year, Datuk Frankie Tan See Meng is now planning to give the loss-making company up to RM501.8 million in business over the next one year through his privately held palm oil trading business, Sawit Raya Sdn Bhd.

Green Ocean’s minority shareholders would be thinking hard about whether to approve the related-party transaction (RPT) at the upcoming shareholders’ meeting on Sept 29. The pertinent question is probably, would this be a lucrative deal that would eventually revive Green Ocean, which has been loss-making for five years?

The transactions are RPTs simply because Tan, the managing director of Green Ocean, is a common shareholder of Green Ocean and Sawit Raya.

According to a circular to the shareholders, the RPTs involve Green Ocean buying some RM250 million worth of palm kernel for crushing as well as RM130 million of crude palm kernel oil, palm kernel expeller, refined palm oil and by-products from Sawit Raya, in which Tan holds a 90% stake.

On the other hand, Green Ocean will be selling back to Sawit Raya some RM120 million worth of crude palm oil kernel, palm kernel expeller, refined palm oil and by-products. Green Ocean will also charge Sawit Raya some RM1.8 billion in tolling services.

Since it involves Green Ocean buying some RM380 million worth of products and services from Sawit Raya while selling RM121.8 million in return, it means Green Ocean will be a net buyer of some RM258.2 million worth of produce from Sawit Raya.

Should Green Ocean be able to sell the feedstocks it purchased from Sawit Raya, naturally this would be a new income stream for it.

While the minority shareholders may see this as a ray of hope for the company, there are concerns about whether Green Ocean will be able to sell the raw feedstocks after processing them.

It is worth noting that the transactions are not by any means guaranteed.

In fact, a previously approved RPT provision was grossly underutilised. Shareholders had on July 1 approved an interim RPT transaction proposal with similar terms, albeit on a smaller scale. The previous RPT approval allowed for RM80 million in transactions between Green Ocean and Sawit Raya from July 1 until the upcoming annual general meeting.

Interestingly, as at Aug 22, Green Ocean only bought some RM1.7 million of palm kernel from Sawit Raya, a fraction of the RM40 million that was approved for purchase. Meanwhile Green Ocean did not sell anything to Sawit Raya.

The transactions took place after June 30, so they were not reflected in the group’s first-quarter results, in which it booked a net loss of RM591,000 or a loss per share of 0.29 sen.

Green Ocean’s losses have narrowed from the RM1.32 million net loss it reported a year ago, as revenue picked up from RM6.6 million to RM8.14 million.

What is Tan’s game plan for Green Ocean? Since he emerged as a major shareholder, Tan has been seen as a possible “white knight” for the company.

When Green Ocean’s management was contacted, they declined to comment on the RPTs.

Some quarters believe Tan’s ultimate goal is to use Green Ocean as a vehicle for the backdoor listing of Sawit Raya, given the similarities between the two companies, for instance, their core activities.

Little-known Sawit Raya was initially involved in the transport of palm oil product and repacking of edible oil for the retail market. In 2007, the company invested in a refining and dry fractionation plant in Teluk Panglima Garang in Selangor.

According to filings with the Companies Commission of Malaysia (CCM), Sawit Raya made a profit of RM11.14 million in the year ended Dec 31, 2012, against revenue of RM853.33 million. The profit margin was razor thin.

Sawit Raya has some RM214.4 million in assets compared with RM170.33 million in liabilities. Hence, its enterprise value is about RM45 million, which is about the same size as Green Ocean’s market capitalisation.

In 2011, Sawit Raya expanded its capacity to produce high quality RBD (refined, bleached and deodorised) stearin and olein suitable for making downstream palm-oil based products.

Tan has a strong grip on Green Ocean given his 15.38% stake — he is the single largest shareholder. He subscribed to part of the company’s share placement for RM4.46 million or 11 sen per share.

An unsecured loan of RM6.2 million that he had given to the company could be converted into shares at a later stage, extending his holdings to about 25%, assuming the shares are issued at 17 sen apiece.

On top of that, Datuk Seri Ng Sing Huat — the second largest shareholder with a 5.38% stake — could be a friendly party to Tan. Ng subscribed to 14.181 million shares in the 30% placement, and he is a director in several companies linked to Tan.

Filings with CCM reveal that Ng is a director in Tan’s 50%-controlled Sinoraya Motor Sdn Bhd, as well as a director in Teck Huat Enterprise Sdn Bhd, a wholly-owned subsidiary of Sawit Raya. The duo are also directors in Binaan Era Hijau Sdn Bhd.

It remains to be seen what Tan will do with Green Ocean, but management has indicated that it will focus on palm kernel crushing at the moment, despite the falling crude palm oil prices that are putting pressure on industry margins across the board.

In the meantime, Tan is already sitting on a paper gain of RM2.43 million for his shares that were issued at a discount. Furthermore, he is charging an annual interest of 8% for his loan to Green Ocean. This is still cheaper than the company’s other borrowings, which are charged an interest of about 8.6%, according to its annual report.

Having invested a hefty sum in Green Ocean, Tan seems to have the most skin in the game.

But like it or not, RPTs usually have negative connotations. Tan will have to reveal his game plan to the minority shareholders.

This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.