Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on June 24, 2019

KUALA LUMPUR: Just over a month ago, Luen Heng F&B Sdn Bhd came under the spotlight after Guidance Note 3 (GN3) company G Neptune Bhd announced its intention to acquire the former, together with Singapore-based Octopus Global Holdings Pte Ltd.

G Neptune signed a memorandum of understanding (MoU) each with the two companies for the asset injection — a move to revive the listed entity that has lacked an earnings-generative core business for years. The non-binding MoUs provide an avenue for the three companies to start discussions, with the aim of entering into a definitive agreement three months down the road, or another three months later, if all are in agreement.

The name Luen Heng might not ring a bell, particularly among the younger generation. But it is not an unknown in the food and beverage industry. In fact, Carlsberg Brewery Malaysia Bhd was once a major shareholder of Luen Heng, which says a lot about the latter’s wide distribution network in Malaysia.

Incorporated in 1956, the group is principally involved in the import, distribution and sale of alcoholic beverages, non-alcoholic beverages and food items, as well as drinking accessories. A check with the Companies Commission of Malaysia shows that Luen Heng is currently 51%-owned by Capriwood Sdn Bhd, with the remaining 49% held by Singapore-based Liquorland Distribution Pte Ltd.

Octopus Global, meanwhile, was founded in 2017, and its group of companies are principally importers and exporters as well as general merchants of liquor, wines and other related beverages.

G Neptune has already missed the May 31, 2019 deadline to submit its financial regularisation plan to Bursa Malaysia. For that, the company has applied to the regulator to seek more time — up to Nov 30 — for the submission.

G Neptune first slipped into GN3 status on Nov 30, 2017. As the information technology solution services company has ceased operations, it has yet to recognise any revenue since the first financial quarter ended Sept 30, 2017 (1QFY18). For 3QFY19, G Neptune reported a net loss of RM75,000.

G Neptune’s share price has been trading below 10 sen apiece since mid-2013. The counter, which at one time was trading at 60 sen apiece in 2004, fell to as low as 2.5 sen in 2008. G Neptune closed at 5.5 sen last Friday, valuing the company at RM15.9 million.

If the deal goes through, it could pave the way for a reverse takeover and the emergence of a new beverage player on Bursa, making it the third-largest listed company involved in alcohol on the local bourse after the two brewery big boys, Carlsberg Brewery Malaysia Bhd and Heineken Malaysia Bhd.

Luen Heng used to be a 70%-owned unit of Carlsberg before the brewery company decided to divest itself of the wine and spirits business.

Luen Heng had total assets of RM223.38 million in FY18, versus RM172.18 million a year ago, while total liabilities stood at RM156.16 million, compared with RM115.37 million in FY17. It has net assets, excluding minority interests, of RM64.19 million.

Under the MoUs, no details were stipulated about how the acquisitions would be funded. Based on G Neptune’s latest balance sheet, it would not be able to fully fund them with cash. As at March 31, 2019, the company’s cash and bank balances stood at just RM9.92 million.

To put things into perspective, Carlsberg divested itself of its stake in Luen Heng for RM19.5 million in mid-2015, which implied a RM27.86 million valuation for Luen Heng. The deal was transacted at a price-to-book value of 0.58 times against its net assets of RM47.94 million as at March 31, 2016 (FY16).

Since then, Luen Heng’s net assets have grown by 34% — to RM64.19 million in FY18. Thus, assuming that G Neptune buys the stake in Luen Heng at the same price-to-book value, the acquisition would cost RM37.3 million.

However, earnings-wise, Luen Heng’s performance may not be impressive. Its profit after tax declined 36.2% to RM7.52 million for FY18 from RM11.78 million for FY16, while revenue was down about 7% to RM165.21 million for FY18, versus RM177.57 million for FY16. Coincidentally, the Malaysian government slammed higher excise duty on locally produced hard liquor, from RM24 per litre to RM60 per litre, effective mid-December 2016.

Based on the previously transacted price in 2015, the stake in Luen Heng is valued at a price-earnings ratio (PER) of only 2.36 times. While it may not be an apple-to-apple comparison, it is worth noting that Carlsberg is trading at a PER of 30 times, while Heineken has a PER of 25.3 times.

The question now is: Are Luen Heng and Octopus Global the right white knights to revive G Neptune?

 

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