After its 80%-owned 260MW Don Sahong hydroelectric dam in Laos started operation in 2020, we know for sure that MFCB is becoming and will become a cash cow.
The concession period for the dam is 25 years which is up to 30th September 2045.
From the most recent FY21Q2 quarter report, the 6-months PBT from its renewable energy segment is RM176.8mil which is almost entirely from Don Sahong with negligible contribution from its solar business.
With the second half of the year expected to contribute more, it's safe to estimate a PBT of RM400mil per year from Don Sahong.
As depreciation and amortization are usually huge for such infrastructure, I guess the operating cash flow from it might be around or even more than RM400mil per year.
What will you do if your company has RM400mil cash coming in consistently every year?There is no doubt that MFCB's management team will be actively looking for business acquisition to grow the group.
There's no surprise at all since we already knew that it will expand its existing packaging business.
I was hoping for an acquisition of technology related company since certain MFCB directors are also in the board of the high-flying D&O.
Nevertheless, last month MFCB announced its diversification into oleochemical business which might have caught many investors off-guard.
Edenor Technologies which is a 50:50 JV between MFCB and 9M Technologies, has proposed to acquire 100% of Emery Oleochemicals (M) Sdn Bhd and Emery Specialty Chemicals Sdn Bhd from Sime Darby Plantation Bhd and its partner.
This Edenor Technologies sounds like a tech company but unfortunately it's not.
Both target companies are involved in the manufacturing and sale of fatty acids, fatty alcohols, refined glycerin, oilfield chemicals, ozone acids, plastic additives, methyl esters and other oleochemicals derivatives.
The raw material used will be palm oil and palm kernel oil which will be made into products for home care, personal care, food ingredients, pharmaceuticals, plastics, building and construction, lubricants and agriculture industries.
The Emery Group is a subsidiary of Sime Darby Plantation Berhad which has oleochemicals businesses in Asia Pacific, Europe and North America. MFCB will only acquire the Asia Pacific business of Emery.
The companies to be acquired have 34-acre manufacturing facilities located at Teluk Panglima Garang, Klang.
Recently on the 1st of May 2021, two crude oil tanks in Emery plant caught fire and unfortunately a foreign worker was killed.
One of the condition of the acquisition is that the sellers have to get the damaged plant up and running.
The targeted purchase price is just RM38mil, based on debt free cash free enterprise value of RM243mil less the net debt of RM205mil.
So, MFCB only needs to take out RM20mil (including expenses) for this acquisition.
The price is "cheap" mainly because those companies are loss-making!
From their latest available FY2019 financial results,
- Emery Oleochemicals: Revenue RM2.1bil, ProfitATAMI RM6.8mil
- Emery Specialty Chemicals: Revenue RM172.7mil, LossATAMI RM40.9mil
It seems like Mr Yeow who is not with KLK anymore, has presented this acquisition opportunity to MFCB and he will be the main man to lead and turnaround Emery.
He is no doubt the right man to do the job but the only concern to me is his age.
No wonder MFCB alone has to standby RM255mil of credit facilities just in case Emery's lenders do not consent to the change of control, which is unlikely.
Besides, MFCB also mentions in its announcement that the acquisition is consistent with its long term objective of talent recruitment which may help its plantation division when it expands downstream into coconut and other downstream agricultural produce processing in 2-3 years' time.
MFCB currently plants coconut and macadamia nuts in Cambodia and it may take up to year 2023-2025 to bear fruits. Once the time its right, it will start the downstream processing of these two crops.
Mr Yeow together with the team he assembles, should be instrumental to both MFCB's oleochemical and plantation division.
Can Mr Yeow turn Emery profitable in 1-2 years time? If he can, then MFCB has struck a good deal.
At his age of close to 70, why did Mr Yeow spend his retirement time and millions of ringgit to acquire and then run the loss-making companies? He must have seen good value in it.
With expected vast amount of positive cash flow, MFCB's future is still full of excitement to me, even though its share price movement might not excite most investors.
The proposed acquisition of Emery is expected to be completed in Jan 2022. The initial loss from Emery might just roughly cancel out the profit from Stenta Film.
I think the near term growth catalyst will still be the 5th turbine of its Don Sahong hydroelectric dam. However, I'm not sure whether the construction work will affect its electricity sales or not.
Anyway, I view MFCB as a long term investment. I expect it to grow slowly and give good dividends once the borrowings are down.