Can Trus Madi be a game-changer for Priceworth?

Priceworth International Bhd executive director Richard Koo Jenn Man

TURNING in relatively negligible profit margins for the longest time, logging and wood product manufacturing firm Priceworth International Bhd (PWI) is banking on its proposed acquisition of timber extraction and replanting rights of a forest reserve in Sabah to help boost margins and reward shareholders in the process.

The extraction and replanting rights are for the 101,161ha Trus Madi forest reserve in Sabah (also known as Forest Management Unit 5 or FMU5) and PWI plans to obtain these rights by buying the concession holder of the said rights for RM260mil.

Executive director Richard Koo (pic) says acquiring FMU5 which ranks among the top ten forest management units in Sabah by acreage will “transform Priceworth into a sustainable plantation and integrated timber company”, and enable it to “exceed our current performance”.

“This will translate to higher revenue and exponentially increase the profit margins thus resulting in wealth creation for our stakeholders, allowing us to eventually reward our shareholders with dividends in the near future,” Koo tells StarBizWeek.

The last time smallish PWI which made a net profit of RM1.3mil on revenue of RM67.4mil for the six months ended Dec 31, 2016 paid out dividends to its shareholders - was in 2009.

Earlier this week, the company said it had increased the size of its proposed special issue - which it wants to use to help fund the buying of the rights to FMU5 - and plans to allot the new shares to RHB Banking Group founder Tan Sri Abdul Rashid Hussain, his spouse and bumiputra firm Maha Gayabina Sdn Bhd.

Abdul Rashid will subscribe to shares representing up to 6.4% of PWI’s paid-up capital as at the last practicable date, Puan Sri Emilahani Yang Mohd Yatim will subscribe to up to 3.6% and Maha Gayabina up to 20%.

In the original proposal, the proposed special issue involved the issuance of up to only 141.25 million shares representing about 20% of PWI’s enlarged paid-up capital.

However, the company now also wants to include its existing treasury shares of 12.56 million, which will boost the special issue size to 30% of the enlarged capital (excluding treasury shares).

“With an enlarged special issue, we will have the working capital ready to mobilise and redeploy our plant, equipment and machinery for the impending commencement of operations at FMU5,” Koo says.

In October last year, PWI said the acquisition of FMU5 would be financed through a private placement, a special placement and a two–call rights issue with bonus shares, as well as an IPO of the company’s subsidiary GSR Pte Ltd on the Singapore Exchange later this year.

“We have completed the private placement, and now that the special issue is underway, we can start planning the rights issue with bonus shares.

“Aside from raising funds, this exercise will increase the opportunity for our loyal shareholders to participate in the transformation of Priceworth,” says Koo.

Notably, the proposed acquisition of the timber extraction and replanting rights remains subject to approvals.

Koo says Priceworth’s performance to date has been affected by structural challenges.

“Economies of scale could not be achieved as there is currently insufficient legal, certified timber for the company to fully utilise its installed capacity.

“We have 240,000 m3 annual capacity to manufacture plywood, but utilisation is only at 40% due to the prevailing shortage of logs,” according to him.

He says with FMU5, Priceworth will have a stable, regular supply of sustainable, renewable logs from a long-term forestry management concession with 81 years remaining on its tenure extending to 2097.

“We will be able to produce more efficiently and more cost-effectively once we have a stable supply of sustainable timber. This is why the acquisition of FMU5 is a game-changer for us.”

In terms of the company’s business strategy for this year, Koo says its immediate focus is completing this acquisition, and managing the concession according to the terms of the Sustainable Forest Management Licence Agreement (SFMLA) which includes timber extraction from approved coupe areas.

Koo points out that as plywood and timber operations involved international markets that are priced in US dollars, the company will continue to benefit from the currency factor, he says, referring to the strong greenback against the ringgit.

Located in Trus Madi, Sabah, FMU5 currently covers 101,161 ha, of which 12,241 ha is to be returned as conservation area to the Forestry Department Sabah.

Under the SFMLA, the balance of about 88,920 ha comprises of 58,374 ha of Industrial Tree Plantation and 23,559 ha for Natural Forest Management (NFM) while the balance is for community needs (3,880 ha) and conservation areas (3,107 ha).

Properly managed, FMU5 has the potential of producing more than RM1bil worth of legal, certified timber over the next decade based on an independent forester’s estimate, Koo says.

If the proposed acquisition of the timber extraction and replanting rights go through, he says the firm is expected to be the biggest producer in Sabah of legal, certified timber that is sustainable and renewable and “will be transformed into a long-term plantation and integrated timber stock.”

At last look, PWI shares finished at 14.5 sen apiece, giving the company a market capitalisation of just over RM102mil.