Moment of truth for rubber industry


  • Business
  • Saturday, 04 Jan 2003

By ERROL OH

IT WILL soon be time for speculation to yield completely to reality. At least, this is the case for those who have taken part in the share market whirl – the so-called Reactorrim play – that has lifted the prices of several counters following announcements of joint ventures (JVs) to consolidate rubber smallholdings. 

At least two of the joint ventures are about to start their operations. By the mid-year mark, there should be some indication as to whether these new businesses are indeed as lucrative as some hope. 

Between Aug 2001 and last Nov, four companies on the second board of the Kuala Lumpur Stock Exchange (KLSE) have announced JVs revolving around the consolidation of rubber smallholdings and the use of Reactorrim, a device said to stimulate and increase latex production in rubber trees. 

The companies are General Soil Engineering Holdings Bhd (Gensoil), Sinmah Resources Bhd, Pohmay Holdings Bhd and Lipo Corp Bhd. 

The first three have tied up with Bukit Saudara Sdn Bhd in the proposed JVs, while Lipo's partner is Synergy Supplies Sdn Bhd, Bukit Saudara's sister company. 

Bukit Saudara and Synergy Supplies have exclusive rights to purchase Reactorrim in the states covered by the JVs. The listed companies, on the other hand, are supposed to bring funds to the table. 

“We select JV partners that would like to play a role in improving the smallholders' income,” said Bukit Saudara executive vice-president Hwang Teng Hooi. “At the same time, we think this can be a profitable venture.” 

According to Hwang, who is based in Sik, Kedah, the consolidation scheme targets areas with a large number of rubber smallholders, particularly those who struggle to keep above the poverty line. 

The plan is basically the same for all the proposed JVs. The smallholders sign agreements to allow the JVs to manage the smallholdings. 

In return, the JVs guarantee the smallholders a monthly yield that works out to roughly RM60 to RM70 per acre, assuming rubber prices stay at between RM2.80 and RM2.90. The smallholders can also opt to work for the JVs as tappers and earn a salary plus some employment benefits. 

“We take care of everything else – the tapping, fertilising, maintenance. To be viable, we need a minimum of 500 acres for each area,” Hwang explains. 

Reactorrim is central to the scheme as it is supposed to boost productivity. IDR Industries Sdn Bhd, which sells the device, has consistently claimed that Reactorrim can increase latex yields by 300 per cent. 

However, there is no shortage of industry insiders who are sceptical about the prospects of the JVs' consolidation scheme. For one thing, they question whether Reactorrim can significantly raise latex output. The chief argument: If it is truly that effective, why is it not widely used despite having been around for several years? 

The naysayers also argue that it is difficult to convince the smallholders to let the JVs manage their land. Hwang concedes that changing the attitude of smallholders is a key challenge. 

“They must be ready to accept change. For us to help them, they must first want to be helped. They must be willing to accept the technology. It's a technology that's been tested and approved by the Malaysian Rubber Board,” he contends. “If the smallholders continue to tap in the conventional way, their income would continue to be small.” 

Hwang says a smallholder's monthly income currently can even be lower than RM200. The consolidation scheme offers the smallholder a fixed income of RM300 (assuming he has five acres), rain or shine. In addition, the smallholder can get close to another RM500 in salary if he chooses to work for the JV as a tapper. 

“It's a win-win situation for the JV partners and the smallholders,” Hwang adds. 

These are sensible arguments, but the true test is set to begin soon. Furniture maker Pohmay and poultry player Sinmah are laying the groundwork for the JVs to commence operations as early as February. 

Pohmay, for example, last week advertised for candidates to fill key positions in its JV company with Bukit Saudara. It is looking for a general manager, an agronomist, an estate manager and a marketing manager and some administrative personnel. 

Last month, Sinmah announced the incorporation of SMNS Rubber Holding Sdn Bhd, whose shareholders are Bukit Saudara and a wholly owned subsidiary of Sinmah. The listed company's capital contribution will come close to RM5 million. SMNS Rubber will consolidate and manage smallholdings in Malacca and Negeri Sembilan. 

According to Pohmay group managing director Geoffrey P. J. Lee, the deal with Bukit Saudara includes Pohmay running the JV's operations. Bukit Saudara's contribution draws mainly on its expertise with Reactorrim and its experience in consolidating smallholdings in Kedah. 

The JV will operate in Perak, which Lee regards as Pohmay's home base. The listed company has a factory in Parit Buntar and sources rattan – Pohmay claims to be Malaysia's largest manufacturer of rattan furniture – from rural folks in Perak. He says the state has nearly 150,000 hectares of rubber, of which 80 per cent is smallholdings. 

For Pohmay, a primary reason for hooking up with Bukit Saudara is to secure a source of raw material. “We'd long been on the lookout for an opportunity to work with smallholders to ensure a long-term supply of raw material. But we'd not been able to do this until we got to know about the Reactorrim project,” Lee adds. 

Reactorrim can improve the smallholders' income and increase latex yield. Through the scheme, we'll have a good rapport with the smallholders. This is a crucial aspect to gaining access to a supply of rubberwood.” 

Pohmay aims to have 15,000 acres under the scheme in the first year. This, Lee says, is enough to break even. “This is also a cash cow. Our initial investment of RM5 million is for start-up costs, mainly to purchase equipment. And we're expecting a cash flow almost immediately.” 

Pohmay's participation in the consolidation scheme also includes a separate JV (with a company called Perfect Concept Sdn Bhd) to procure rubberwood logs from smallholdings in Kedah and Perak, and to set up mobile chipper operations to salvage rubberwood fibre to supply to fibreboard and chipboard manufacturers. 

Lee points out that when rubberwood is extracted from replanted estates, about 70 per cent is left behind as waste wood. Pohmay plans to capitalise on this to expand its earnings base. 

But what of the JV plans of Gensoil and Lipo? As Hwang of Bukit Saudara points out, Gensoil has “its own difficulties”. The company was classified as a financially distressed (or PN4) company last September and trading in its shares was suspended. In its latest announcement through the KLSE, the company “is in the midst of evaluating and finalising various options for the regularisation exercise”. 

Gensoil's JV with Bukit Saudara had meant to cover Kedah. According to Hwang, Bukit Saudara has gone ahead to undertake the consolidation scheme in the northern state on its own. 

As for Lipo, about a year after signing its JV agreement with Synergy Supplies, it had a change of heart and entered into a supplemental deed to dilute its shareholding from 49.9 per cent to 19.9 per cent. As such, its share of earnings from the scheme is not likely to be considerable. 

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