MAIN board-listed Megan Media Holdings Bhd is in a quandary but it is one that well describes the bright prospects of its business.
In contrast to most other businesses that are plagued with excess capacity, Megan Media is finding it a challenge to keep up with the rising demand for its products.
But this it has to do if it wants to meet its aspirations – to be among the largest optical data storage manufacturers in the world.
The task ahead is not so easy. Megan Media's executive director Yeo Wee Seong admits the company is facing difficulties with regard to production capacity. “We have difficulty in supplying larger quantities to our customers.
“Since the Taiwanese manufacturers shifted their production focus from manufacturing DVDRs (digital versatile disc-recordables) to CDRs (compact disc-recordables), the demand (for the former) has grown,” he says.
To meet the escalating demand, Megan Media has made several moves such as setting up more production lines, establishing tie-ups with manufacturers in China and more recently, making a proposed acquisition of a Singaporean data storage manufacturing company.
But even as Megan Media fraternises with large optical data storage manufacturers and executes plans with its eyes all the time focussed on its ambition, several concerns have emerged.
The biggest concern is one that is typically faced by most companies on expansion mode – funding capability and its financial impact.
As at Jan 31 this year, Megan Media had secured and unsecured borrowings amounting to some RM95.65 million.
An analyst from Mayban Research says: “The plans to increase capacity will incur a lot of expenditure. Each production line costs some RM20 million, which will result in borrowings on the part of Megan Media.
“Rather than risk losing customers, as there is a lot of demand for the company's products, Megan Media is incurring debts to meet high demand.”
As a result, most expect Megan Media's current gearing ratio of 0.6 times to increase significantly.
Megan Media is looking at a long-term capacity of around 20.5 million discs a month, up from the current 6.5 million discs. This year alone, the company plans to increase production by 40 per cent.
To do this, a factory is being set up in Selangor, which costs RM10 million, and another two production machines have been put up costing a total of RM40 million.
Another real concern is the falling prices of CDRs, which have come off significantly from RM22.80 two years ago to about RM7.30 currently, as pointed out by OSK Research.
The analyst expects prices to come down further to RM3.80 in two years' time. This downward trend is likely to have a serious impact on the company.
Meanwhile, however, there's very little stopping the company. Megan Media just announced plans to acquire MJC (Singapore) Pte Ltd. Both companies have common substantial shareholders.
Yeo Wee Seong is a director and substantial shareholder of both MJCS and Megan whilst Yeo Wee Koon is a substantial shareholder of both MJCS and Megan. The Yeos, together with Speed Media Limited, which they control, have a 74.03 per cent interest in MJCS.
One analyst says the acquisition will be done in cash raised via borrowings and will cost roughly below RM100 million.
Wee Seong said Megan Media was still in negotiations with financial advisors on the mode of payment and as it stood, no concrete terms on whether the sale would be made via cash or otherwise has yet been determined.
MJCS, which chalked up sales of RM200.63 million in 2001, is principally involved in the original equipment manufacturer supply and distribution of data storage products such as videocassette tapes and housings, floppy diskettes, blank CDRs and blank DVDRs and the distribution of consumer electronic products.
In an announcement, Megan had said the proposed acquisition was in line with the company’s plan to expand its market share in the data storage products industry.
“(It) ... will provide Megan the opportunity to double its production capacity, thereby elevating Megan from currently being the biggest producer in Malaysia to a major manufacturer of blank optical discs in South-East Asia.
“The proposed acquisition will also allow Megan Media immediate access to MJCS' established marketing network and manufacturing expertise,” says Megan Media.
This plan follows shortly after Megan Media had moved to tap the opportunities in China via a joint venture with Beidaihe Qinhuandao Xingyuan Science Development Co Ltd, to develop a manufacturing cum distribution channel in China. The tie-up is expected to be completed by the third quarter of this year.
“The venture in China is at present only a foothold in the huge booming market, which can help us with capacity problems in the future, but our focus for now has to be on our home ground, Malaysia,” Wee Seong says. The actual expenditure on the joint venture company in China, however, is yet to be determined.
Megan Media to its credit has a strong list of clients namely Grundig AG, Etronics Corp Ltd, International Business Machines (IBM), Samsung Electronics and Mitsubishi Electric Semiconductor Group. Grundig is Megan Media's largest customer accounting for some 30 per cent of Megan Media's business. Megan Media's over reliance on Grundig has posed a challenge to the company.
Sometime in February this year, Sampo Corp of Taiwan was reported to be actively pursuing an acquisition of a substantial stake in Nuremberg based Grundig, which although did not materialise, did take a toll on Megan Media's share price.
The share price had dipped to a 52 week low of RM1.59 only recently on March 11 from RM2.26 in early February on concerns that Sampo's interest in Grundig may lead to Megan Media losing grip on its largest customer.
Since then, the share price has gained some ground and is hovering just above RM2 presently.
Talks between Sampo and Grundig have fallen through but a Turkish party – Beko Elektronik A.S – has now expressed interest in Grundig.
Wee Seong has always stressed that Megan Media would not be perturbed by such changes involving Grundig. “Our arrangement with Grundig is contractual till December 2005, and till then it will be business as usual,” he says.
Even as he maintains this position, it is widely talked about in the industry that Megan Media is in talks with both Japanese and Korean companies to hedge a possible loss of Grundig, all of which has yet to materialise.
For the cumulative three financial quarters ended Jan 31 this year, Megan Media registered a net profit of RM18.58 million from a RM152.31 million turnover, up from a net profit of RM15.68 million from a RM95.63 million turnover for the corresponding period the previous year.
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