PROPERTY development may be uncharted waters for Grand-Flo Bhd, but the company reckons that its decision to venture into the business will set a new frontier in its development and growth.
“We think it is timely to diversify,” Grand-Flo group president Derrick Tan says.
“We have focused on the technology-solutions business for the last 10 years that we have existed as a listed company, so it is high time to have another core business to support the sustainable growth of the group,” he tells StarBizWeek.
Grand-Flo, which specialises in the provision of comprehensive automatic identification and data capture and tracking solutions, has recently surprised the market with an announcement to acquire a 52% stake in Jalur Bina Sdn Bhd, a smallish property player based in Penang, for RM2.44mil. But the surprise has been a welcome one, as the new venture will enable Grand-Flo to diversify its earnings base.
“We expect the electronics and technology industry to enter a challenging phase that will last for the next two to three years. In that sense, we think our venture into the property sector will help mitigate the adverse effects of heightened uncertainties in the electronics and technology industry,” Tan says.
According to Tan, buying into Jalur Bina has turned out to be a sweetheart deal for Grand-Flo, which has no background in property development. The acquisition, he points out, will provide Grand-Flo with an easy entry into the property market, especially in the northern region of Peninsular Malaysia, at a rather low price.
“For a majority stake in company that is led by a management with a proven track record and established reputation in the property development market in the northern region (that is, Jalur Bina), the price tag is very attractive to us,” Tan say.
“And it presents only a small risk for Grand-Flo, considering the relatively small price we are paying for the majority stake in Jalur Bina,” he adds.
Grand-Flo, in Tan’s words, does not have the appetite for excessive risk. Being a rather “conservative” company, he says, Grand-Flo’s priority is to make sure that its investors are always protected.
“It has always been our strategy to identify small companies, with what we see as big potential, to grow with us,” Tan says, adding that he does not rule out the possibility of acquiring the remaining 48% stake that it does not own in Jalur Bina at a later stage.
Grand-Flo is currently awaiting final approval from the Penang government for its maiden property project.
Located in Alma, Bukit Mertajam, the proposed exclusive project comes with a gross development value of RM60mil. Comprising 77 units of semi-detached and bungalow houses in a gated-and-guarded compound, the project is expected to be launched by mid-2014.
Tan reveals that all the units are expected to come with a size of at least 3,000 sq ft each, and prices are expected to start from RM800,000 each.
“As this is our maiden project, we have to put in extra effort to make sure that we do it well,” Tan says, adding that Grand-Flo has already spent RM1mil on building the guardhouse alone.
“We don’t think it is a challenge for us to sell all our units; in fact, we are confident that we can sell all the units within a short period of time after launching the project,” Tan shares.
“We are certainly in this (property development business) for the long run,” Tan says, adding that he expects the property segment to account for 25% to 30% of Grand-Flo’s earnings by 2015.
He maintains that Grand-Flo has no intention to be a full-fledged property player, as technology-solutions business will remain the mainstay of the group.
Sitting on a huge cash pile, especially after paring down its stake in its Thai unit Simat Technologies plc early this year, Grand-Flo has been under a lot of pressure from its stakeholders to put the money to good use.
“We have to look at ways to use the cash productively and grow our business,” Tan says.
“But it is also important for us to conserve a healthy amount of cash for rainy days, what with the electronics and technology industry expected to face a challenging period over the next few years,” he adds. Grand-Flo had in April and May disposed of a total of 19.1 million shares in Simat for eight baht (81 sen) each, and earned a gross proceeds of RM15.9mil.
While Grand-Flo has already used part of the cash it gained from the Simat stake disposal to acquire a stake Jalur Bina to venture into property development business, the company has yet to stop scouting for more opportunities to expand its business.
“We are still scouting for opportunities to acquire potential companies around the region, but they have to come at reasonable valuations. In the information technology business, there are not many attractive companies for us to buy into at present,” Tan explains.
“The sector in general is softening across the region; but despite the poor industry outlook, most companies with which we have started negotiations have been asking for unreasonably high valuations,” he reveals.
According to Tan, Grand-Flo is also currently scouting for good parcels of land to grow its landbank for its property development business in Malaysia.
As of now, Grand-Flo still owns 20.9% stake in Simat, a Thai technology company that started out as a tracking solutions provider before recently venturing into the provision of high-speed Internet services in Thailand, focusing on the Nakhorn Ratchasima and Chiangmai provinces. On whether Grand-Flo intends to dispose of its entire stake in Simat, Tan says his team is still weighing the pros and cons.
“We are already in talks with several interested buyers, one of whom is a leading telecommunications company in Thailand… the question is whether the valuation is attractive enough for us to sell,” Tan says.
“We have several options… We may not exit from Simat entirely, we may just pare down further our stakes in the Thai unit,” he adds, noting that Simat has the potential to generate good and stable earnings for the group as the former’s high-speed broadband business has started to pick up.
Tan revealed that Simat has already secured around 500 subscribers (mainly home users) for its broadband services since its launch more than two months ago. The group’s target is to secure 8,000 subscribers by mid-2014.
Grand-Flo posted a net profit of RM7.99mil, or 2.49 sen per share, on revenue of RM21.19mil for the quarter ended June 30, 2013. This compared with a net profit of RM2.25mil, or 0.7 sen per share, on revenue of RM22.57mil, for the previous corresponding period.
The increase in Grand-Flo’s earnings during the period in review was due to the gain on disposal of Simat’s shares, while the decline in the group’s revenue was due to the global economic slowdown which impacted its sales. As of end-June 2013, Grand-Flo’s net cash totalled RM21.03mil, compared with RM7.22mil a year ago.
Tan expects the company’s financial position to remain sluggish in the financial years ending Dec 31, 2013 to 2014 due to the global economic slowdown. But he expects the group to see earnings accelerating from 2015 onwards.