Compugates may have just turned the corner


See Goh: ‘We want to unlock value first’.

PETALING JAYA: IT distributor Compugates Holdings Bhd might have just turned the corner after years of recording losses.

This sense of optimism from executive director T See Goh stems from the sale of its Agarwood trees to Westwood Marketing Sdn Bhd for RM43.9mil.

The trees were part of a plan the company realised it needed to embark on years ago to turn around Compugates since its business of distributing cameras and printers was seeing low margins.

It had committed RM1.5mil to plant the 23,000 Agarwood trees, which has since delivered a fantastic return to Compugates. The use of the Agarwood tree ranges from incense to perfume and ornamental functions.

On April 24, it announced that Westwood Marketing had decided to buy the Agarwood trees from Compugates, allowing the latter to get into Agarwood cultivation and trading in a bigger way.

“Because we are listed, we want to unlock value first. We take the money, then enter into a joint venture with either a landowner or a state government and plant more trees,” said See Goh.

The deal with Westwood Marketing is the second Compugates had entered into with the company. The first inked in September last year was to sell its Agarwood leaves to the Singapore-owned company. The leaves were to be sold as Agarwood tea leaves by Westwood Marketing.

The agreement in April will see Westwood Marketing, a member of Westwood Investment Group Pte Ltd, buy the trunk and branches of the 23,000 trees Compugates had planted on its 54 acres in Kuala Kangsar five years ago.

In its announcement to Bursa Malaysia, Compugates said Westwood Investment took an interest in the Agarwood trees because of high demand for the wood and the oil it would extract from the tree.

The oil, which will be processed after the trunks are inoculated, will then be mainly sold to markets in the Middle East where it will be used as a fragrance to make perfume. Agarwood is also in demand in China and Japan as a source of incense.

In its statement, Compugates said the trade value of Agarwood wood and oil out of Singapore was estimated at US$1.2bil a year.

“It takes two years for the resins to form in the trees that are inoculated. These resins are what makes the trees valuable,” she said.

The oil from one tree that is inoculated is worth close to RM20,000.

She said at the moment, supply of Agarwood oil could only meet about 20% of demand. Supply of Agarwood is mainly from a few countries in South-East Asia and India. Not all trees are able to deliver the oil extract in the quantities sought. Compugates said its trees were synthetically grafted from 10 different species to give it value and abundance of oil.

The cultivation of Agarwood is also carried out by Asia Plantation Capital, based out of Singapore. It has significant Agarwood operations in the region.

Compugates also sells Agarwood tea leaves in Malaysia, and according to See Goh, the business is picking up. “We have a distributor now in Hong Kong. We are looking for distributors all around the world,” she said.

One of the reasons why Compugates decided to sell the trees early was for the return on investment (ROI).

It intends to use the money from the sale of its trees to buy more land and plant. It is in discussions with landowners and the Perak Government to source for land to grow its Agarwood trees.

“If we had waited, we could have made a bigger return but we wanted an ROI, as we had not been making money over the past few years. With this money coming in, we will surely turn around Compugates,” she said.

The sale of the trees for RM43.9mil will, according to See Goh, see the company posting a profit for its current financial year once it receives money from Westwood Marketing.

Coupled with the fact that the company no longer needs to make big write-offs for goodwill from its reverse takeover exercise years ago, the company thinks it can start implementing a dividend policy, whereby it will pay 50% of its net profit to shareholders.

The deal with Westwood Marketing will probably see a patchy contribution to earnings for the next few years until it starts to grow its own Agarwood trees on a larger scale.

Once that happens, See Goh said trees could be harvested for its Agarwood oil on a more sustainable basis.

But Compugates will also see it extracting future income from its existing Agarwood trees in Kuala Kangsar.

The trees will be cut just above four inches from ground level to gather the logs so the oil can be extracted from the trunks.

“But the trees can grow two more cycles without having to plant new seedlings. That way, Compugates still has the trees and the land it owns. Then, we can sell the trees again. That’s the beauty of this business.”

Compugates wants to use the proceeds from Westwood Marketing to grow more Agarwood trees and is also proceeding with its proposal to raise more cash via the issuance of 304.9 million redeemable preference shares (RPS) and 304.9 million warrants in the company. Under the maximum scenario of subscription to its RPS, Compugates will raise RM29.9mil. The scenario for the minimum subscription, meanwhile, is RM19.5mil.

The cash will be used for its existing business of distributing cameras and printers.

“Our existing business is still ongoing but is a high-volume, low-margin business because we have to give our creditors 30 to 60 days credit,” she explained.

Compugates wants to raise capital because if it were to pay early to buy IT equipment such as printers and cameras, it would receive a discount of 1.5% per shipment. The savings can be large, given the multiple shipments it receives in a year.

Having cash also allows Compugates not to rely on bank credit lines, where interest is charged and margins are squeezed.

“The savings on interest can amount to RM5mil to RM10mil a year,” she said.

“The coupon on the preference shares is 4%, but that’s less than what Compugates is being charged by the banks for credit lines.”

Compugates also has 100 acres of land in Dengkil, where it intends to venture into property development. The land is next to a project by MCT Consortium Bhd and nearby a couple of universities.

Compugates is in discussion with some parties to launch its property venture on the first 38 acres on its site.

The land, bought in 2008 for RM13mil, now has a book value of RM160mil, according to the company.


   

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