From billionaire to millionaire in less than four months

ABOUT nine years ago, KNM Group Bhd chief executive Lee Swee Eng (pic) was easily worth more than RM2bil on paper. That was the time when KNM, a manufacturer of process equipment for the oil and gas (O&G) industry, was the darling of the O&G run and in the news almost every week.

At its height in 2007, the company’s market capitalisation was about RM8bil. His stake of about 26% in the company propelled Lee into Malaysia’s billionaire list.

In mid-2008, a confluence of factors reduced his paper wealth by more than 80%, as the company’s market capitalisation reduced to less than RM1.5bil.

It all started with the Transmile Bhd accounting fraud that cast a shadow of doubt on all active stocks on Bursa Malaysia.

KNM, which was a favourite then among investors, felt the heat from the Transmile scandal.

Then, the sub-prime crisis in the United States started to bog down global markets from mid-2008 onwards. Oil prices fell from their dizzy heights of US$100 per barrel and this impacted sentiment on companies in the sector, KNM included.

Then came the financial crisis in the final quarter of 2008 after the collapse of Lehman Brothers. It triggered a liquidity crunch and ripped stock markets across the globe apart.

During this time, KNM was struggling to overcome its financial woes after a large expansion in Europe in early 2008. The company acquired German-based Borsig, a company that has a strong technological and manufacturing presence in the area of waste heat recovery systems.

The Borsig price tag was 350 million euros (RM1.67bil) then. To complete the acquisition, KNM undertook a rights issue of RM2.2bil. After utilising the proceeds of the rights issue to settle a portion of the 350 million euros, there was a sum of 150 million euros left that was to be settled via an exchangeable bond issue.

The poor stock market sentiment, coupled with the liquidity crunch and oil price crash, caused its financing plans to go haywire. KNM had to abort its bond issue. As it negotiated with the banks to convert the 150 million euros into a long-term loan, the stock took a beating.

Within four months of June 2008, it fell from RM2.20 to less than 70 sen. Lee had to sell some of his shares to cover his margin positions. Since then, KNM and Lee have no longer been in the news except in June 2010 when he and another party explored the idea of taking KNM private. The deal failed.

After an almost eight-year hiatus, Lee is finally speaking to the media again.

A close associate says that the single-largest shareholder of KNM, with a 21.2% stake, has been waiting for the right moment to talk about the company’s transformation into a renewable energy player, which he says is bearing fruit.

Below are excerpts of the interview.

Can you update us on how KNM’s transformation into a renewable energy major is progressing?

We are making good progress in this space, with the first phase of our bio-ethanol plant in Thailand coming onstream in the fourth quarter of this year. The first phase of this project, which comes with a daily capacity of 200,000 litres, will contribute to about 15%-20% of our bottom line for the financial year ending Dec 31, 2017.

By mid-2018, the second phase of our bio-ethanol plant, which has a similar capacity of 200,000 litres per day, will come onstream.

We also have a waste-to-energy project in Peterborough, the UK, which will see the first phase involving a capacity of 18MW starting commercial operations by the first quarter of 2018. For the Peterborough project, we have planning approval for up to an 80MW capacity. So, we have 80% more to develop in the future. We will do this in phases, with the aim of achieving the maximum capacity within five years.

We are moving very actively in this.

But over and above that, the opportunities for us to get contracts in the waste-to-energy segment are also strengthening. Locally, we have already secured two of such projects in Negri Sembilan. So, you can see we are becoming more and more of a renewable energy player – both on the contracting side as well as the developer-operator side.

What drove you to undertake such transformation?

The whole idea is to develop a business model to generate a recurring income stream for the company so that it will be more resilient and less susceptible to cyclical factors.

We got our wake-up call in the aftermath of the 2008/09 global financial crisis. Prior to 2008, we were very dependent on contracting income to drive growth, and at that time, nobody really cared whether it was a contract or recurring income because customers kept knocking on our doors to give us orders.

But the business landscape changed after 2008. The contracting environment became very volatile and we were hit. After 2008, we tried to rebuild the company in several ways. The first thing we did was to enhance our balance sheet, and then, dispose of our “bleeding” subsidiaries.

The third thing we are doing is moving into a recurring income business model, focusing on what we know best, that is, bio-fuel projects, where we have expertise in the processing side and also through our historical experience through Borsig where we gained experience in waste-to-energy technology.

When will renewable energy start contributing to the group?

We will reap the fruits by the end of this year.

Contributions from the renewable energy segment will account for 15%-20% of the group’s income for 2017.

Then, with contributions from our 18MW Peterborough waste-to-energy project and the second phase of our Thai bio-ethanol project coming in when they become operational, we expect the renewable energy segment to account for 30%-40% of our total income in 2018, and this will eventually grow to 70% by the next five years.

How profitable is your bio-ethanol plant in Thailand and the Peterborough project?

In the first phase of the Thai project, we expect a net profit of RM10mil per year.

As for the Peterborough project, at an 18MW capacity, we are looking at a net profit of RM50mil per year.

One thing good about our project in Thailand is that we have a tax incentive for 18 years after commissioning, that is until 2036. The incentive gives something like nine baht (RM1.05) per litre, and that gives us good security in terms of a stable recurring income.

For our Peterborough project, 50% of the income will come from the fees for the waste we collect from municipal councils. And we expect this fee to increase, as the country has no more landfill space, and with Brexit, the country will be subject to about 20% tax if it exports waste to the European Union (EU), which it is currently doing tax-free.

If the UK had to pay 20% more for exporting waste to the EU, then it might as well pay us 5%-10% more to take the waste to produce energy.

The other half of the income of our Peterborough project will be made up of 25% government incentives and 25% electricity sale.

With this transition, does it mean that there will be less focus on your original business?

We will still continue to expand our contracting business in the downstream O&G segment, and contribution from this segment will continue to grow, along with our renewable energy business.

The only thing is that our contracting business will feature less prominently when contributions from the renewable energy segment reaches maturity. For instance, our income structure in the next five years will be 70% renewable energy and 30% contracting.

With our renewable energy segment being a recurring income business, we will be more resilient.

Are you looking to buy any potential new assets?

No, we are not actively looking around. But of course, if good opportunities arise, we will consider, but they have to be one that can enhance our recurring income stream and add to our core competencies.

Our cash pile of RM130mil is mainly to cater to our working capital.

How would you manage in the event of another global economic downturn on the horizon?

We don’t think we will be badly hit. Our existing order book can keep us busy for at least two to three years. After that, our renewable energy will reach maturity stage and we will see our earnings being further strengthened, and by then, the economic environment would likely have stabilised.

Is the low oil price environment negatively affecting you?

Our problem today is market perception. Just because we are in the O&G industry, the market thinks we are in a dreadful position now because of the low oil prices. They don’t differentiate between a downstream and upstream player.

We are a downstream player, catering to the petrochemical and refining segment. Downstream players like us are doing better because the feedstock costs are lower in the current low oil price environment. Projects are coming in for us because there is now more demand for petrochemicals.

How are you addressing the market perception problem?

We are making good progress to address the problem by meeting with fund managers and bankers. The fact is, we will be more resilient going forward and our balance sheet will continue to strengthen. And many are beginning to understand our business model better and see the prospects of our renewable energy. A good indicator of bankers’ growing confidence in KNM is the ease of us securing financing from them despite the current challenging environment.

Our low gearing ratio (at 0.27 times as at end-2015) has enabled the company to undertake high-capital expenditure and long-term recurring-income projects. And we are in the position to build our own projects for our recurring income stream.