Pos Malaysia dilution poser

Will minority shareholders allow their stake in the postal company be diluted?

A FEW things would be on the minds of Pos Malaysia Bhd’s minority shareholders when voting on whether the company should buy the logistics assets of DRB-Hicom Bhd.

For starters, are they willing to allow their stake in Pos Malaysia to be diluted following the asset injection exercise by DRB-Hicom?

Last December, DRB-Hicom had proposed to inject its logistics assets such as KL Airport Services Sdn Bhd (KLAS) and a parcel of freehold industrial land in Shah Alam, Selangor into Pos Malaysia.

DRB-Hicom, which already owns a 32.21% stake in Pos Malaysia, will be issued with 245.75 million new Pos Malaysia shares for those assets.

This in turn will raise DRB-Hicom’s stake to 53.5% in Pos Malaysia, thereby diluting all other minority shareholders in Pos Malaysia by 32%.

Second, for breaching the 33% threshold of shareholding, DRB-Hicom is seeking a waiver from having to make a general offer for the rest of the shares of Pos Malaysia.

One Pos Malaysia shareholder believes that any waiver given to DRB Hicom would be unfair as that would take away their option to exit the company if they are not in favour of the exercise.

“While we are positive on the proposal of turning Pos Malaysia into an integrated logistics player, we feel that any waivers given to DRB-Hicom from making a mandatory offer would take away minority shareholders’ rights.”

DRB-Hicom would need to get Pos Malaysia’s shareholders approval on the proposed acqusition of assets from DRB-Hicom.

Pos Malaysia shareholders would also be voting on whether to give DRB-Hicom the waiver from having to undertake a general offer of the remaining Pos Malaysia shares.

Pos Malaysia would be having its extraordinary general meeting to vote on this deal on August 18.

DRB-Hicom group managing director Datuk Seri Syed Faisal Albar told reporters on Wednesday that the group did not plan to take Pos Malaysia private.

Another Pos Malaysia shareholder says that although he is likely to vote for the purchase of the logistics assets, he reckons that the price of the assets is “too high” especially for the 9.9 acres of land in Seksyen 28, Shah Alam.

The proposed acquisition is divided into two parts: first is to inject KLAS into Pos Malaysia from DRB-Hicom Bhd for RM749.35mil, and secondly is a RM69mil price tag for a piece of freehold land in Shah Alam.

At RM69mil, the land is valued at RM159.8 per square feet.

According to DRB-Hicom, the land has been earmarked to build a warehouse to support the upcoming logistics operation for Pos Malaysia.

Meanwhile, on KLAS, it has three main assets, namely, DRB-Hicom Asia Cargo Express Sdn Bhd, KLAS Engineering Services Sdn Bhd and Konsortium Logistik Bhd, which is one of the largest haulage and transport companies in the country.

KLAS Engineering handles and receive cargo, while Konsortium Logistik operates in both land and sea and Asia Cargo Express mainly focusing on cargo operation in Sabah and Sarawak.

Pos Malaysia provides the last mile services to the public.

For the financial year 2015, KLAS posted a net profit of RM8.3mil on the back of RM530.27mil.

A huge chunk of KLAS’ revenue in 2015 is mainly from Konsortium Logistik, which posted RM303.9mil in revenue.

The largest shareholder in Pos Malaysia is DRB-Hicom, followed by Employee Provident Fund, Retirement Fund Inc or Kwap and Aberdeen Islamic Asset Management Sdn Bhd with 13.8%, 12.3% and 11% stake respectively.

The whole acquisition will be paid with new shares of Pos Malaysia at issue price of RM3.33 apiece.

It is worth noting that the shares are to be issued at RM3.33 per share,which is at a 17% premium to Pos Malaysia’s close of RM2.85 yesterday.

According to a circular to Pos Malaysia’s shareholders, Kenanga Investment Bank, an independent adviser to the deal, said that the proposed acquisitions of KLAS and a parcel of land in Shah Alam for RM818.35mil is “fair and reasonable”

Integrated logistics player

For DRB-Hicom, its plan to be in the logistics sector could be traced back in the last four years that saw the group on an acquisition spree that saw it buy into significant parts of the logistics chain.

In July 2011, DRB-Hicom bought a 32.2% stake in Pos Malaysia from Khazanah Nasional Bhd for RM662.8mil or RM3.60 a share.

Following that, in 2014, DRB-Hicom completed its takeover of Konsortium Logistik Bhd through KLAS for RM392mil or RM1.55 share, and bought Asia Cargo Express (formerly known as Gading Sari) for RM72mil cash, or RM4.80 per share in 2015.

In total, DRB-Hicom paid RM1.12bil for its logistics acquisitions.

Syed Faisal says: “Since 2011, DRB-Hicom had been working on reducing its dependency on the automotive and property sector, which are vulnerable to the economic cycle.

“We decided that the services sector particularly logistics sector is one area where we would like to be in.”

According to DRB-Hicom’s presentation materials to its shareholders, the management said the group could provide the total logistics solutions but all the components are not under one roof.

“We want to grow Pos Malaysia’s position as a key logistics players in Malaysia via diversification into postal logistics business, which Singpore Post has been successful,” it says.

Another positive for DRB-Hicom is that Pos Malaysia is cash rich company sitting on RM638mil cash and low borrowings of less than RM100mil.

With the proposed injection of KLAS into Pos Malaysia, DRB-Hicom has a five-year plan to reduce its dependency on its core automotive and property businesses.

It plans to do this by introducing new service offerings in the areas of logistics.

Presently, the automotive and property businesses contributed 81% to the group’s total annual revenue, while the remaining 19% is from its services segment that include logistics and financial services.

The need for DRB-Hicom to grow its other businesses can be seen in its latest annual results.

For the financial year ended March 31, 2016, DRB-Hicom posted a net loss of RM991.9mil from a net profit of RM300.2mil a year ago, mainly due to the poor performance of its automobile manufacturer Proton.

In the logistics space, GD Express Carrier Bhd (GDex) is the largest carrier service provider in Malaysia in terms of market capitalisation, which stands at RM2.1bil.

It’s shares trade at a lofty 69times historical earnings. Pos Malaysia comes in second with RM1.54bil in market capitalisation and its shares trading at 24 times earnings multiple.

With Gdex having a company like Singapore Post as a major shareholder and considering the high multiples Gdex trade at, it is clearly an industry that investors like. Hence the question is whether Pos Malaysia can ride this logistics wave with these new assets it is going to buy.