The group will focus on growing chemical and polymer businesses post-demerger
Chemical Company of Malaysia Bhd (CCM) is working towards building up its capacity in chemicals and polymers production in anticipation of stronger demand from local and regional markets.
According to CCM group managing director Leonard Ariff Abdul Shatar, both the group’s chemicals and polymers businesses are growing quite robustly, riding on the positive prospects of, among others, the rubber glove industry as well as the refinery and petrochemical integrated development, or Rapid, project in Pengerang, Johor.
Hence, the group will focus on nurturing the two core businesses once it demerges from its lucrative subsidiary CCM Duopharma Biotech Bhd .
“We are investing in businesses that we know, and what we are trying to do is to nurture our chemicals and polymers businesses so that they could grow larger than where they are at the moment,” Leonard Ariff said at a recent press briefing on CCM’s proposed degearing and demerger exercises.
“At present, both our chemicals and polymers businesses are already operating at very high capacity.
“Both require specific investments in order to improve their performance to get to optimal levels ... some of the expansion can be self-funded, while some others may require some gearing to be added on at a later date,” he notes.
CCM is expected to spend at least RM10mil in capital expenditure this year for its chemicals business, after having spent RM50mil last year.
And without specifying a number, Leonard Ariff says the capex for the group’s polymers business this year is also expected to be substantial, as it needs to “debottleneck” capacity at its plants.
“One of the reasons for the demerger (of CCM from CCM Duopharma) is that we hope a lot more focus will be given to chemicals and polymers because there is huge potential in both the businesses,” Leonard Ariff says.
He points out that the growth of both the chemicals and polymers businesses have been quite steady over the last few years, as product prices have been quite stable.
“These are commodity businesses (which are subject to cyclical fluctuations)... however, they have been able to show encouraging performance even during downcycles,” Leonard Ariff says.
So, what’s more, he notes, now that the industry is in an upcycle, resulting in the group’s chemicals and polymers businesses “growing at a rate slightly above the country’s gross domestic product”.
CCM at present commands about 35% of the chemicals-product market share in Malaysia.
The group’s polymers business also commands quite a “sizeable” market share in the country.
Historically, CCM earns around 40%-50% of its revenue and earnings from its chemicals and polymers units, while its pharmaceuticals business, through CCM Duopharma, contributes more than 50% to the group’s top and bottom lines.
On that note, CCM will likely see its revenue and profit base slashed by more than half once CCM Duopharma ceases to be its subsidiary in a demerger exercise is expected to be completed by January 2018.
Leonard Ariff acknowledges that post-demerger, CCM will become a smaller organisation, with a lower earnings base, but it will also be one with a significantly lower cost base as a result of the group’s degearing exercise that will be taking place concurrently with the demerger exercise.
“Undoubtedly, we will have lower net profit, but our margins will be better, going forward.
‘Suffice to say, our margin definitely be higher than the current 8%-10% post-demerger,” Leonard Ariff says.
Importantly, he notes, CCM will emerge as a company with a lighter balance sheet and lower cost base upon the completion of its ongoing restructuring exercise.
He argues that there are merits to operate on a more nimble scale, as it gives the company the opportunity to enhance its efficiency and ability to respond to market changes.
“We will be able to utilise our resources more effectively and efficiently, and promote strong growth for our chemicals and polymers businesses,” Leonard Ariff explains.
Returning to the black
CCM is among the latest entities under Permodalan Nasional Bhd (PNB) stable to undergo a restructuring exercise.
At present, PNB owns a 70.25% stake in CCM, which, in turn, has a 73.4% stake in CCM Duopharma.
The country’s largest fund manager also has a direct 4% stake in CCM Duopharma.
However, PNB’s direct stake in CCM Duopharma could increase to about 51% post the demerger of the company from CCM via dividend in specie.
This is based on the assumption that PNB does not participate in the upcoming private placement of CCM’s shares.
CCM over the week announced a series of corporate exercises, which included the proposed demerger of CCM Duopharma and proposed degearing exercise through the sale of three parcels of land measuring 70.93 acres in Shah Alam for RM190mil and a private placement of new CCM shares to raise up to RM67.6mil.
Under the proposed restructuring exercise announced on Wednesday, CCM would redistribute its entire 73.37% stake in CCM Duopharma to its shareholders. The move would result in the demerger of the two companies.
And to reflect its reduced size post-demerger, CCM would undertake an exercise to consolidate its shares on the basis of three to one.
Upon the completion of the restructuring exercise, PNB will remain as a major shareholder in CCM, with a stake of 64.29%.
CCM’s demerger and degearing exercises are part of a strategic review which began in 2015, whereby the group merged all its pharmaceutical businesses under the CCM Duopharma umbrella in 2015 and exited the fertiliser business in 2016.
CCM’s fertiliser business was the main culprit of the group’s losses from the financial years ending Dec 31, 2014, through 2016.
“After having solved our P&L (profit and loss) between 2015 and 2016, we are now shifting our attention to strengthening our balance sheet,” Leonard Ariff says, acknowledging that CCM is still carrying a huge debt burden.
He reveals that CCM at present has debts of about RM440mil, of which RM400mil are long-term loans and RM40mil working capital credit.
For that, CCM spends RM21mil annually in interest costs to service its debts.
According to Leonard Ariff, CCM’s aim is to reduce its debts to RM100mil, which would effectively reduce the group’s gearing from the current 0.7 times to 0.6 times.
“While the reduction in gearing ratio appears marginal, the implication on our interest payment is very high... any savings will contribute to our bottom line,” he explains, adding that he expects CCM’s annual interest costs to be cut by 75% post degearing exercise.
Separately, Leonard Ariff points out that CCM could raise gross proceeds of around RM65mil from the sale of its two other identified non-core assets, namely, the Nilai Industrial Land and the group’s 8.45% equity stake in Korea-listed PanGen Biotech Inc.
These will go towards further paring down its debts.
Essentially, the proposed degearing initiative will lighten the balance sheet for CCM, while the demerger exercise will give shareholders direct ownership in both CCM and CCM Duopharma, and participate directly in the growth of the two separate entities.
According to Leonard Ariff, demerging CCM Duopharma from CCM will benefit the pharmaceutical company, as the move allows the pharmaceutical company to expand further without being weighed down by CCM’s debt burden.
“CCM Duopharma has a lot of business proposals and potential to expand, but as long as it is still a part of CCM, it will come to a stage where the company will be bound by the loan covenants at the group side.
“This will limit CCM Duopharma’s ability to borrow to finance its expansion. So, it is better to split the company from CCM,” he explains.
Post-demerger, the free float of CCM Duopharma is expected to increase to about 40% from the present 26%.
For the first quarter ended March 31, 2017, CCM Duopharma saw its net profit increase 21.9% to RM9.56mil, or 3.43 sen per share, from RM7.84mil, or 2.81 sen per share, in the corresponding quarter last year.
During the quarter in review, CCM Duopharma’s revenue rose 55.2% to RM123.31mil from RM79.47mil in the previous corresponding period.
CCM Duopharma attributed its revenue and earnings growth to the supply of insulin pursuant to the commencement of a distribution agreement with a business partner and increased demand from Government hospitals via other tender business.
CCM, on the other hand, returned to the black after three years of chalking up losses.
For the first quarter ended March 31, 2017, the company posted a net profit of RM8.23mil, or 1.81 sen per share, compared with a net loss of RM250,000, or 0.06 sen per share, in the previous corresponding period.
The group said improved sales in all its businesses contributed to its earnings growth.
During the quarter in review, CCM’s revenue rose 40% to RM212.24mil from RM151.53 mil previously.
It said the higher revenue was mainly contributed by increased contributions from the group’s pharmaceuticals and chemicals businesses.
CCM’s shares fell one sen to close at RM1.56 yesterday. Year-to-date, the counter had gained about 77%.
CCM Duopharma shares, on the other hand, fell seven sen to close at RM2.04 yesterday. This represented a year-to-date gain of about 5%.