Ekovest transaction raises questions

THE related party transaction (RPT) between Tan Sri Lim Kang Hoo (pic)-controlled companies, namely Ekovest Bhd and PLS Plantations Bhd, has raised some eyebrows.

The transaction involves Ekovest buying a 23.42% stake in PLS from Serumpun Abadi Sdn Bhd, a company controlled by Lim, who is its executive chairman, for RM76.5mil cash.

Lim is also the executive chairman of Ekovest, owning a 40% stake in the company.

The PLS deal comes a year after Lim proposed that Ekovest buy a 62% stake in Iskandar Waterfront City Bhd, a public-listed property development company based in Johor.

However, shareholders of Ekovest had shot down the proposal.

According to a filing with Bursa Malaysia, Ekovest says that the move to buy a stake in PLS is to transform Ekovest into “a larger listed conglomerate” with “a larger portfolio of diversified business.”

It is worth noting that PLS is a loss-making company over the past three years that is involved in the oil palm and durian plantation businesses.

In an email reply to StarBizweek, Lim says he is optimistic that PLS would return to profitability “by having Ekovest as a shareholder.”“Ekovest is going to be the single largest shareholder in PLS and we have our internal strategies to help turnaround the PLS Group in the mid to long term.

“We are optimistic on PLS group returning to the black and this will contribute positively to Ekovest in the future,” he says.

He points out that although PLS is loss-making, the firm losses had dropped significantly in FY18 to RM5.24mil from RM19.4mil in FY16.

For Ekovest, Lim says the diversification in the plantation business can bolster the firm from any downturn in the construction and property development sectors.

UOB Kay Hian (UOBKH) Malaysia Research has raised two main issues on the transaction which can be negatively perceived by investors.

For one, it is on the valuation of PLS which it reckons to be quite “expensive”. Another is on the nature of the transaction.

UOBKH points out that in December 2015, Serumpun Abadi was nominated by Iskandar Waterfront Holding, a company that is also controlled by Lim, to receive specie dividend of 76.5 million PLS shares.

Now, Lim is selling that block to Ekovest for RM76.5mil cash or RM1 per PLS share.

“The RM1 per PLS share is slightly expensive in comparison with its peers involved in the palm oil business with market capitalisation of RM100mil to RM500mil,” UOBKH says. “While the reported higher implied price-to-book ratio is at 0.88 times versus 0.48 times of peer average.” On the three-year losses, UOBKH says that PLS revenue stream was volatile amid subdued CPO prices in FY18, while incurring higher amortisation cost in FY16-17.

Ekovest says it is aware of PLS’ financial performance but is optimistic on the latter’s potential and may consider acquiring more PLS shares.“When deciding on the pricing, we must look beyond the valuations and take into account the growth potential a company offers,” Lim says.

He says PLS has a large land bank that can be optimised for future plans or developments. He expects PLS to garner a strong yield growth in the coming years from its oil palm plantation as 84% of its trees are at the beginning stage of their “most productive years”.“The fresh fruit bunches (FFB) production of PLS has grown substantially from 51.62 tonnes in FY16 to 118.39 tonnes in FY18.

“This will only keep growing moving forward. Its prospects in durian plantation are also positive as the hilly areas at Ulu Selidi are suitable for durian crops,” Lim says.PLS Group, through its 70%-owned subsidiary Aramijaya Sdn Bhd, runs Ladang Hutan Ulu Sedili, a forest plantation project that covers a 35,223 ha within the Kota Tinggi and Mersing districts of Johor.

To further grow the prospects of its durian business, in October last year, PLS has proposed to diversify into the durian plantation and distribution business.

Under the deal, PLS is buying 70% of Dulai Fruits Enterprise Sdn Bhd for RM21mil.

The acquisition comes with a profit guarantee of no less than RM10mil for the financial years ending 2019, 2020 and 2021.

PLS will be having a shareholders meeting next Tuesday to get their approval on the proposed deal. Demand for durians from China has led to increased interest in large-scale durian farming in Malaysia.

According to Ekovest, durian is the most widely planted and harvested fruit in Malaysia in 2017, with 72,391 ha of planted area, representing 35.65% of the total planted area of major fruit crops.It adds that durian recorded total production of 210,874 tonnes with a total production value of RM2.79bil in 2017, which is the highest production value for fruit crops in Malaysia.

At the moment, Ekovest generates most of its revenue from the construction sector, followed by property development and toll concession for the DUKE highway.

For the second quarter ended Dec 31, 2018, Ekovest posted a 17% decline in net profit to RM43.9mil from RM53.1mil a year earlier. Revenue for the quarter, however, was higher, a 22% jump to RM361.2mil from RM295.6mil previously.

During the quarter, Ekovest says its construction and toll highway businesses are reporting growth in topline and bottomline, while property development reported a decline.

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