PETALING JAYA: Two leading steel players are combining their steel bars and billets businesses in a RM1.65bil partnership deal, with the ultimate aim to list the soon-to-be-established joint-venture (JV) company on Bursa Malaysia.
The proposal by the country’s largest steel company by market capitalisation, ANN JOO RESOURCES BHD, and SOUTHERN STEEL BHD is mooted at a time when the local steel industry is hit by weak demand and depressed selling prices.
The JV is aimed at creating South-East Asia’s highly-competitive long product steel manufacturer.
An equity analyst told StarBiz that the move could boost the utilisation rates of production plants owned by Ann Joo and Southern Steel as well as reduce the manufacturing costs by achieving greater economies of scale.
“The decision to team up for the manufacturing of long product steel will be key in improving the financials of Ann Joo and Southern Steel, both of which are currently in the red, ” he said.
However, the proposal seemed to have received mixed reactions from investors.
Ann Joo’s shares dropped by about 4.88% or six sen to RM1.17 yesterday, following the announcement that a memorandum of understanding has been signed by Ann Joo and Southern Steel to form a JV.
However, Southern Steel stock rose by 4.08% or four sen to RM1.02.
The counters were suspended in the morning session from 9am to 12.30pm prior to the announcement.
Under the proposal, Ann Joo will be disposing of its entire interest in Ann Joo Integrated Steel Sdn Bhd, Ann Joo Steel Bhd and Saga Makmur Industri Sdn Bhd to the yet-to-be-established JV for RM907.5mil.
As for Southern Steel, it would dispose of Southern Steel Rod Sdn Bhd, Southern Steel Mesh Sdn Bhd, Southern PC Steel Sdn Bhd and Danstil Sdn Bhd to the JV for RM742.5mil.
Post-completion of the corporate exercise, the JV company will become a 55%-subsidiary of Ann Joo and a 45% associate of Southern Steel.
As an integral part of the proposal, the JV company will apply for listing on the Main Market or “any other agreed recognised markets” as soon as the profit track record for the listing of the JV is achieved for the financial year ending Dec 31,2020 (FY20).
In the event the profit track record is not achieved by end-FY20, the JV’s listing will be applied once the profit track record is achieved at a later date.
In a filing with Bursa Malaysia yesterday, Ann Joo said the JV would offer synergistic benefits to itself and Southern Steel.
“The proposal seeks to realise various benefits, including the ability to leverage on each party’s market reach, product range and human capital to drive the business in both domestic and export markets and contribute significantly to the infrastructure development and industrial sectors of Malaysia, ” said the company.
Ann Joo added that the JV company would be able to improve the working capital position of its combined operations and achieve a strong balance sheet to support long-term expansion opportunities.
“The pro forma effects of the proposal on the net assets, gearing, earnings and earnings per share of the company will be included in the detailed announcement of the proposal to be made on Bursa Securities at a later date upon the execution of the definitive agreements to effect the proposal, ” it said.
Meanwhile, in a separate filing with the stock exchange, Southern Steel said the combined businesses under the JV will create an enlarged group with an extended range of steel manufacturing services to enhance business sustainability.
“Southern Steel will continue to participate in the growth of its steel manufacturing business and be able to develop high grade steel products through the JV company.
“The enlarged JV company is expected to enhance its ability to compete in the international market place and be a major contributor to the industrial development of Malaysia, ” said Southern Steel.
Upon completion of the corporate exercise, Southern Steel will no longer be able to consolidate the earnings from the disposed assets, as the JV will become a 45%-associated company of Southern Steel.
However, Southern Steel pointed out that it would continue to recognise its share of profits from the disposed assets as well as the share of profits from Ann Joo’s disposed assets via its shareholdings in the JV company through “share of profit in associated companies”.In recent times, Ann Joo and Southern Steel have been affected by the steel industry’s challenging operating environment.
Southern Steel posted net losses of RM34.85mil in the fourth quarter ended June 30,2019 compared with a net profit of RM35.20mil a year ago.
As for Ann Joo, in the second quarter ended June 30,2019, it posted net losses of RM37.75mil compared with a net profit of RM20.70mil a year ago.
In the first half, it registered net losses of RM44.35mil compared with a net profit of RM82.14mil in the previous corresponding period.
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