HEXTAR Global Bhd has ramped up its merger and acquisition (M&A) activities to diversify into the specialty chemicals sector. The group is among the largest agrochemical producers in Malaysia.
In July this year, the group acquired the Chempro Group for RM138mil.
The deal for Chempro, which provides niche specialty chemicals products for cleaning, hygiene and food as well as rubber glove industries in South-East Asia, came with a profit guarantee of RM39mil over three years which translates to a profit after tax (PAT) of RM13mil a year until financial year ending Dec 31, 2023 (FY23).
Also in July, Hextar Global proposed to acquire the Nobel Group for RM105mil.
The Nobel Group manufactures and supplies chemical derivatives, coating and related products and its customers include the large rubber glove makers.
The deal for Nobel, expected to be completed by early October, also comes with a profit guarantee of RM42mil over three years, which translates into a PAT of RM14mil per year.
Hextar Global executive director Datuk Eddie Ong Choo Meng (pic) is not concerned by analyst reports of lower average selling prices (ASPs), higher compliance costs and intensified competition that are expected to weigh down on glove makers’ profitability.
A recent Hong Leong Investment Bank (HLIB) Research report opines that all glove makers will scale back on their expansion plans and be more disciplined in the commissioning of new lines, so as to not flood the market with excess supplies or put downward pressure on ASPs.
“We do not see this as an issue. Even though glove makers may be scaling back on their expansion plans, Malaysia is still currently the world’s largest producer, producing over a 100 billion pairs in 2020.
“Hence, the existing production is already very large. We are confident that Chempro Group and Nobel Group will meet their profit guarantees,” Ong tells StarBizWeek via email.
In July, Hextar Global also proposed to enter the oil and gas sector via buying a 49% stake in Enra Kimia for RM24.5mil cash, partnering Ekopintar Sdn Bhd which will buy the balance 51% for RM25.5mil from Enra Group Bhd.
Enra Kimia supplies specialty chemicals, catalysts and odorants, as well as provide ancillary services for these products to the oil and gas and petrochemical industry in Malaysia, Australia and New Zealand.
Ong points out that Enra Kimia is licensed to conduct business with national oil company Petroliam Nasional Bhd (Petronas), and has the skill and experience in handling hazardous chemicals that has taken years to acquire.
“The oil and gas industry is very difficult to penetrate. This opportunity was one which we could not refuse. Datuk Mazlin Md Junid (president and group CEO of Enra Group) has years of experience in the industry and is the driving force behind Enra Kimia’s business. We are very optimistic that our partnership in Enra Kimia will be a rousing success,” he says.
Ekopintar is partly-owned by Datuk Mazlin, who is also a director of Enra Kimia.
Ong also took into account that for the financial year ended March 31, 2021, Enra Kimia had recorded its lowest profits over the past three financial years, as the company was badly affected by the movement control orders due to the Covid-19 pandemic.
“However, as the economy is slowly reopening, we expect that business recovery for Enra Kimia will come swiftly. As it is, we are already seeing average crude oil prices recovering from circa US$40 (RM167) a barrel in 2020 to an average of US$65 (RM272) a barrel in 2021, and is now trending at above US$70 (RM293) a barrel in September 2021,” he says.
Ong says the acquisitions would enable Hextar Global to diversify its chemical product offerings to industries which are core drivers of the Malaysian economy.
He explains the group’s recent diversification allows it to expand its earnings base, and thus reduce its dependence on just one sector or industry.
“This makes us resilient. We still have the appetite to acquire companies and are always on the lookout for opportunities,” he says.
“We foresee that contributions from the specialty chemicals sector will be the catalyst for our future earnings growth, whilst the agriculture segment will continue to be the bedrock of our group,” Ong explains.
Ong recalled that two years ago, when Hextar Global was formed after Hextar Chemicals Ltd group merged its agrochemicals business with Halex Holdings Bhd, he had told investors that its strategy to grow was through M&As.
“The agriculture industry is also a mature industry where you will not find new plantations being developed overnight. Hence, the fastest way to grow further and to expand our earnings base would be through M&As,” he explains, adding that the group still wants to continue to grow its presence in the agriculture industry.
“Hextar Global’s background is in agriculture and we have extensive knowledge of the industry. We will leverage on this knowledge to seek out opportunities to expand in other agriculture related businesses,” he says.
Ong noted that agriculture remains a vital sector in the country’s economy, and is expected to be among the main focus areas in Budget 2022 as the government looks toward reducing the country’s dependency on imported food in the long run.
Hextar Global is the leading crop management solutions provider in Malaysia with a strong global presence, due to its specialised agrochemical products supply chain.
Currently, about 95% of the group’s revenue comes from its agriculture segment, and the balance 5% is contributed by its consumer products segment which produces disposable healthcare items such as wet wipes, tissue and cotton-based products.
In a report, PublicInvest Research noted that Hextar Global’s consumer products segment had slipped deeper into the red with a net loss of RM800,000 in the recent second quarter ended June 30, 2021 (2QFY21).
Ong explains that the segment was badly affected by movement restrictions as many retail outlets and shopping malls were closed.
“These are our main distribution channels. We will, however, continue to work hard at turning around this business as we still believe it is a good business with products that are widely used by a wide range of consumers and where demand remains strong. It was already breaking even before the pandemic broke out. We just need to make some adjustments to our distribution model and cost structure,” he says.
For 2QFY21, Hextar Global’s net profit fell 33% to RM7.44mil, from RM11.1mil a year ago while revenue fell 2% year-on-year to RM98.7mil.
The agrochemical group had blamed the reduced profits on lower revenue and gross profit margin, due to higher raw material prices and overhead costs.
Ong explains that the high raw material prices was due mainly to the disruption in the supply chain as well as logistics issues, resulting from the global pandemic.
“With our experience having been in this business for over 30 years, we had anticipated the impending rise in raw material prices and had stocked up on certain raw materials. Our raw materials do not have a shelf life and hence we are not limited by the expiry of our stocks. This allows us to manage our product costing more effectively. However, we were still affected by the increase in prices due to the prolonged disruption,” he says.
Ong notes that the group’s products are priced on a “cost plus”’ basis, and for shorter term supply contracts, margins are adjusted to reflect current market prices.
“In the interest of our long term relationship with our customers, we always work toward ensuring our products are priced competitively. For supply contracts which are based on tenders, prices are locked in for the period of the contract, for example, one year. In such cases, we would have to manage the purchase of raw materials to ensure that the cost is within the contract value and our margins are protected,” he explains.
He points out that the group had done well in 2QFY21 despite complying with the 60% workforce limit which was imposed from May 2021 and “only recently relaxed”, and added that the group also had to cease operations for two weeks in June due to movement restrictions.
Ong says he is optimistic about the outlook for the rest of the year and going into 2022.
“We should be completing the integration of the Chempro business, the Nobel Group and also Enra Kimia by end-2021 and can look toward consolidating their results. For Enra Kimia, the transaction is subject to the approval of the shareholders of Enra Group by end-2021. So, we have much reason to be optimistic and I am looking forward to begin 2022 as an enlarged and diversified chemicals group,” he says.
Ong says while the group has set itself growth targets for the next five years, he prefers not to reveal them.
“I believe that our track record in growing Hextar Global, from the time we merged our agrochemicals business with Halex Holdings two years ago, to where we are now, should be a good indication of the kind of growth rate which we are targeting.”
As for challenges, he says finding the right talents would be near the top of his list.
“As the M&A activities increase and our businesses continue to diversify, there will be an increasing need to hire capable talent to help manage these businesses effectively and efficiently,” says Ong.