Khazanah makes the right bet

Farm Fresh Bhd managing director and group chief executive officer Loi Tuan Ee’s impossible story of grit and endurance in building the Holstein Milk Company Sdn Bhd (the original name of Farm Fresh Bhd) from ground up definitely qualifies to be a chapter in the encyclopedia of entrepreneurship.

THE story of homegrown brand Farm Fresh is very well documented by the media.

Farm Fresh Bhd managing director and group chief executive officer Loi Tuan Ee’s impossible story of grit and endurance in building the Holstein Milk Company Sdn Bhd (the original name of Farm Fresh Bhd) from ground up definitely qualifies to be a chapter in the encyclopedia of entrepreneurship.

For what it’s worth, Farm Fresh was the most anticipated Main Market initial public offering (IPO) of 2022 and despite the current poor market sentiment, Farm Fresh’s share price is still holding well at RM1.64 with a market capitalisation of RM3.05bil as at July 20, 2022.This is a good 23% above the IPO price of RM1.35. It is definitely trading at a premium valuation in current market conditions.

At its book building phase, many friends told me that they were going to try to get some pre-IPO share allocation. I remembered clearly telling them to forget it as it was too popular.

Indeed, the retail portion of the offering was oversubscribed by 18.74 times. Let’s not forget the record 30 cornerstone investors –pretty much unheard of.

This brings me to the lesser-known story of how Khazanah Nasional Bhd made one of its best investment decisions of all time –investing in Loi’s and chief operating officer Azmi Zainal’s dream.

Apart from the EPF, Khazanah has probably one of the most well regarded reputation in terms of its professionalism in managing the country’s funds.

Back-of-the-envelope calculations show that Khazanah’s investment has grown over the course of 11 years to a stake worth RM1.09bil (RM366mil realised during the pre-IPO offer for sale and RM725mil value of the current 11.8% holding). When the IPO of Farm Fresh successfully concluded, Loi sent out dinner invitations to some of the senior leaders of Khazanah, as he felt a sense of gratitude to them for believing in him and giving him the opportunity when others doubted him.

It is not just the pedigree of its talent pool within the organisation, it is how the organisation has proven itself by growing an initial government seed capital of RM2.6bil worth of government assets in 1994 (of which only RM100mil was cash) to its current net asset value of RM86bil as at end-2021.

No doubt, over the years, the country’s leading sovereign wealth fund has courted flak for some investment decisions which caused major blips in its performance, such as the continuous bailout of a bleeding Malaysia Airlines or missing out on MyTeksi (today known as Grab) opting to invest in Uber instead.However, it is important to know that Khazanah has to balance its role not only as an asset manager, but also as the guardian of strategic national assets. At times, social welfare takes priority over earnings and profitability.

But Farm Fresh was a real game-changer for Khazanah. With an initial RM20mil seed capital in exchange for a 30% stake in Farm Fresh back in 2011, the investment delivered more than a 54-fold return following the recent IPO.

Back-of-the-envelope calculations show that Khazanah’s investment has grown over the course of 11 years to a stake worth RM1.09bil (RM366mil realised during the pre-IPO offer for sale and RM725mil value of the current 11.8% holding). When the IPO of Farm Fresh successfully concluded, Loi sent out dinner invitations to some of the senior leaders of Khazanah, as he felt a sense of gratitude to them for believing in him and giving him the opportunity when others doubted him.

They were reminiscing the good old days when Loi was still working the supermarket floors and Azmi was working the bazaars.

At the time, Loi was writing a long email to Datuk Amran Hafiz Affifudin hoping to seek Khazanah’s investments to grow the venture.

They needed larger tracts of land for the cows to graze and also to build their own milk-processing facility.Just as he was about to send the email, Amran decided to visit their farm. Following the site visit, Amran was very impressed and invited Loi and team to meet with his senior leadership.

Following the presentation by Loi, the proposal was brought up to the investment committee and board for the final decision.

Although Khazanah had a lot of headaches in the past when it comes to the ROI for agricultural ventures, this was one of the projects which potentially could meet the profitability, social welfare and national agenda goals.

The initial seed capital eventually funded Loi’s company growth and Khazanah’s network helped facilitate the subsequent lease of the tract of land in Pahang for the farm (known today as Farm Fresh Milk Muadzam Shah).

Loi knew if he could execute it well and fill the area with sufficient cows to produce the quality he hoped for, it would likely be a home run. Well as they say, the rest is history.

It is sexy to build the next unicorn with ludicrous valuations and being regarded as billionaires despite running a loss-making business. We have seen that is how most “successful entrepreneurs” are defined these days.

As the global markets are heading to a possible recession, the flaws in our modern capital markets, especially within the venture capital and private equity sector, is even more apparent.

Going back to the basics, as simple as planting crops and creating actual value is highly crucial at a time when food security is of paramount concern to leaders around the world. I have not seen such a huge paradox within a short span of time, especially in the past two years.

While managing our clients’ monies, I often ask the team, “What kind of fund managers do you want to become? Do you want to be one that chases profits and delivers the highest possible returns without regards to the fundamentals of a business? Or do you want to invest in good companies and grow with the amazing entrepreneurs driving it?”

We often come to the conclusion that we prefer the latter, simply because it is more sustainable and would likely withstand the test of time.Steve Jobs once said, “The ones who are crazy enough to think they can change the world are the ones who do.” I am particularly impressed by Farm Fresh because it is a true-blue Malaysian story by a man crazy enough to dream.

I know the youth of today often admire tech entrepreneurs in the Western world and seek out greener pastures abroad. Many tend to dismiss the possibility that grazing local pastures may be just as rewarding.

Farm Fresh is living proof that not only agriculture can be lucrative, but the friendship of two men from different ethnic backgrounds can work hand in hand to build a great enterprise for the betterment of the country. It simply does not get better than this.

Let me put it this way, if Farm Fresh was listed prior to the publication of my book, it would definitely have a place in it.

Ng Zhu Hann is the CEO of Tradeview Capital. He is also a lawyer and the author of “Once Upon A Time In Bursa”. The views expressed here are the writer’s own.