Advanced takes big step towards new business

Singapore

SINGAPORE'S mainboard-listed Advanced Holdings' compass is finally set for a big turn towards palm oil after the engineering services and equipment provider for the oil and gas sector won shareholders' go-ahead last week to acquire a minority share of Indonesian-based Agricore Global for S$15 million.

This is a much downsized deal, riddled with delays and costs Advanced about ten times less than the original intent two years ago to acquire the oil-palm cultivator lock, stock and barrel via a reverse takeover (RTO).

The question is: whom does it benefit, given the nascent operations of Agricore - a company founded and part owned by Indonesian timber tycoon Hery Hermawan Herijanto - that is capital-hungry and demands investors' forbearance given the gestation of four to five years, and especially since the deal is worth nearly 90 per cent of Advanced's market capitalisation.

"First, we need to acknowledge that all investments carry risks. This transaction was meant to be a RTO with Advanced but the board feels that this is the right commercial angle to take at this juncture," said Advanced chief financial officer Chua Chee How, in response to queries by The Business Times.

As for the deal being worth a chunk of Advanced's market value, Mr Chua blames it on the company's "depressed" stock price which has long traded below the net asset value per share. (Advanced's NAV stood at 57.06 Singapore cents as at end-2018; its shares closed at 16.8 Singapore cents on Thursday).

"We have not been rewarded with the right kind of valuation because of our strong association with the oil and gas industry. Perhaps, this is a good opportunity to diversify into another industry where we could still leverage on our capabilities."

Some minority shareholders, like private investor Conor McCoole, have misgivings.

"Agricore has a very large need for capital investment. Investing in a non-cash-generating business that requires a massive injection of cash, is not justifiable. The same cash - hypothetically - could be used to acquire approximately 5 per cent of Indofood Agri, a large, diversified, fully-funded, dividend-paying business with an extensive and integrated palm oil business," said Mr McCoole, who is executive chairman of Asia Biogas.

"This is not a criticism of Agricore but recognises the enormous financing challenges faced by palm oil companies, let alone one that is a greenfield business."

Others worry that Agricore could drain Advanced's cash kitty, which as at end-2018 stood at S$32 million, or that it would piggyback on Advanced to raise the much-needed capital down the road, more so given the business risks.

"I think the misconception is that when you have over a hundred thousand hectares (of land), you have to develop everything at the same time. Nobody does that," said Agricore chief executive Gerald Pang, who also owns an interest in Agricore and is Mr Herijanto's son-in-law.

Agricore, which is owned by a small group of private investors including the Herijanto family and Advanced director Ho Choon Hou, collectively owns rights to develop nearly 170,000 hectares of plantation land in Indonesia's Sulawesi island.

That hectarage - more than twice the size of Singapore - is a sweet spot given that the world's top exporters of palm oil, Indonesia and Malaysia, have curtailed expansion of plantation land banks as they tackle deforestation.

"(Existing) Land banks will be up for grabs over the next few years. We don't want to sell as we want to build value by developing the land," said Mr Pang, adding that the company was open to strategic tie-ups.

According to him, around 60,000 hectares are currently "plantable and sustainable" and will be cultivated in phases of 10,000 hectares each.

The company is currently working on the first batch and expects to finish planting over the next two to three years which means revenue could start flowing in by 2022-2023.

"We are also looking at strategic acquisitions of brownfield assets to boost our balance sheet and P&L (profit and loss)."

Advanced wasn't Agricore's first shot at a backdoor listing on the Singapore Exchange. In 2015, Izzisen Global, as Agricore was then called before it was renamed in 2016, planned an RTO on cash-rich Jaya Holdings.

The plan flopped within months. Jaya Holdings eventually opted for voluntary liquidation and in March 2018, was delisted for want of an underlying business.

In January 2017, Agricore took another RTO stab, this time with Advanced but the deal was bogged down for over a year and a half due to, as BT understands, discomfort among certain board members and lapsed last October.

Within days, an alternative plan was hatched for Advanced to instead buy 12.25 per cent of Agricore. Last week, shareholders voted overwhelmingly in favour of it.

Advanced's small stake in Agricore will give it a big say in the latter's business as its one director on board will have "affirmative vote" on key "reserved" matters such as budget, changes in Agricore's capital structure or business or future tie-ups.

The inducement for Advanced - a company founded, helmed and majority owned by Wong Kar King, an engineer who started the business in 1993 and took it public nine years later - to seek a new business is easy to appreciate.

The company has spent three fiscal years between 2013 and 2018 in the red. Topline over the period has nearly halved to S$62 million in 2018 while prospects remain clouded by lacklustre activity in the oil and gas space that has hurt margins.

Could Advanced be testing the waters with the minority deal involving Agricore and is this, as some market watchers expect, a prelude to a big merger between the entities?

Mr Chua, Advanced's CFO, said: "Given the right opportunity, we will consider."