Singapore-listed rubber firms eye rebound in prices and fortunes

Singapore

AS CHINA'S growth engine sputtered and the global economy slowed, prices for rubber - used mainly for tyres - have tanked, bringing the share prices of Singapore-listed rubber players along the same downward trajectory.

But they may be nearing the end of the tunnel, as the companies look to a rebound in rubber prices that they deem to have fallen too far already.

Halcyon Agri's share price has fallen from 79.5 cents at the start of 2014 to 62 Singapore cents last Friday; GMG Global, a subsidiary of Shanghai-listed Sinochem International, has more than halved to 47 Singapore cents from S$1.03; while Thailand-based Sri Trang Agro-Industry has been more resilient, gaining three cents to 53 Singapore cents over the same period.

Taking advantage of the depressed rubber market, all three have gone on the prowl for more factories and new plantation land.

Halcyon Agri's aggressive expansion, in particular, has caused the rubber sector to sit up in surprise. The group has embarked on a string of acquisitions to boost operations, from an initial two processing facilities when it listed on the Catalist board in 2013 to 14 in Indonesia and Malaysia currently, increasing its annual capacity ten-fold to over 700,000 tonnes.

The huge leap was in large part due to its purchase of Singapore-based Anson Company from Lee Rubber for S$450 million last year. Anson owns and operates nine crumb rubber - or rubber mainly from scrap tyres - factories in Indonesia.

The acquisition raised its gearing level significantly, but made Halcyon one of the world's top five rubber producers: it is expected to now supply 10 per cent of the world's natural rubber. Earlier this month, Halcyon secured refinancing of up to US$413 million - comprising an amortisable term loan and working capital facilities - to replace temporary facilities used for its acquisition of Anson.

The company has enjoyed the backing of high profile investors along the way. In 2013, famed angel investor Koh Boon Hwee's private-equity firm Credence Partners invested nearly S$30 million for a 13 per cent stake in Halcyon. His friend, billionaire businessman Sam Goi Seng Hui, also picked up 25 million Halcyon shares in August for S$18.45 million last year, amounting to a 5.94 per cent stake in the firm.

But as rubber prices plunged and expenses mounted from the acquisitions, Halcyon fell into the red, with a net loss attributable to shareholders of US$9.4 million last year, from a net profit of US$9.1 million in 2013. Despite a revenue that more than doubled to US$479.2 million, proportionately higher costs of sales, plus increased selling, administrative and financing expenses eroded the bottom line.

Halcyon expects its results this year to be mainly driven by the integration of its production capacity with its extended global sales and marketing reach. "2015 is all about bringing the full strength of our platform to bear and delivering to our full volume and margin potential," executive chairman and CEO Robert Meyer said in a media release. He declined to comment for this story.

The group also transferred to the mainboard on June 29, marking an important milestone for the firm.

UOB Kayhian on July 7 upgraded the counter to a "buy" on its share price decline since it downgraded it in May. "We view the upgrade (to the mainboard) positively as this will reduce liquidity risk, elevate visibility, extend Halcyon Agri's investor base and attract a higher level of interest from institutional funds," it said.

Meanwhile, GMG, which has been listed since 1999, has also been keeping itself busy, investing in new plantations and expanding processing capacity to prepare for the upturn. The group manages more than 78,000 hectares of rubber plantations in Africa and Asia, and runs 12 rubber processing plants - with a total capacity of 527,000 tonnes a year - in Thailand, Indonesia, Cameroon, Gabon and Cote D'Ivoire.

The producer of premium natural rubber recorded a net loss of S$35.1 million last year, compared with a net profit of S$8.7 million in 2013, as revenue fell 20.2 per cent to S$806.3 million. Its higher sales volume had been offset by a 27.5 per cent drop in the average selling price of natural rubber.

GMG is expecting an increase in manpower costs to further weigh on profit margins, and has therefore invested in technology to streamline operations and improve efficiency. It is also continuing to strengthen its presence in existing markets, while looking for opportunities in new ones such as Cambodia and Laos. "Regardless of the market volatility . . . we are in this business for the long term. And to prepare ourselves for the upturn, we continue to strategically invest in new planting and replanting in our African plantations," said its then-CEO Yao Xingliang in February.

Sri Trang, which conducted its secondary listing here in 2011, has similarly expanded actively across the natural rubber supply chain, buying 8,000 hectares of land for rubber plantation in Thailand, and building four new factories in Myanmar, Thailand and Indonesia that will bring an additional 174,000 tonnes in capacity.

The group's business model of a fully integrated supply chain business allows it to access supply information and understand changing customer behaviour daily, said its investor relations assistant vice-president Busarin Leelawankulsiri. "Therefore, we are flexible to any market conditions and are able to manage production and position efficiently."

Sri Trang's net profit fell 43 per cent over the year to 1.03 billion baht (S$41.2 million) in 2014, on the back of a 18 per cent slip in revenue to 75.5 billion baht.

It is now expecting prices for natural rubber to move in a narrow range in the short to medium term, as they are already near the cost of production, amid continued sluggish global demand.

It is a view echoed by Halcyon. "These price levels, being near to or below the cost of production for many producers are . . . unsustainable," it said. The new lows in rubber prices in the first quarter of this year led the firm to scale back production volumes and adjust terms of trade, to seek prices that better reflect the cost of production and give "appropriate returns" for farmers and tappers.

But it added: "Regardless of short term price movements, we remain confident in the long-term demand for natural rubber, driven by the increasing motorisation of emerging economies in Asia and worldwide."

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