(Oct 16): AGV Group is preparing to buy back a major stake in an upcoming galvanising plant in Pasir Gudang, which could soon benefit from a wave of capital expenditure by Malaysia’s Petroliam Nasional (Petronas). But it is unclear when AGV will return solidly to the black. And, in the meantime, its shares are trading at a stiff premium to its book value.

AGV went public in August last year, following a placement of 26.92 million shares at 22 cents each. The company owns a galvanising plant in Singapore with a processing capacity of 5,000 tonnes a month. The plant is running at a utilisation rate of about 70%, and is contributing the bulk of AGV’s revenue. AGV also owns a 36% stake in an entity called AGV Holdings, which owns 51% of the Pasir Gudang plant. This plant began operations only in April 2016. It, too, has a capacity of 5,000 tonnes a year, and is running at a utilisation rate of around 50%.

Albert Ang, CEO of AGV, says this plant could soon benefit from stronger demand for galvanised steel from major construction and infrastructure projects in the area. These include a Petronas project in Johor — the Refinery and Petrochemical Integrated Development. Other projects that could benefit the plant are the KL-Singapore high-speed rail and the new port in Melaka. “There are a lot of developments in Malaysia that you can look into,” says Ang in a recent interview with The Edge Singapore.

In the longer term, the Pasir Gudang plant could generate higher revenue and earnings than AGV’s plant in Singapore. While the two have the same processing capacity, steel parts that are sent for galvanising at the Pasir Gudang plant tend to be heavier than in Singapore. The industry practice is to charge based on the weight of parts that are galvanised. Labour costs at the Malaysia plant are about 30% less than at the Singapore plant. “If Malaysia is able to hit full potential, then it is going to be a good turnaround for the company,” he says.

Just before AGV launched its IPO last year, it sold 64% of AGV Holdings to three individuals to “de-risk” itself and avoid booking start-up losses from the Pasir Gudang plant. AGV has an agreement to buy back this stake in AGV Holdings at a later date, according to Ang. “We are planning to do it soon already,” he says.

Ang adds that buying back the stake in AGV Holdings could cost the listed company about $2 million. This is a significant amount for AGV. With its shares trading 24.1% below its IPO price, the company now has a market value of only $21 million. For the six months to March 30, 2017, AGV reported a 7.6% decline in revenue to $9 million and a loss of $1.9 million versus earnings of $475,000 in the same period the previous year. As at March 31, the company had a shareholders’ equity of $10.9 million, or 8.62 cents a share.

“We are looking into various funding options,” Ang says. “And, of course, we already have some money on standby.” On Oct 9, AGV announced that it will issue a total of $1 million in convertible loans to husband-and-wife team Tan Chwee Seng and Pua Lay Pen via two separate but equal tranches. The couple owns Liverland Investments, which is an existing owner of 2.5 million AGV shares, or 1.98% of the company. AGV will have to pay an annual interest of 15% on the convertible loans. The loans will be convertible into new shares at 95% of the volume-weighted market price on the 14 consecutive days before the conversion date, rounded up to the nearest 0.1 cent.

Ang acknowledges that the terms on which these funds are being raised seem expensive. However, with a bigger stake in the Malaysian galvanising plant, AGV will be able to earn higher returns in the future, he says. In fact, AGV may issue another $1 million of convertible loans at a later date, he adds.

In the meantime, Ang will be working on improving AGV’s profitability. The way he tells it, the recent losses were really caused by higher administrative and operating expenses incurred in its first year as a publicly listed company. “Maybe in the first year, we are not familiar. Going forward, I expect to trim losses, I will be doing my best to better manage costs,” he says. And, while he will not be drawn on talk about when AGV will return to the black, he sees a better year ahead. “There are only a few things that I need to restructure, to adjust. We have a strong team and once everything is there, the company will turn around quickly, strongly.”

Rising material costs However, AGV is under pressure from increasingly expensive zinc — the key raw material in the galvanising process. Since the company listed last year, the price of zinc has rocketed from US$1,800 ($2,438) per tonne to some US$3,200 per tonne. Ang attributes this to speculation on metal commodities as well as the closure of a number of zinc processing plants in China on environmental concerns, with the government now restricting supply.

AGV’s plants in Singapore and Malaysia consume about 3,500 tonnes of zinc a year. This is sourced through a network of agents rather than directly from zinc producers. “They don’t entertain small buyers,” Ang says. To cope with the higher costs, AGV is now trying to raise its prices. Some of the company’s customers have already been told that they will be hit with higher fees in the coming few months. However, Ang says he is approaching this price increase cautiously because most of AGV’s customers are contractors and steel parts suppliers who face cost challenges and cash-flow pressures of their own. “I can’t be too harsh,” he says.

While AGV can complete a galvanising job for a customer within a few days, the company often does not collect payment for as long as 120 days. Ang says this is the norm in the industry. As at March 31, the company had $6.9 million worth of receivables on its balance sheet, which was nearly a quarter of its total assets of $28.7 million. Ang says these outstanding receivables do not represent a big risk, because they are spread across more than 900 customers, the largest of which accounts for less than 5% of the company’s revenue. “We won’t be affected by any single customer. Even if a customer collapses, the exposure is not big,” he says. Ang is hoping that other galvanisers also raise their prices to compensate for the rising cost of zinc. While AGV only has a handful of competitors, the industry is sensitive to prices. “I just hope they also increase [prices], but we don’t discuss these kinds of things,” he says.

Potential M&A? Besides raising its stake in the Pasir Gudang plant, AGV would also be prepared to acquire other galvanisers if an opportunity to do so arose. According to him, some owners of galvanising plants who are nearing retirement age might be prepared to sell or form some kind of joint venture.

For Ang, who turns 50 this year, this would be a more preferable way to grow AGV than expanding into a different part of the industry supply chain. For example, he is not keen on AGV becoming a steel stockist as many of its customers are in this business. He also does not want it to become a steel works contractor, fearing the company does not have the relevant expertise. “If it is galvanising-related, then okay. If not, I have to think very carefully. We don’t want to go and touch something that we do not know,” he says.

Ultimately, what AGV needs to do in order to return to the black and grow its business is a stronger demand for its galvanising services. On that front, Ang is quite positive. Even as AGV is preparing to raise its stake in the Pasir Gudang plant to ride a slew of new infrastructure works in the area, business in Singapore is picking up too. Among the major projects here are the expansion of the Public Utilities Board’s deep-tunnel sewage system, the ongoing expansion of the MRT system, and Changi Airport Terminal 5. There is also a sprinkling of other projects, mainly from the public sector, such as power stations, hospitals, schools and new HDB flats.

“Within each construction project, for every infrastructure development, we will have a certain percentage of work that requires galvanising. As long as Singapore doesn’t stop building, there will always be jobs,” says Ang.

Shares in AGV are down 15.7% this year to close at 16.7 cents on Oct 12. They are trading at 1.94 times the company’s book value.

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