SINGAPORE (June 11): Catalist-listed Asiatic Group (Holdings) is defending the viability of its power plant investments amid criticism from some minority shareholders that the plants have been mismanaged and that the financial terms are questionable.
In his open letter to Asiatic’s board dated May 9, Jerry Low Chin Yee, who previously led the revolt against the management of Sabana Shari’ah Compliant Real Estate Investment Trust, said the series of power plant investments had soaked up capital and destroyed shareholder value.
In its response on June 4, the company maintains that operating conditions had been weighed down by external conditions, but even then, Asiatic had remained profitable in the last five years.
Over the past year, shares in Asiatic have fallen 21.4% to close at 1.1 cents on June 5, giving it a market value of just $14.6 million. At this level, the counter is trading at just 0.3 times its book value of 4.1 cents as at March 31, but at 15.9 times earnings.
Asiatic started off in the fire protection business in 1965 and established its “Killfire” brand of fire extinguishers. In 2005, two years after it listed on the then-Sesdaq board, Asiatic began to diversify into small-scale energy projects across the region. The energy business eventually surpassed the fire-fighting business in terms of sales.
For FY2018 ended March 31, Asiatic reported revenue of $38.1 million, up 0.1% from a year ago. Power plants contributed 60.6% of the top line, with fire-fighting the remainder. During the year, Asiatic posted significantly higher earnings of $923,000 compared with $87,000 the previous year. The company attributes the improvement to a $1.2 million reduction in depreciation costs, as some of the power plants have reached their residual values.
During the year, the power plants contributed a profit before tax of $1 million, while the fire-fighting division contributed $868,000. In its June 4 response to Low’s letter, Asiatic points out that it is not alone in suffering within the broader energy sector, and states its intention to stay put in the power business for the long haul. “In the process, the group has also gained invaluable experience and expertise, which are critical for its long-term sustainability in the energy business,” the company says.
Asiatic ventured into the power sector in 2005 when it won contracts to build, own and operate two plants in Cambodia — a 10MW fossil fuel plant in Sihanoukville and a 10MW fossil fuel plant in Phnom Penh. Both plants were completed at a total cost of about $25 million. Asiatic had a 10-year agreement to sell power to Electricite Du Cambodge, the government utility company, which most recently was extended to end-April 2019.
In 2008, Asiatic added a third plant to its business in Cambodia, a fossil fuel plant in the Phnom Penh Special Economic Zone comprising three 6.5MW generator sets. According to the company’s June 4 statement, it will be operating this plant for up to 50 years. Asiatic has also moved into renewable energy. In July 2008, it announced an investment of US$6.3 million for a 51% stake in the Coc San hydroelectric power plant in Vietnam’s Lao Cai province. However, Asiatic’s stake was diluted to 13.5% when it did not contribute new capital to the venture. In March 2017, Asiatic sold its stake, booking a loss on disposal of $500,000 and a write-off of $100,000 on this venture.
Questions raised on Maju Intan power plant
One of Low’s bigger grouses is the way Asiatic has steadily increased its exposure in a biomass power joint venture in Perak called Maju Intan Biomass Energy (MJE). Asiatic first invested in this venture in October 2009, when it spent RM10 million for a 30% stake.
In 2010, MJE issued RM12 million worth of convertible bonds to its shareholders. The bonds carry an interest of 12% per annum and will reach maturity in 12 years. Under the terms of the issue, the bonds are to be converted only upon certain events, such as an IPO, or insolvency. In 2017, Asiatic bought RM1.2 million ($402,424) of the bonds held by another MJE shareholder. Interest had been waived on the convertible bonds since the date they were acquired.
In March 2014, to help fund MJE, Asiatic issued its own non-convertible bonds worth $4 million at 10% interest per annum for a three-year term. Four individuals, including Lee Fang Wen, who was later made an independent director of Asiatic in 2016, subscribed for a quarter of this issue, which was personally guaranteed by George Tan Boon Keng, Asiatic’s managing director. The remaining $3 million, which was non-guaranteed, was subscribed by Asiatic’s founder and former chairman Tan Ah Kan (who is also the father of George), substantial shareholder Bernard Lim and other associates of the Lim family. Bernard, the CEO of Tai Sin Electric, owns 9.8% of Asiatic, according to the company’s most recent annual report. In March 2017, the maturity date of the NCBs was extended to March 19, 2019.
In its June 4 response, Asiatic announced that $1.8 million in the principal amount of the NCBs had been repaid. Management has also reduced the interest rate of the outstanding balance to 8%. For FY2018, Asiatic’s share of loss incurred from associates was $700,000, stemming from MJE. That was a significant improvement from $1.6 million in losses a year ago, which Asiatic attributed to improved efficiency. The plant is now operating at a higher capacity, following addition and alteration works carried out during the year.
However, Asiatic’s overall exposure to MJE remains a concern. In its FY2018 results, the company reclassified the $17.3 million due from MJE as non-current assets, from current assets. The reason was that it did not expect repayment within the next year. Meanwhile, Asiatic’s own liability, via the NCBs, looms. Some $4.2 million worth of non-current liabilities were reclassified as current liabilities mainly because the NCBs were due within the next year.
There is also the question of why Asiatic chose to acquire RM1.2 million of convertible bonds from the MJE bondholder. In the June 4 letter, MJE says it was to prevent the bonds from being sold to a party that may have conflicting interests. “[It] would not be in the Group’s best interests if the bondholder had sold these bonds to a party that did not share the same sentiments and understanding of the business,” the letter says.
Meanwhile, the board says the issue of the NCBs was reached “after careful deliberations on fund-raising options available”. It also defends MJE as “one of the few pure biomass power plants that have succeeded in providing electricity to the national grid in Malaysia”, and points to its improved performance.
In his latest response to the board dated June 6, Low says he is unconvinced about the sustainability of the Maju Intan plant. He writes: “All three [independent directors] must let us know at which point you believe MJE can be profitable if it is still losing money today… You have to let us know when MJE can pay [the] $17.3 million owed to us. And finally, tell us, can Asiatic survive if MJE goes down?”
Shareholders’ forum
The better operating performance of the power plant cuts no ice with Low, who, with his 1.02% stake, is Asiatic’s 12th-largest shareholder. He calls the return on equity on Asiatic’s assets “mediocre”. Besides his unhappiness over MJE, Low also questions the longer-term viability of the Cambodian plants. He doubts the ability of these plants to compete with the larger plants.
In its June 4 response, Asiatic’s board says if it is unable to secure further extensions on the power purchase agreement for the Sihanoukville and Phnom Penh plants, it will “at the appropriate time, decide whether the relocation of or the realisation of its investments in these power plants would be in the best interest of the group”.
However, in a June 6 follow-up to Asiatic’s reponse, Low contends that the company did not indicate whether divestment of the power plants would enable their book value to be realised. Asiatic’s power plants had a net book value of $57.4 million as at end-March 2017. In addition, Low has attributed the company’s inefficiencies to its family-run structure.
In his first open letter, he had written: “Inherent in any family-run business structure is the risk of unstructured corporate governance and the possibility of nepotism.” The board did not respond directly to this comment in its letter. In response to queries from The Edge Singapore, the board of Asiatic declined to comment on the financing terms of the bonds, risk management implemented after the appointment of Lee, and what led to the improved operating performance of the power plant. “As this entire matter is between the company and its shareholders, the board is happy to engage shareholders at an appropriate forum for such a discussion, like the AGM,” states Asiatic via its public relations representative.
According to the company’s most recent annual report, Bernard’s father Bobby Lim, a non-executive, non-independent director at Tai Sin, owns the single-largest stake of 14% in Asiatic. Prominent oil and gas businessman Brian Chang holds a 13.3% stake via Brian Chang Holdings. Bobby, Bernard and Chang control 37.2% of Asiatic, more than the Tan family’s total stake of 23.8%. As communication between Asiatic’s board and Low flies to and fro, these few big-name shareholders have yet to weigh in — at least not openly. — With additional reporting by Trinity Chua
