Titan Chemicals Corp Bhd’s two major shareholders, Taiwan’s Chao Group and Permodalan Nasional Bhd (PNB), are in talks to divest their stakes in the petrochemical company. The prospective buyer could be a foreign party, a source said.
“Foreign players will look at the company’s liquidity and critical mass. This is a good time to sell (the stakes) as the company is at the point of the cycle where everything is looking up,” the source said.
To this end, it is believed that the company’s top officials had in recent months made numerous trips to Europe and China.
The company’s 2009 annual report shows that as at March 15, 2010, Union Harvard Investments SRL (UHI) owned a 32% stake in Titan while China General Development Corp (CGDC) held 5.4%.
Datuk James Y. Chao, the group’s executive chairman, and his family members are the principal beneficiaries of a trust that indirectly wholly owns UHI and CGDC.
PNB is the second largest shareholder via a 24.6% stake owned by Skim Amanah Saham Bumiputera and a direct 5.6% holding.
If the potential buyer acquires Chao Group and PNB’s 37.4% and 30.2% stakes respectively, it could trigger a mandatory general offer for the remaining shares in Titan, unless it involves a partial divestment that’s below the takeover threshold.
Titan’s share price has risen steadily in recent months and is trading at its 52-week high of RM1.46 from a low of 79 sen just over a year ago, which could be due to speculation of a potential takeover.
The revived interest could also be related to the recent removal of dividend covenants in the company’s term-loan agreement and the fact that it is trading at a low price/earnings ratio of some five times based on prospective earnings. (The restriction on dividend payment was imposed in February last year when the company requested certain amendments to the term-loan agreement, given the downturn in the petrochemicals industry then).
PNB, it is believed, has long been mulling over selling its stake in the company, even before the listing of Titan on the main board in June 2005.
Titan is a pioneer and the country’s largest integrated olefin–polyolefin producer and one of the largest polyolefin producers in South-East Asia. The company has a petrochemical complex centred on two steam crackers in Pasir Gudang, Johor. It also has polyethylene facilities at a second site in Malaysia and Indonesia.
For its 2009 financial year, the group made a net profit of RM537.8mil on sales of RM5.61bil.
According to sources close to the company, PNB’s sizeable investment in Titan was originally viewed as one with a strategic development objective, hence expanding its role from being solely a fund manager.
Titan’s business is largely cyclical in nature, hence volatile, and is margin-driven, whereby any fluctuation in raw material prices would have an impact on the group’s earnings. For these reasons, it is believed that over the years PNB’s interest in the business had waned somewhat.
“The thing about Titan’s business is that it is either feast or famine. There’s very little in between which PNB may have found hard to stomach over the years, hence favouring a stake sale,” a source said.
Following the Asian financial crisis in 1998, when the company was facing some financial difficulty, sources said an attempt was made to sell PNB’s stake to Petroliam Nasional Bhd (Petronas). The deal, however, fell through for two reasons: the then boss of Petronas, Tan Sri Hassan Marican, was more keen to see Petronas focus on exploration activities while the Chao family had some reservations as Petronas, unlike PNB, would most probably want to be in the driver’s seat of the company’s operations.
Again in 2006, it is believed that similar talks were held with Sinopec Corp (China Petroleum & Chemical Corp) but they fell through for unknown reasons.
The Chao Group’s intention to exit Titan, according to a source, is relatively more recent. “It could be that it no longer views the Malaysian market as strategically important for its future growth. It appears to be increasingly more interested in Indonesia,” the source said.
The group’s net profit for the first quarter ended March 2010 was down 22% year-on-year to RM104.1mil, which the company attributed to “the increase in the price of naphtha, resulting in a squeeze on the gross margins and profit.”
Revenue rose 48% to RM1.7bil during the period largely due to the increase in the average selling price of polyolefin, olefin and derivative products.
Quarter-on-quarter, however, pre-tax profit for the period marked a significant improvement by RM77.4mil, or 166%, due to the increase in olefin and derivative product prices. Revenue increased marginally from RM1.58bil to RM1.67bil due to higher sales prices. The group’s gearing ratio improved from 21% to 16% with the reduction of total borrowings outstanding from RM948.4mil to RM785.1mil as the company continued to pare down debts.
According to the company, it expects stable demand for polyolefin products this year on the back of the improved economic climate.
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