Hextar Global (HGB) announced the acquisition of various companies via 51%- owned Hextar Fruits for RM84m in cash, in efforts to diversify its business away from the vagaries of the industrial and specialty chemical space. The various acquisitions will see HGB involved in the trading of durian and wholesale of fruits. While the potential is attractive, notably the vast market in China, we are neutral on this development. Costing a trailing price-earnings ratio of ~9x, the acquisition is earnings and value accretive, though we err on the side of conservatism and keep estimates unchanged at this juncture. The weak global economic environment continues to weigh on near-term outlook (weak product prices and subdued demand), though longer-term prospects in the plantation industry and the continued application of agrochemicals remain encouraging, complemented by the Group’s exposure in the specialty chemicals space. We retain our Neutral call on the stock with an unchanged PE-based target price of RM0.63.

• The acquisitions will see 51%-owned Hextar Fruits Sdn Bhd acquire a 100% equity interest in PHG Ever Fresh Food (M), a 100% equity interest in PHG Ever Fresh Food (TK), a 100% equity interest in PHG Wholesale and Retail and a 55% equity interest in PHG Plantation.
  
  PHG (M) is in the business of trading of durian paste and durian. Unaudited net profit for its 2023 financial year (April) is RM3.6m (FY22: RM6.1m). PHG (TK) is engaged in the business of wholesale of fruits, manufacturing of fruit and vegetable food products, and wholesale of a variety of goods. Unaudited net profit for its 2023 financial year (April) is RM1.4m (FY22: RM2.5m). PHG W&R is in the business of wholesale of fruits and wholesale of a variety of goods. Unaudited net profit for its 2023 financial year (April) is RM6.2m (FY22: RM4.4m). PHG Plantation is engaged in the business of growing of durian, growing of other tropical and subtropical fruits and wholesale of a variety of goods meanwhile. The company reported an unaudited net loss of RM727,816 for its 2023 financial year (April) meannwhile (FY22: -RM12,371).
   
• Funding for the acquisition will be via internally-generated funds (RM34m) and bank borrowings (RM50m). Based on the above, earnings attributable to HGB is estimated at ~RM3.0m, net of interest cost.
   
• Market potential of the durian industry is attractive. While Chinese imports of Malaysian durians is reported to have doubled from 901 metric tonnes valued at USD9.3m in 2018 to 1,839 metric tonnes valued at USD14.7m in 2022, this only represents a meagre 0.2% market. China imported a massive 783,976 metric tonnes of durian valued at USD3.85bn from Thailand in 2022. Domestic production in China remains a work-inprogress, with first harvest estimated to yield about 2,500 metric tonnes. Production growth is not expected to be able to fill demand.

Source: PublicInvest Research - 4 Jul 2023