Initial Public Offering (IPO)
IPO - Seng Fong Holdings Berhad (Part 1)
MQTrader Jesse
Publish date: Mon, 20 Jun 2022, 03:59 PM
Company Background
The company was incorporated in Malaysia under the Act on 1 July 2021 as a private limited company under the name of Seng Fong Holdings Sdn Bhd. On 9 September 2021, the Company was converted into a public limited company and the company assumed its present name. Subsequently, the company completed the Acquisition on 18 May 2022 which resulted in SFT becoming its wholly-owned subsidiary and STG becoming its wholly-owned indirect subsidiary, followed by the Share Split on 19 May 2022.
The company is principally an investment holding company and engaged in the provision of management services
Through the subsidiaries, the company is principally involved in the following business segments:
Use of proceeds
- Working Capital - 28.90% (within 12 months)
- Repayment of bank borrowings - 55.60% (within 6 months)
- Installation of Biomass System - 9.2% (within 12 months)
- Estimated listing expenses - 6.3% ( within 2 months)
Working Capital - 28.9% (within 12 months)
The company has allocated RM19.7 million from the Public Issue proceeds to fund its working capital requirements, which include, but are not limited to, the purchase of raw materials and general administrative and daily operational expenses such as staff-related costs, utilities, statutory payments, and any other overhead expenditures.
The breakdown of such utilization has not been determined at this juncture and will be dependent on the operating and funding requirements at the time of utilization. Notwithstanding that, and on a best estimate basis, the percentage of the allocation of the proceeds to be utilized for each component of the working capital is as follows:
The allocation of working capital requirements is in line with the Group’s business plan to maximize the utilization of the production capacity by increasing the production hours which requires additional workers and raw materials to increase the amount of rubber processed. A total of 93 additional new workers are required to increase the production output in line with the Group’s business plan to achieve the target increase in production capacity by FYE 2023.
The Board shall have the absolute discretion to decide on the allocation between the purchase of raw materials, general administrative and daily operational expenses, as well as the hiring of additional workers, depending on the operating requirements at the time of utilization
Repayment of bank borrowings - 55.6% (within 6 months)
The company has allocated RM37.9 million from the Public Issue proceeds to partially repay its existing bank borrowings as follows:
The actual interest savings may vary depending on the then applicable interest rate. Based on the above, the expected annual interest savings is estimated to be approximately RM0.4 million, and the repayment of bank borrowings is expected to reduce the gearing position from 1.0 times as of 31 December 2021 to a pro forma gearing position of 0.4 times at 31 December 2021 after the Public Issue and the intended use of proceeds (adjusted after dividend).
Installation of Biomass System - 9.2% (within 12 months)
The company has allocated RM6.3 million from the Public Issue proceeds for the installation of the Biomass System in the processing factories located in Gemas which consists of 2 units of Biomass System as follows:
The total costs for the installation of the 2 units of the Biomass System are fully funded by the Public Issue proceeds. The Biomass System is installed to generate gas from wood chips as a fuel source for the dryer system. Upon commissioning of the Biomass System, the usage of diesel as a fuel source for the dryer system will be replaced by the gas generated from wood chips. Nevertheless, the dryer system can continue to use diesel as a backup in the event of failure of the Biomass System. The installation of the Biomass System is aimed at achieving cost-saving measures by reducing overall fuel costs, resulting in savings estimated to be approximately RM3.5 million per annum to the COS. The Biomass System is expected to be fully commissioned in the 3rd quarter of 2022. Upon Listing, the Company will make the necessary disclosures in the financial reports to be announced to the shareholders on the status of progress on the installation and/or any update in the expected commissioning timeframe for the Biomass System.
Business model
The source cup lump primarily from domestic and international rubber traders; semi-processed rubber (e.g. RSS and synthetic rubber) and value-added additives (e.g. other chemicals) mainly from international rubber traders, to produce SMR Grade and Premium Grade block rubber (Processing Segment). The Group also trades block rubbers which are sourced from international rubber traders and/or natural rubber processors (Trading Segment), upon request by the customers.
Block rubbers produced in the factory are sold directly to end-user customers, the majority of which are tyre manufacturers, and are also sold to international rubber traders. Upon request by the customers, the company also sources block rubber that they do not produce in their factories such as CSR and SGR for trading purposes, in which revenue contribution from block rubber trading contributed 0.2%, 4.0%, and 2.5% of the revenue in FYE 2019, FYE 2021 and FPE 31 December 2021 respectively. There is no revenue from the Trading Segment during the FYE 2020 as there is no order from the customers. The Trading Segment is mainly to complement the Processing Segment. Block rubbers which are sourced from international rubber traders and/or natural rubber processors, for trading purposes, are sold to tyre manufacturers.
In the past 3 FYEs 2019 to 2021 and FPE 31 December 2021, the direct sales to tyre manufacturers (including affiliates of the tyre manufacturers which may be a trading entity) contributed to 66.9%, 80.9%, 76.2%, and 65.7% of the Group’s total revenue respectively. This direct distribution approach enables the Group to foster business relationships with the customers and to work closely with the customers to evaluate and obtain a better understanding of their requirements which serves as feedback for the Group to continuously improve the products.
The indirect sales to tyre manufacturers through international rubber traders contributed another 32.8%, 18.8%, 23.6%, and 32.9% to the Group’s total revenue in the past 3 FYEs 2019 to 2021 and FPE 31 December 2021 respectively. This method is useful for the Group to indirectly serve small and medium-sized customers (e.g. tyre manufacturers) as these customers purchase directly from international rubber traders. Further, engaging with international rubber traders is effective in expanding the company network and enabling the Group to penetrate new markets as international rubber traders have wide customer networks. The remaining sales of less than 1.5% to international rubber traders were contributed by other end-users (e.g. manufacturers of rubber products for general purposes), other than tyre manufacturing.
Click here to continue on the IPO - Seng Fong Holdings Berhad (Part 2)
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