By Sherilyn Goh
Boasting a strong management line-up, Red Sena raised RM400 million upon its debut on Bursa Malaysia but its share price has since been weak amid a sluggish market environment. Where will the country’s first F&B Spac go from here?
Business model: The first food and beverages (F&B)-focused special purpose acquisition company (Spac) was listed on Bursa Malaysia’s Main Market on Dec 5, Red Sena Bhd raised a total of RM400 million in initial public offering (IPO) proceeds.
Spacs have no assets or operations at the time of their initial public offerings, but are merely holding companies set up to acquire operating companies or assets known as the qualifying asset (QA).
According to its IPO prospectus, the group’s management is targeting a minimum internal rate of return of 9% for its QA, eyeing on fairly established F&B businesses that are primarily focused on branded, processed, and ready-to-consume or ready-to-cook F&B products.
The prospectus added that management will source QA from countries which are enjoying healthy gross domestic product growth rates, rising income levels and have large populations. Singapore, Vietnam, Thailand, Indonesia, Malaysia and the Philippines were named as the countries it targets.
Other requirements on potential QA include a minimum profit of RM10 million based on latest audited profit after tax, at the growth phase of the business life cycle, have operated for at least five years, and comply with halal requirements. It is also looking at securing a minimum 51% controlling stake in the QA.
According to the Securities Commission regulations, Spacs are given a three-year timeline from listing date to attain a QA, failing which 90% of the IPO funds placed in a trust account (92% in the case of Red Sena) will be liquidated and distributed to shareholders.
Shareholders and management: Among the eight investors taking up blocks of its private placement shares are notable private investor Brahmal Vasudevan and other large asset management companies who bought the shares for their high nett worth clients, including RHB Asset Management, Affin Hwang Asset Management, UOB Asset Management, and Maybank Asset Management.
The key management line-up of the Spac comprises six individuals, namely Richard Koh, Tan Ang Meng, Joseph Tan, Ian Yoong Kah Yin, Ismail Halim and Richard Ong.
Tan Ang Meng, 60, is Fraser and Neave’s (F&N) former chief executive officer (CEO) and serves as executive director of Red Sena. Joseph Tan, 58, was formerly F&N’s chief financial officer (CFO), and serves as CEO. Ismail is CFO and Yoong is executive director of business development.
Ismail is executive director in biscuit company Khong Guan Enterprise Sdn Bhd, while Yoong was formerly senior vice-president for the retail broking division of CIMB Investment Bank Bhd.
The management team also owns 20% of the enlarged issued and paid-up ordinary share capital of Red Sena, above the minimum requirement of 10%.
Share performance: On Dec 5, Red Sena debuted at 39.5 sen per share, a 21% discount to its IPO price of 50 sen per share, amid sluggish market environment. It peaked at 40 sen per share on Dec 11, and has plateaued at 38 sen since.
Prior to the IPO, Red Sena’s 80 million shares were oversubscribed by 4.49 times.
Its warrants on the other hand, saw more volume traded. The company’s warrants began trading on Dec 5 at 10 sen, with a total of 17.05 million warrants traded.
What analysts think: PIVB Research is optimistic that the group is likely to secure a good QA within the stipulated time frame.
“We see Malaysia’s consumption expenditure on food has been increasing at a growth rate of about 10%, while small to mid-cap processed F&B listed companies are growing at an average compound annual growth rate of about 4%.
“Hence we believe there are still opportunities for Red Sena to acquire high-growth small to mid-cap companies in Malaysia,” said PIVB Research.
The research house has also expressed confidence in the management line-up of Red Sena.
“Based on the experience profile of its management team, significant vested interest of 20% and a tighter moratorium, we believe all efforts will be taken in ensuring a successful acquisition of QA,” said PIVB Research in its note published on Nov 26.
Utilisation of proceeds: According to its IPO prospectus, RM368 million of the gross IPO proceeds (92%) will be placed in a cash trust account to be administered by Maybank Trustees Bhd immediately upon receipt of the IPO proceeds.
The remaining RM32 million (8%) will be used to defray listing expenses and as working capital.
StockStalk: Since the Securities Commission introduced the Spac investment model in late 2009, only four companies, all in the oil and gas sector, have employed the model. Only one Spac – Hibiscus Petroleum – has graduated into a full-fledged company to date.
That said, associating risk factors to consider include the fact that Spacs are essentially shell companies with no track record, the eventuality that a QA is not achieved within the time frame of three years, as well as the the global economic slowdown affecting consumer spending and the F&B industry.
Besides an admirable line-up to offset the lack of track record, the management should also be able to identify a good asset, manage growth and operational needs as well as dealing with mergers and acquisitions.
With 90% held in trust and earning interest over a three-year period, shareholders might, in fact, benefit if management fails in its pursuit of a QA. Not only will they get their initial investments back, they may even make some gains on it.
Hong Leong Investment Bank (HLIB) previously noted in August that its investment thesis on Spacs is that its share base value should be determined by its gross trust value.
Based on this thesis, HLIB said that Spac investors could expect “higher risk-free returns than a fixed deposit… (and) for investors with longer-term horizon, in the worst-case scenario, holding to maturity will translate to about 13% risk-free per annum (for the three-year time frame), which is significantly higher than the average fixed deposit rate of 3.2% per annum”.
Hence, it is ultimately up to investors’ wisdom to determine if investing in Spac is going to be worthwhile, which, until the company successfully secures a QA, will likely be no more than a vote of confidence in the Spac’s management.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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