Frankly Speaking: Aug 16-22, 2010

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Spend oil money prudentlyLast week, the Terengganu State Assembly approved a supplementary allocation of RM220 million for administrative expenses. That pushed the state’s 2010 budget to a substantial RM2.2 billion, making it the largest in Peninsular Malaysia. It’s way ahead of the current year’s RM1.5 billion budget for Selangor, the country’s most developed state.
There are no prizes for guessing where Terengganu gets its funds from — its annual oil royalty — which allows it to have such a big budget.
It is ironic that Terengganu’s economy has not grown in proportion to the wealth it contributes to the nation through its oil and gas industry. Apart from petroleum, the state’s other economic activities — tourism, fishing and farming — are modest in scale, reflecting a low economic base. Furthermore, a relatively high proportion of its population — some 13%, by official estimates — lives in poverty.
Details of the budget allocations are scanty, but it is hoped that the state’s oil revenue is being put to productive use. After all, the oil reserves are estimated to run out in some 13 years, and gas in 41 years at current extraction rates.
Some serious concerns about development spending in the state have arisen in recent years. Last year, the roof of the RM270 million Kuala Terengganu stadium collapsed, just one year after it was built. Apart from the quality of work, questions about development priorities are pertinent.
Another example was the more than RM300 million estimated to have been spent on facilities to hold the annual Monsoon Cup regatta. That was incurred a few years ago, also with the funds from the oil royalty. Here too, the rationale for spending such a huge sum on facilities that are not often used have to be weighed against the general development needs of the state.
Although it is argued that the Monsoon Cup brings tourism dollars to the state, there is the question of its sustainability and impact as a wealth multiplier for people in the state.
There is no room for extravagance with revenue from natural resources because these will run out sooner or later.

Taking a leaf from Wilmar’s book Last Friday, Kencana Agri Ltd and Wilmar International Ltd confirmed that the latter will be taking a 20% stake in the former for a cash consideration of S$80.4 million or 35 cents per share. Wilmar will purchase 229.6 million shares via Newbloom Pte Ltd, a wholly-owned subsidiary, representing 20% of Kencana Agri’s share capital. Kencana Agri will issue 150 million new shares while Kencana Holdings Ptd Ltd — the largest shareholder — will place out 79.6 million existing shares.
Kencana Agri has 188,784ha of oil palm plantations in Sumatra, Sulawesi and Kalimantan, of which 42,975 ha have already been planted. Wilmar says the acquisition will add to its plantation assets and is not expected to have a significant impact on its financial position.
The move is not surprising and is in line with Wilmar’s intention to expand both upstream and downstream. Given the lack of plantation land in the region, Wilmar has already ventured into the African continent via joint ventures and now owns 6,000ha and 37,000ha of plantations in Uganda and West Africa respectively.
In May this year, Wilmar announced a proposal to acquire a 58.45% stake in Benso Oil Palm Plantation Ltd, which is listed on the Ghana Stock Exchange. Benso cultivates oil palm and processes palm fruits in Ghana.
Last year, Wilmar acquired 16.67% of Three-A Resources Bhd’s equity and has since entered into a “framework cooperation agreement” to invest and explore joint-venture enterprises in China.
Wilmar’s string of equity acquisitions suggests that its strategy is to grow via equity participation in established companies without having to go to the ground and starting from scratch. Perhaps this should be the strategy of plantation companies expanding downstream. Instead of constructing refineries from scratch, they should venture into equity tie-ups with existing players to reap synergies between partners.

Yee Lee nibbling at SpritzerLast week, Yee Lee Corp acquired another 4.2% in Spritzer Bhd, raising its stake in the mineral water producer to 32.35%. The shares were acquired from a related party for RM5.6 million or 98 sen per share.
The acquisition is a surprise as Yee Lee Corp and companies associated to its major shareholders already held more than 52% of Spritzer directly and indirectly.
Yee Lee had a 28.14% stake in Spritzer while Yee Lee Holdings Sdn Bhd, another related company, had another 14.05% in the mineral water producer and distributor.
So, why is there a need for Yee Lee to acquire more shares? Is this the beginning of a corporate exercise between Yee Lee and Spritzer? Or is Yee Lee simply telling the market that Spritzer’s shares are undervalued?
According to the company, the acquisition of the additional shares was a good investment opportunity and could contribute positively to Yee Lee’s future growth.
If Spritzer represents such a good opportunity, perhaps Yee Lee’s major shareholders should consider amalgamating the companies through a corporate exercise.
After all, privatistion exercises are back in vogue.
Corporate lending is not as difficult as it was 18 months ago and equities are still relatively undervalued.
Buying small blocks, especially from related parties, is not the ideal situation. Sometimes, it tends to send the wrong message.

This article appeared in Corporate page of The Edge Malaysia, Issue 819, Aug 16-22, 2010