Wednesday, September 25, 2013

Tropicana - asset rich but tight cash flow

While many were guessing what would be the next asset that Tropicana Corp Bhd would hive off, the company sprang a surprise on the investing public when it announced the purchase of 18 tracts if land in Pulai, Johor for rm366 million cash.

It said the land acquisition is in line with the company’s overall objective of increasing its landbank in strategic locations especially in Johor.

However the land purchase came as a surprise as many expect Tropicana which currently (Sept 2013) has total assets of rm4.58 billion to dispose of some to help reduce its borrowings and ease cash flow.

The group’s balance sheet as at June 30 2013 had total borrowings of rm1.86 billion, including long term debts of rm1.56 billion. Its cash balance was at rm372 million. It had a net gearing ratio of 0.63 times.

It intends to fund the proposed land acquisition and the development cost through internally generated funds and/or bank borrowings.

In Aug 2013, it unveiled its plan to sell its retail mall to CapitaMalls Malaysia Trust.

Tan Sri Danny Tan’s reverse takeover move to inject his 762-acre tract of land into Albedo Ltd may be the only logical move for the tycoon, considering Tropicana Corp Bhd cannot stomach any more big asset injections.

The land situated in Iskandar Malaysia was cited to worth an aggregate value of RM2.71bil as at Aug 30 2013, based on estimations by Knight Frank Malaysia Sdn Bhd.

Tropicana, which is asset-rich but tight on cashflow, underwent an amalgamation exercise a year ago injecting some 73 properties into its coffers for RM948.7mil. The asset injection included Tan’s private property assets.

The group was also in a de-gearing exercise through strategic disposals.

It made sense for Tan to plant his private assets in another company if Tropicana could not take the asset injection. It is important to note that this land deal (with Albedo) came much later than the amalgamation exercise in Tropicana. If (Tan) could not inject any more assets into Tropicana, it is logical for him to look for another vehicle to do so.

Earlier reports said that Singapore-listed Albedo could pose potential rivalry for Tropicana, the latter having its own Iskandar projects.

Market observers said there should not be any conflict of interest given the collaborative possibilities for both companies ... collaborations are highly likely. It is better for both companies to have the same shareholders overseeing the projects. This would create healther competition than if other companies came in.

However Tan’s move could raise some questions on Tropicana’s direction. Some may be confused about where Tan Sri’s focus is now until there is more clarity on what this means for Tropicana.

Tan’s move will enable him to gain controlling stake in Albedo, a steel and raw materials trader.

Albedo has signed a MOU with Tan’s private company, Temasya Cergas Sdn Bhd, to purhase the land in Iskandar, settled via the issue of Albedo shares. Albedo had agreed to a S$774mil (RM1.96bil) takeover deal. It planned to issue 34.55 million new shares at2.24 Singapore cents (5.7 sen) per share to Tan’s Infinite Rewards Inc, which equals 95% of the enlarged Albedo’s stock.

Albedo will then use the proceeds to buy Reflections Oasis Inc, a subsidiary of Infinite Rewards. Infinite Rewards is reported to be acquiring seven parcels of land in Malaysia for commercial, industrial and residential development.

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