Its planned venture into oil palm cultivation in the Republic of Congo is considered risky as the company has no experience in this field. It is also the first listed company to do so in the republic.
The concerned is due to sociopolitical risks in the country. Market observers do not see any catalysts in the short term coming from this venture as it will take some time before Wasco can reap the harvest. If it succeeds in this, the oil palm venture will be good recurring income for the long term.
On Feb 3, 2012, it had entered into an agreement with Silvermark Resources Inc and Ginat Dragon Group Ltd to subscribe for up to 51% equity interest in Atama Resources Inc (ARI) for US$25 million. Silvermark and Giant will hold the remaining 49%.
ARI has a 30 year oil oil palm plantation concession agreement with the government of the Republic of Congo. Under the concession, ARI has the right to occupy 470000 ha to develop oil plam plantations and compexes.
At this juncture, 180000ha or 38% of the concession land has been identified as highly suitable for plantation. ARI will begin planting by 2QFY2013 and the development of the 180000ha is expected to be completed in 10 phases over 15 years.
Wasco will raise half the rm75 million share subscription in ARI via bank borrowings while the rest will com from internally generated funds. As at end Sept 30, 2011 Wasco had rm515 million in cash and rm726 million in borrowings. It has a net gearing of 0.2 times based on its shareholders’ funds of rm987 million.
Although the bank borrowings portion for the share subscription in ARI will only raise Wasco’s gearing to 0.25 times, the venture might become a financial burden in the future. Estimate that it will cost between US$4000 – US$6000 per hectare to develop oil palm to maturity.
Based on the initial 180000ha that have been identified and the US$4000 per hectare development cost, the capex is estimated to be at least US$48 million per year. Wasco will also need to pay RM15 per hectare to the government.
Once ARI becomes a 51% subsidiary of Wasco, its borrowings will need to be capitalized or consolidated in the latter’s balance sheet to develop oil palm plantations. This will undermine Wasco’s ability to seek new borrowings for its oil and gas ventures. This will become a burden unless it manages to hive off its oil and gas business soon, which is currently its bread and butter.
The venture will have a long gestation period. Wasco and its partners are looking at an unplanted area, which may take about five years to see first harvest.
The foray could be a move by management to seek recurring income after hiving off the oil and gas segment. Currently, all of Wasco’s six business divisions are parked under its wholly owned subsidiary Wasco Energy Ltd (WEL).
Under thr proposed demerger exercise, the non oil and gas pipe manufacturing, renewable energy and trading businesses will be parked under Wasco, while WEL will run the oil and gas business. The demerger exercise had been slated for mid 2011, but it was postponed. However, with the new venture, Wasco may be able to complete the demerger soon as the share subscription in ARI is expected to be completed in 2012.
Once Wasco completes the share subscription, it will appoint four of the eight directors in ARI. A director of IGB is also a director in ARI. IGB’s group MD Robert Tan is also the chairman of Wasco, and his family holds a 40% direct and indirect stake in the latter.
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