Published August 20, 2008

Tri-M, KRL: more than meets the eye?

By OH BOON PING
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ON Monday, electronics contract manufacturer Tri-M Technologies said it would pay $203 million for Kingworld Resources Ltd (KRL), a company that is involved in petroleum production in China.

On the face of it, the investment is a strategic move that will give Tri-M access to the highly lucrative oil-and-gas (O&G) business at a time when the global technology sector is still in a slump.

Indeed, Tri-M has been on the watch-list since March 5 after three straight years of pre-tax losses. For the first half ended June 30, the firm reported a net loss of $6.18 million, after sales plunged 30 per cent to $6.38 million.

In contrast, KRL has a contract with China National Petroleum Corporation (CNPC) to jointly develop and produce hydrocarbon resources at an oilfield in Songliao Basin, Jilin Province - a venture that could reap handsome returns if successful. However, the acquisition deal also raises a number of pressing questions which need to be addressed.

First, KRL is a company that has no financial track record and its only project now is the O&G production contract with CNPC.

While the oilfield has an estimated crude oil reserve of at least 5.14 million tonnes, it is also clear that the project is not likely to be earnings accretive for a few years, as it is still in the evaluation phase. Therefore, to cough out $203 million - $23 million cash and 180 million new shares at $1 each - for such a venture is an extremely risky move especially for loss-making Tri-M.

Plus, doing business in emerging markets like China remains risky as hydrocarbon nationalism appears to be on the rise in these economies. Therefore, what makes Tri-M confident of success where other players with deeper pockets have failed?

Also, the decision comes at a time when analysts are predicting that crude oil is already in a bear market - down some 22 per cent from its peak in July. The International Energy Agency (IEA) recently said 'in terms of oil fundamentals, crude and product supply tightness has eased'.

Interestingly, both vendors are members of Malaysia's Tiong family, which holds a controlling stake in Tri-M, and they agreed to sell KRL for a mere $203 million - 14.8 per cent of the US$975 million value imputed on KRL by Norton Appraisals.

This begs the question: if the business is really worth that much, why didn't the vendors ask for a higher sale price, or do they know something about KRL which Tri-M does not? When asked about this, Tri-M's management said there are other risk factors such as possible downturns in oil prices, among others, which led to the discount.

Still, a discount of more than 80 per cent is too steep to be considered reasonable. Couldn't independent valuer Norton have also considered these factors in deriving its valuation? Or will this be another Rowsley-like deal - which looked like a good move initially, but failed to materialise in the end?

Since news of the investment first emerged on March 14, the market has reacted positively to the move, as seen from the stock price's phenomenal rise from 10.5 cents to 99.5 cents yesterday.

However, this does not diminish the importance of the questions above. Tri-M shareholders deserve the answers before taking the $203 million gamble.