Saturday, June 26, 2010

Octagon Series: A New Octagon

Continued from Octagon Series: The Rise

On 24th Feb 2004. Octagon was suspended.

  • Octagon Consolidated Bhd (pre-susp RM5.95) - From inks and paints to power generation.2004-02-24
    From inks and paints to power generation. In line with Octagon's strategy to venture into power generation business, the company has signed three conditional share sale agreements on Saturday (21 Feb) to acquire two Indian power plants. The 2 plants are Kasargod Power Corp Ltd (KCPL) located in Mylatti Village, Kasargod district, and RVK Energy Pte Ltd (RVK) based in Krishna district, Andhra Pradesh state. KCPL began its commercial operation in May 2001 with a capacity of 21.178MW, fuelled by petroleum supplied by Bharat Petroleum Corp Ltd, a government-owned company. Meanwhile, RVK started in Jan 2000 as a merchant power producer (MPP) with a capacity of 19.17MW, powered by natural gas supplied by Andhra Fuels Ltd (source: Bernama). Prior to the new venture, Octagon was primarily involved in the production of customised industrial paints, inks and chemical products. Industrial paints make up 97% of sales. Products are sold under the "Durachem" brand name. The group has operations in Selangor, Penang, Johor and Indonesia. The stock has run up substantially for the past 12 months, with a 1-year return at 254%. Not rated (52w Hi-Low: RM6.00-RM1.72) (Moolah: yup, that was Octagon's unadjusted stock price then!)

And the next day, online investment portal, Surf88 wrote the following.


Octagon Consolidated (Octagon) (RM5.95, stock code 7109) has proposed to purchase two power generating companies in India, hence not only diversifying from its current core operations of industrial paints, but also geographically to India as well. The to-be-acquired companies are:

  • Kasargod Power Corp (KPC), the operator of a 21.2MW power plant, which is one of only two existing independent power producers (PPA) in the state of Kerala. KPC, which commenced operation in May 2001, is backed by a 15-year power-purchase agreement (PPA). Octagon has proposed to pay RM16.5M cash for KPC which posted RM1.7M-RM1.8M annual net profit in the Mar 2002 and Mar 2003 financial years;

    RVK Energy (RVK), the only merchant producer in the state of Andhra Pradesh which has been operating a 19.2MW plant since Jan 2000 under a 12-year arrangement. RVK is in the midst of negotiating a seven-year PPA with a cement plant which if successful, would take up 97% of its expected electricity output. Relatedly, there is an ongoing dispute as to whether RVK needs a transmission licence to sell electricity to end users. Octagon has proposed to pay RM33.5M cash for RVK which posted RM3.8M-RM4.8M annual net profit in the past three financial years up to Mar 2003.

Take note that the vendors have guaranteed cumulative net profit for KPC and RVK amounting to RM11.5M in the Mar 2005 financial year, RM11.8M in Mar 2006, and RM10.2M in Mar 2007 based on prevailing exchange rates. The proposed acquisitions are inter-conditional and subject to various approvals including from the Indian and Malaysian authorities as well as shareholders.

Separately, Octagon has also entered into a Joint Development Agreement with KSK Energy Ventures (KSK) to express its intention to invest in Indian power projects developed or to be developed by KSK upon mutually agreed terms. KSK is linked to several individual vendors of KPC and RVK.

Surf88: While the acquisition pricing for KPC and RVK seems cheap at less than 5x PER based on guaranteed profit, one should note the various dimension of risks which may come with a diversification outside core expertise and in another country, including forex, operational, regulatory etc. We also note the uncertainties at RVK vis-à-vis the need of a transmission licence and also that it does not have a firm PPA as yet. Further, the net profit guarantee seems high relative to actual net profit of RM5.5M in the Mar 2003 financial year.

In the Oct 2003 financial year, Octagon itself posted flattish EPS of 18.4 sen, giving the stock an expensive historical PER of more than 30x based on the pre-suspension share price. Although the proposed acquisition should enhance valuation from such levels (assuming all goes well), we also note that the share price has more than doubled in the past few months, having traded at no more than RM2 up to mid-2003. We would hence advise caution. Meanwhile, financing for the RM50M proposed purchase should not be a problem given net cash of RM37M at end-Oct 2003 and about RM14M proceeds from the pending private placement of 5M shares @ RM2.88 to two independent directors.


The rising share price mentioned in the posting The Rise Of Octagon Consolidated made the stock expensive. (Rather expensive if you ask me. :p ) and then you have this DOUBLE DIVERSIFICATION plus private placement to independent directors

Me? I don't like to see such share placements. Yeah, after the share placement, how could the 2 independent directors be independent?.

Seriously? Share went up so fast... what else do we want? Better to take profit, yes? From ink and paint to power plants woh! Power plants business so easy meh?

The company was featured prominently in the news.

On Star Business:

  • Thursday February 26, 2004
    India power ops boost for Octagon

    OCTAGON Consolidated Bhd expects its proposed acquisition of a mini-power generation operation in India to help double its net profits in 2005 from the RM11mil reported for the year ended Oct 2003, according to chief executive officer Mazlan Ali.

    “The forecast is based on a net profit guarantee of RM11.53mil by March 2005 from the vendors and developers of the power plants and at least RM10mil from Octagon’s coating division,” he told a press conference in Kuala Lumpur yesterday.

    He said Octagon was guaranteed net profits of RM11.8mil in 2006 and RM10mil in 2007.

    The industrial and specialised coatings manufacturer marked its entry into the new core business when it entered into purchase agreement to buy over RVK Energy Ptd Ltd and Kasargod Power Corp Ltd (KPCL) with several parties, including Caterpillar Power Ventures International Mauritius Ltd, K&S Consulting Group Private Ltd and Maruti Finance Pte Ltd, on Feb 21 for RM50mil.

    Mazlan said the acquisitions, subject to approvals from the local authorities, would be funded internally as well as by offshore financing.

    “We have some RM40mil in cash and there’s not much we need to borrow,” he said.

    Mazlan said the acquisition of RVK and KPCL would provide the Octagon group not only with a stable cashflow but also a stable base for its entry into India.

    With an installed capacity of 21.17MW, KPCL, one of two independent power producers in Kerala that have started commercial operations, has secured a 15-year power purchase agreement with the Kerala State Electricity Board.

    RVK's plant, which boasts 19.17MW and a 12-year wheeling agreement with Transmission Corp of Andhra Pradesh Ltd, has been operating for the past four years.

    Octagon had also signed a joint development agreement with KSK Energy Ventures Ltd in a tie-up aimed at looking into opportunities in future power generation ventures in India, Mazlan said.

    He said the potential for power generation in India was huge in view of the current undersupply of electricity in a country of 1 billion people which was experiencing strong economic growth.

    India’s current 108,000MW of installed capacity is expected to double in the next 10 years.

    The world’s fourth largest economy expects a 8% to 10% growth in gross domestic product in the next 10 years.

On 2nd March 2004, on the Edge Weekly:

  • Corporate: A careful diversification, says Octagon
    By Lim Ai Leen

    What is a producer of industrial paints doing with power plants? Enhancing shareholder value,
    says the management at Octagon Consolidated Bhd, dismissing any notions of synergy between the two businesses.

    Last Wednesday, the company announced that it was buying two power producers in India - Kasargod Power Corp Ltd (KPC) and RVK Energy Private Ltd (RVK) - for RM50 million.

    "We hope to increase profits. Octagon has zero gearing and RM40 million cash, which only contributes fixed deposit income to the group," explains Mazlan Ali, managing director and chief executive officer.

    The purchases, Mazlan adds, will not be at the expense of dividend payouts. "We've been paying dividends at about 12.5% a year. And we are looking at maintaining that policy this year," he stresses.

    Half the company's cash pile will go towards the purchase, while offshore financing will supply another RM20 million. Octagon will be retaining RM10 million of the purchase price as security against performance guarantees provided by the vendors. "Our gearing will be at about 0.8 times after we complete the purchase," says Mazlan.

    According to executive director Siti Fatimah Mohd Shariff, the search for an alternative business has been going on for the last three years. "
    We decided to go into power producing because of the stable earnings cash flow," she says.

    Another factor was the price. "Assets are more expensive in Malaysia. And those who have successful businesses in India are very quiet about it," she observes.
    Not surprisingly, there is some scepticism about this move despite it being described as a "careful diversification" by Octagon's management. Both Mazlan and Siti Fatimah shrug off concerns that they may not have the requisite know-how for the new business.

    "Power plants are quite easy. It's a question of generation, transmission and distribution. We will learn the ropes, culture and acclimatise to the government there. We don't need a big team, just experienced people. And we aim to be fully independent within three years," says Siti Fatimah.
    ( Moolah: Waaa.. power plants are quite easy!!! Really? )

    Both producers operate "mini-power plants", that is, plants that generate less than 40mw of electricity. They both also have power purchasing agreements (PPA) in place.
    KPC has been operating for 21/2 years, and has 13 years to go on its PPA with the Kerala State Electricity Board. RVK, on the other hand, is a merchant power producer which sells to power distributors. It has been running for four years, and has a 12-year wheeling agreement with the Transmission Corporation of Andhra Pradesh Ltd.
    As back-up, vendors Caterpillar Power Ventures International Mauritius Ltd and K&S Consulting Group Private Ltd will stay on as operations and maintenance contractors at the plants. Plus there are net profit guarantees to the tune of RM11.53 million, RM11.79 million and RM10.19 million for the financial years ending March 31, 2005 to 2007, respectively.

    Mazlan also believes that the future looks bright. He says: "India's power industry is generating 108,000mw currently. And demand is expected to grow by an additional 10,000mw each year on top of that."

    If all goes according to the guaranteed numbers, Octagon could see earnings for the group double. Power generation could emerge as the second core business of the group, contributing an equal share of the profits.

    "That is assuming that the first core business does not also grow," Siti Fatimah points out, referring to the industrial paints and inks, or coatings, business under the Durachem group of companies. These are mainly supplied to the consumer electronics industry. This business has earned Octagon an average net profit of RM10.9 million a year over the last three years. Muted growth in this sector, though, was one of the reasons for pursuing the power alternative.

    It also provided the impetus for expansion plans - to improve research and development capabilities and move the business towards higher-end, higher-margin specialised coatings. New and larger factories in Shah Alam, Johor, China and Indonesia should start showing results over this year and next.

    "Currently, we are producing 4.4 million litres of paint. After all this expansion, our capacity will stand at 7.4 million litres," says Mazlan. The management are hoping to see a 10% growth in profits over 2004 and 2005 from this.

    Looking further ahead, Octagon may not be stopping at just two power plants. It has also entered into a joint development agreement with KSK Energy Ventures Ltd to explore potential new projects in India. KSK operates the "Small is Beautiful" fund, which focuses on development projects that generate less than 100mw of power. It has five projects in the works currently.

    India may also provide other opportunities. "We are not discounting industrial coating in India… together with prospects in the renewable energy industry," says Siti Fatimah.

    Octagon still requires approvals from shareholders and the Securities Commission before it can go ahead. Siti Fatimah is confident that investors will back the proposal. "We have proved ourselves as far as Durachem is concerned. And we are the same bunch of people," she says.

    Investors are reacting positively already, judging from the stock market. Octagon's share price closed at its year-high of RM6.50 last Thursday. This was an increase of 9.2% from its close of RM5.95 on Feb 19, before the announcement was made.

(Sorry the above news links were all broken. Too long ago! :P )

Waaaa.... share price closed at year high of 6.50.

On an adjusted price basis, that was around 3.40. (So from 1.30ish to 3.40!!!)

So how?

Not a little incy wincy scared? Still don't want to take profit? The stock is now looking really pricey. Company taking on huge diversifications. And the management... err... how would you rate their explanation of their diversifications? Did you like how they addressed this issue in the media?

Seriously.. sometimes it is ok to take profit... it is not a sin! As long as one finds that there are justifiable reasoning to do so!

(To be continued...
this is part II of the Octagon Series.

Part I: Octagon Series: The Rise )


  1. Octagon Series: The Rise
  2. Octagon Series: A New Octagon
  3. Octagon Series: Failed Plans And New Plans
  4. Octagon Series: The Fall