JT 8.2016This article by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 27 October 2017. The article is republished with permission.

Halcyon factoryHalycon Agri has 33 facilities in Malaysia, Thailand, Indonesia, China, and Africa for processing rubber. (Photo: Company)

Rubber - the stretchy, durable material made from milky-white latex and found in everything from condoms to car tyres - holds a particular magic for Robert Meyer.

The Chief Executive Officer of SGX-listed Halcyon Agri Corporation Ltd grew up with rubber factories as his playground.

"My father was a rubber trader, and introduced me to the business when I was very young. For most of my childhood, rubber was always at the dinner table," recalled German-born Meyer, whose family moved to Singapore just before he turned one.

"I remember sitting in the back of Dad's car every second Saturday of the month, driving up and down the highways in Malaysia to visit rubber factories."

After graduating with a Bachelor of Arts degree from the European Business School in Oestrich-Winkel, Germany in 1999, Meyer returned to Singapore, and five years later, started Halcyon Group - a holding company with investments in several businesses.

LQM 8d7557We've taken the constituent parts of what we merged last year - which were loss-making - and turned them around this year.

- Robert Meyer
CEO

Halcyon Agri Corporation

"By 2010, I was looking to get involved in rubber, as I've always been attracted to the industry," he said.

That year, Meyer acquired Hevea Global, which eventually became the Group's tyre major merchandising arm.

This was followed by the purchase of rubber factories in Indonesia between late 2010 and early 2011, all of which culminated in the founding of Halcyon Agri Corporation.

In 2013, Halcyon listed on SGX's Catalist board and continued its aggressive acquisition spree. Assets purchased over the next two years included 12 rubber factories in Malaysia and Indonesia, plantations in Malaysia, as well as two distribution businesses. The Group was upgraded to the Mainboard in 2015.

Last year, Meyer stitched together his most complex deal yet - a three-way merger of Halcyon, all the natural rubber assets of Chinese state-owned chemicals company Sinochem International Corp, and Singapore-listed peer GMG Global - to create the world's largest natural rubber supply chain manager.

Now, Halcyon - 55%-owned by Sinochem International - has 33 natural rubber processing factories spanning Thailand, Indonesia, Malaysia, China and Africa, with an annual distribution capacity of about 2 million metric tonnes. It also owns 122,000 hectares of plantations in West Africa and Malaysia.

The Group has a market capitalisation of over S$920 million. Its shares have registered a price decline of 4.9% in the 2017 year-to-date, compared with a gain of 16.1% and 16.0% respectively for the benchmark Straits Times Index (STI) and FTSE ST All-Share Index.


Aggregating the Industry


Meyer has made it his mission to "reboot" the natural rubber industry. He believes the dichotomy between how rubber is produced, and how it is priced, presents an opportunity for Halcyon to be an aggregator in the sector.

"What our customers require in terms of technical specifications when we sell them a tonne of rubber has risen exponentially - for example, we can't supply just any kind of rubber to the tyre majors - there are numerous chemical and material parameters involved," he said.

On the other hand, the marketplace for rubber, where demand and supply forces meet, remains archaic, dominated by a commodity-pricing system.

"You have a futures market which is subject to volatility on any given day, and where the reference or closing price has nothing to do with the cost of producing rubber, or the utility it creates for our customers," he added.

RobertMeyer
LQM 8d7557

Our aim is to integrate these assets in a sustainable manner, while at the same time, keeping a close eye on balance sheet strength and P&L results, so as not to give investors the impression that we're biting off more than we can chew.


- Robert Meyer
CEO

Halcyon Agri Corporation

(Photo: Company)

This dichotomy exists because the rubber barons of old were traders, playing an intermediary role between small farmers and the buying houses of tyre companies, Meyer noted.

"That trader mindset maintained the status quo. Rubber was a source of cash for them - in fact, some of the biggest family fortunes in Singapore can, in some way, be traced back to this product. But the cash got invested outside the industry, and so the industry stagnated."

Other industries like semiconductors, grains, and palm oil have already been aggregated, but not rubber. "This is the business that time forgot. So I've decided to take on that task, and for that, I created Halcyon Agri," he added.

Meyer's philosophy is simple: Round up talent in the industry, and marry this talent with the best assets that can be purchased.

"People who are familiar with the product and possess industry-specific knowledge are few and far between - because the sector has been devoid of investment for so long, it has not nurtured talent," he added.

The next step? Create a franchise based on transfer of knowledge from incumbent industry specialists to next-generation management trainees, as well as upgrading assets purchased to an industrial standard.

"That will allow us to break the outdated pricing system for the commodity, and replace it with a cost-plus pricing model. This, in turn, will reduce volatility, and level out returns on investment in the upstream segment," Meyer said.

Halcyon, in the meantime, has made big strides. "We've taken the constituent parts of what we merged last year - which were loss-making - and turned them around this year," he added.

For the six months ended 30 June 2017, the Group swung to a net profit of US$13.1 million from a net loss of US$14.3 million in the year-ago period. It has also completed a number of capital recycling initiatives, where non-performing assets, such as SIAT SA and Teck Bee Hang Co Ltd, are to be disposed and the funds set aside for new opportunities. It plans to identify additional strategic assets for sale to build its franchise.

"This is what we call the cleaning-up process, and it will generate improved income on a sustainable basis for the Group."

And the end game? To be the "Wilmar of Rubber", where Halcyon is the go-to enterprise globally for natural rubber, Meyer said, referring to SGX-listed Wilmar International Ltd, the world's largest palm oil trader.

 

♦ Driving Investment Returns

In 2017, Halcyon aims to contribute 10% to 11% of global supply, with this figure rising to 15% next year. "Our ambition is to account for 20% of world supply by the early 2020s," he added.

And Meyer sees no reason why this target cannot be achieved. "If our ambition was purely to develop scale, we could get there tomorrow. But our aim is to integrate these assets in a sustainable manner, while at the same time, keeping a close eye on balance sheet strength and P&L results, so as not to give investors the impression that we're biting off more than we can chew."

Halcyon has reorganised its businesses into a customer-centric structure comprising three market segments - global tyre makers, global non-tyre makers, and China. This in turn is sub-divided into three key divisions - upstream, midstream and downstream.

Stock price  59c
52-week Range 48.5c - 72c
Market Cap S$941.1m
Price/Book 0.84
Price Earnings 5.44
Dividend Yield -
Source: SGX StockFacts

"China is the Wild West of the rubber market - it's grown so quickly in a relatively short span of time, and accounts for more than a third of global demand," he noted.

The Group is focused on the differentiated allocation of capital across the entire supply chain and end-markets for rubber. Within this nine-segment matrix, the emphasis remains on driving returns on capital and investment.

And it is this diversification that sets Halcyon apart. "There's no other rubber company as globally diversified as we are, or with a business model that's as customer-centric as ours."

Another advantage of having an expanded footprint is the ability to monitor the cost of production globally.

"With our factory footprint, we're able to see the cost of raw materials across geographies, and this price discovery process allows us to allocate new investments into areas where we're most cost-competitive," he said.

In particular, the higher cost of production in Thailand - relative to Indonesia and Africa - could spark a re-routing of upstream investments. "You could see a shift possibly away from Thailand, certainly into Indonesia, and 100% into Africa," he added.

"The future of upstream field development - which refers to additional capacity that needs to be built in order for supply to keep up with demand - will be in Africa."

 

Velocity and Volatility

In the first nine months of 2017, global natural rubber output stood at 9.24 million tonnes, compared with total demand of 9.64 million tonnes, resulting in a shortfall of nearly 400,000 tonnes, according to data from the Association of Natural Rubber Producing Countries (ANRPC), whose members account for over 90% of global production.

Despite the shortage, a strong yen, higher inventories and a broad sell-off in global commodity markets continued to weigh on prices, ANRPC Secretary-General Nguyen Ngoc Bich wrote in a website commentary dated 10 October 2017.

The International Rubber Study Group (IRSG), an inter-governmental organisation that comprises rubber producing and consuming stakeholders, has forecast natural rubber consumption to grow 3% annually between 2017 and 2023.

LQM 8d7557With our factory footprint, we're able to see the cost of raw materials across geographies, and this price discovery process allows us to allocate new investments into areas where we're most cost-competitive.

- Robert Meyer
CEO

Halcyon Agri Corporation

Looking ahead, volatile rubber prices remain the biggest challenge, Meyer noted.

Natural rubber sank to a low of US$1,039 per tonne in February 2016, a level last seen in 2008, according to global pricing benchmark SGX SICOM TSR20 Rubber Futures. In January this year, prices more than doubled to a high of US$2,450 per tonne, before stabilising below the US$1,500 per tonne level.

"The price is volatile because of the three futures exchanges - the largest by volume and value being the Shanghai Futures Exchange, which trades on any given day between 50% to 100% of the annual crop in underlying notional value," he added.

"With that kind of velocity, you can imagine what it means for volatility, and all of that has nothing to do with the fundamentals of rubber."

The industry typically attracts short-term, hot money seeking quick returns. This exacerbates price volatility and nullifies any discounted cashflow or financial analysis tools that can be used to forecast investment returns, he pointed out.

The result? "Long-term, healthy funds are crowded out, which in turn means the industry supply chain is underfunded."

"If the price of rubber calms down and behaves more like the price of coffee or cocoa - it can still be traded on a futures exchange, just without that excessive volatility - you will see more long-term funds coming in."

That's because the case for rubber demand growth, which is pegged to the rise of mobility, and which in turn corresponds to an increase in gross domestic product, is irrefutable.

"The use of rubber is positively correlated to GDP growth - the wealthier we get, we more we consume the product called mobility," he noted.

"Take for example, Amazon, Uber and Tesla. Their operations rely, in one form or another, on vehicles and tyres. Without rubber, their businesses would completely fall apart."

Likewise, industry consolidation is a matter of when, not if. "Everyone knows consolidation is taking place - companies like Sri Trang and Halcyon are forming very large industrial groups, all with the target of gaining 15%-20% market share. So in five to 10 years, you will probably have three big players with 20% share each, and a couple of smaller guys."

Once that happens, the hullabaloo of trading will subside. "There may still be excessive trading in rubber, but those prices will not be the ones used to determine what we sell," he added.

♦ Reach for the Stars

"How many start-ups do you know have accomplished as much as we have? We were able to acquire businesses so much larger than ourselves, we've done almost every corporate transaction possible, and sailed as close to the wind as we wanted," he said.

"There's a manifest destiny in this business, and a certain wind beneath our wings."

The Group's 15,000 employees, its strong management bench, and superior assets also give him much comfort. "If there are challenges out there, and there will be, we're going to figure it out together."

An irrepressible optimist, Meyer believes today will be better than yesterday, and tomorrow will be an improvement over today. "That's why I have no trouble waking up in the morning," he quipped.

And in line with a love for rubber, Meyer is fascinated with cars. "I am a chip off the old block - my father infected me with an enthusiasm for automobiles, which cost way too much time and money," he admitted with a wry grimace.

LQM 8d7557I like people to challenge the status quo, to question why, what and how we are doing what we are doing.

- Robert Meyer
CEO

Halcyon Agri Corporation

"I love driving, and I love cars - whether fast or slow, new or old - and it is this lifelong passion that has helped me understand and identify with rubber as a product," said Meyer, who drives a Porsche 911, and recently purchased a 1979 Volkswagen Beetle convertible.

"It's an affliction! I'm sad to say that the last thing I usually do before going to bed every night is surf car websites," he added, tongue firmly in cheek.

The father of a daughter, nine, and a son, 11, is a huge believer in the values of trust, loyalty, and integrity. "All of that, for me, is a no U-turn street."

He also prefers the company of the curious and inquisitive. "I like people to challenge the status quo, to question why, what and how we are doing what we are doing - I guess that's the rebellious streak in me," he grinned.

Similarly, he wants each of his children to chart their own course in life - according to their personalities and talents - and be true to themselves.

"I don't necessarily expect my kids to go into this industry, but I do think they might gain some insight from the history and values of this business, which could make them want to reach a little higher, and a little further, for the stars than they would otherwise."


Financial results

Year ended 31 December (US$ '000) 2016 2015 2014 2013
Revenue 1,010,310 994,712 479,247 204,970
Operating profit 100,401 33,568 -250 12,130
Net profit / loss attributable to owners 74,380 6,805 -9,429 9,093



Quarter ended 30 June (US$ '000) 3QFY2017 3QFY2016
yoy chg
Revenue from continuing operations 482,145 187,111 157.7%
Net profit / loss from continuing operations 8,727 -12,000 n.m.
Net profit / loss attributable to owners 1,232 108 1,040.7%

Source: Company data

 


Outlook & Risks
  • Following the completion of its recent merger, Halcyon Agri has implemented new management, marketing and reporting platforms, both geographically and strategically, to manage the significant increase in the scale, scope and market share levels of the enlarged group. The Group continues to realise the positive impact of cost and revenue synergies, which together with improvement in operating leverage, has benefited the Group's performance, as seen in its 1H 2017 financials.
  • As part of Halcyon Agri's ongoing strategic review, and capital and asset optimisation, the Group announced on 2 October 2017 that it had entered into an agreement with Fimave SA/NV to sell its stake in SIAT SA, owned by GMG Global Ltd. The disposal of 9,348 ordinary shares, which represents 35% of the issued and paid-up capital in SIAT SA, was executed on Sept 29, 2017. The proposed disposal of shares will be made at an aggregate consideration of 192.56 million euros (S$308.23 million). The aggregate call option price of 5.5 million euros will be paid first, with the balance of 187.06 million euros paid upon completion of the deal.
  • The natural rubber market continues to be affected by significant price volatility. While market prices are presumed to maintain levels which support the sustainable development of the industry, continued price volatility is also expected over the remainder of 2017. The Group continues to tighten operational cost controls and to optimise its capital and asset base in anticipation of a tightening in supply of natural rubber, as well as ongoing market volatility. Halcyon Agri is convinced that the natural rubber products it produces and distributes remain irreplaceable to global mobility, and health and safety needs.



Halcyon Agri Corporation Limited

Halcyon Agri is a natural rubber supply chain manager, supporting the world's growing mobility needs through the origination, production and distribution of natural rubber. The Group owns 33 natural rubber processing factories in Indonesia, Thailand, Malaysia China and Africa and produces sustainable, natural rubber under its proprietary HEVEAPRO brand. It distributes its products and a range of other natural rubber grades, including latex, to an international customer base through its network of warehouses and sales offices in South East Asia, China, Europe, South Africa and the United States. The Group's workforce totals nearly 15,000 people and its aggregate natural rubber distribution capacity is approximately 2 million tonnes per annum.

 

For its 3rd quarter results for the period ended 30 September 2017, click here.

The company website is: www.halcyonagri.com.

The ccompany's Stock Facts page is here.

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