Why Mestron dispose of two (2) one-half-storey factories?

Wondering why Mestron to dispose of two (2) one-half storey linked factories to fund working capital?

The question here: Mestron just raised RM 25.28 million on 18th June 2019, but on 1st August 2019, they proposed to dispose of two (2) one-half storey linked factories -- Isn't it strange that within very short period, Mestron required the working capital again after listing of forty five (45) days?

18th June 2019

Under the listing exercise, Mestron has raised RM 25.28 million from its public issue of 158 million new shares at 16 sen per share.

1st August 2019

The Board of Directors of Mestron Holdings Berhad (“MHB” or “the Company”) is pleased to announce that Mestron Engineering Sdn. Bhd. (“MESB”) and Meslite Sdn. Bhd. (“MSB”) (collectively as “Vendors”), had on 1 August 2019 entered into two (2) separate Sale and Purchase Agreements (“SPAs”) with Lim Jii Yan and Lim Woan Yun (the “Purchasers”) respectively for the disposal of the following properties for a total cash consideration of RM2,250,000 (“Disposal Price”) (“Proposed Disposal”):

(a) all that piece of freehold land held under individual title Geran 150625, Lot 16732, Mukim Dengkil, Daerah Sepang, Negeri Selangor measuring in area of 186 square metres together with one and half (1½) storey linked factory erected thereon and bearing postal address No. 41, Jalan Meranti Jaya 12, Taman Meranti Jaya, 47120 Puchong, Selangor Darul Ehsan for a cash consideration of RM1,125,000.00 (“Property 1”); and

(b) all that piece of freehold land held under individual title Geran 150626, Lot 16733, Mukim Dengkil, Daerah Sepang, Negeri Selangor measuring in area of 186 square metres together with one and half (1½) storey linked factory erected thereon and bearing postal address No. 39, Jalan Meranti Jaya 12, Taman Meranti Jaya, 47120 Puchong, Selangor Darul Ehsan for a cash consideration of RM1,125,000.00 (“Property 2”),

(collectively referred to as “the Properties”).

Source: Bursa Malaysia Announcement on 1st August 2019

Newly-listed Mestron Holding Berhad

What caught my attention on Mestron Holding Berhad?

One of my friends sought my opinion as to the newly-listed Mestron Holding Bhd, which is a steel pole maker. By the way, he said that he was able to communicate with the management to seek for the related listing and business operation information.

Therefore, I searched the respective prospectus to do some studies on its business operations and financial analysis. After doing some studies, I listed down few questions for my friend to get answers from the management.

1. How do the management ensure that Mestron can stay competitive? 

A: On pole business. Instead of offering pole only on passive basis, we step to provide solution of lighting requirement by offer lighting + pole + related accessories. Lighting business through Max Lighting Solution we are partnering industry leading lighting company like Osram, GE, Gruppe to provide professional lighting service. Lastly on non lighting Specialty pole business, we are aggressively establishing network in Oil & Gas business through Korean EPC like Samsung and Hyundai whereas Telecommunications industry we work closely w Telco companies to co develop the optimize design for their infrastructure need.

2. What's kind of the strategy that the management will apply to venture into Brunei, New Zealand and Sri Lanka? How confident are you, Gary? In how many years, the overseas sales can overtake Malaysia?

A: We are developing overseas business partner to actively promote our products at their respective countries. At the peak in 2011, we were having 40% of our sales exporting to Australia during the mining boom in Australia. As our business concentrates locally, we do not foresee Export to overtake local sales in near future.

3. From the past three-year financial data, it could be interpreted that the Company's core business has apparently been shifted from the manufacturing to the trading by referring to the revenue segment. The question here is: Did the management lose their focus or not aware of the shift of the business strategy?

A: Past few yrs witnessed the emergence of LED technology into lighting. From a 500 rm lantern it became 3k+ each. Growth on lighting and pole business will grow together in tandem. If we succeeded in a project, chances is that it will be Lantern + Pole. Both products complement each other to make themselves stronger.

 It will not an isolated case

4. Would your business be involved in bribing the government officers or related authorities to get the projects?

A: Since our listing exercises started 18 mths ago, we were subjected to audit and checking by various professionals from different background in ensuring Mestron conduct business in Legal and Professional manner. We do not practise illegal activities as mentioned.

5. Why piling up the inventories from FY2016 onwards?

A: We finally relocated to our self owned factory in 2016. The larger factory allows us to increase our inventory to improve our supply competitiveness.

The above highlighted in blue, it's the answers were given by the management. As for No. 5, it sounds like the reason was not that specific and convincing.

Figure 1.0

By the way, from the Figure 1.0 -- hot rolled price movement, it shows that the price had been skyrocketing from mid of the year 2016 onwards but Mestron appeared to go against the steel price hike and still able to produce the excellent financial results -- the gross margin had been trending up from 15.70% to 33.20% -- actually, what's something behind the numbers?

My concern here: whether the increasing gross margin (Figure 2.0) was driven by piling inventories or Mestron management is very good at running business?

Figure 2.0

Other than the above, the below few things that as an investor, you may ponder but I won't add on my comments (due to...you know one):

Suspect#01

Suspect#02