With its ongoing hospitality projects on hold because of the Covid-19 pandemic, Mercurius Capital Investment has chosen to diversify into the consumer staples business of selling groceries instead.
On July 12, Mercurius announced further details of a planned $36 million acquisition of an entity called Songmart Holdings, which operates 12 minimarts and convenience stores under the “Songmart” brand as well as a supermarket branded “Granville”. These outlets are all located in Johor, Malaysia.
With the ongoing pandemic disrupting economies and businesses, Mercurius is but one of a growing number of Singapore-listed companies that in a way has gone back to the basics: to try and eke out new growth in the decidedly staid but more resilient consumer staples and food-related sector.
For instance, Far East Group, which sells aircon and refrigeration equipment, this month announced its plan to acquire a 20% stake in an Australian fresh vegetables producer. KTL Global, which used to provide rigging equipment, is diversifying into fresh vegetables distribution under new shareholders and management.
Indeed, companies that are already in the food production has seen earnings improvement or greater investors’ interest recently. For one, Russia-based Don Agro International is pushing ahead to boost its production with the acquisition of more farm land and shifting focus to the cultivation of organic crops despite the pandemic.
Next-gen’s ambitions
Mercurius’ acquisition of Songmart will be funded by the sale of 200 million new shares at 18 cents each or $36 million in total to the owners of the various stores making up the target group. No independent valuation has been conducted.
The 200 million new shares will increase Mercurius’ share base by 13.1% to nearly 1.5 billion shares. The shares will be issued in three tranches, in approximately equal amounts. Chang Wei Lu, executive chairman and CEO of Mercurius, explains to The Edge Singapore in an interview that he has known the sellers for some time.
Chang says “the idea of collaboration did arise sometime ago” although it was not followed up. But as the pandemic dragged on, both parties resumed discussions again. Among the sellers, there are second-generation business leaders who are keen to expand and transform Songmart into a modern groceries chain.
Chang, who has experience in hotel management, property investment as well as the F&B and lifestyle businesses, believes that the grocery business acquisition will enhance Mercurius shareholders’ value in the long term.
For now, Mercurius’ various real estate projects are suspended and will remain so until there is better clarity on the recovery from the pandemic. They include the Kempas project in Johor, Malaysia, and the Sheraton Grand Bay Resort in Phuket, Thailand.
Chang still holds to the belief that “hotels have always been our main focus”. However, “Given the current [Covid-19 situation], the opportunity for the grocery business will be our main priority at this point in time.”
With the property projects still undergoing development, Mercurius has yet to generate any operating revenue for several years now. The same goes for the most recent 4QFY2020 ended March. Losses for the quarter narrowed slightly to $229,000 from $272,000 a year ago.
Stock comes alive
According to Mercurius, the pro forma book value of the target group was RM13.8 million ($4.4 million) for FY2020 and RM16.1 million as at March 31. For the whole of FY2020, the target companies, calculated as one entity, reported profit before tax of RM9.4 million or $3 million. This means, based on the price tag of $36 million, the acquisition is priced at around 12 times historical earnings.
In 4QFY2020, the target group reported earnings of RM2.4 million. Pre-acquisition, Mercurius’ losses per share for FY2020 was 0.15 cent. On a pro forma basis, post-acquisition earnings per share would be 0.073 cent. The deal comes with after-tax profit targets of RM15 million for FY2022 and RM16.5 million for FY2023.
In the few weeks before and after the details of the acquisition was announced, Mercurius shares came alive. As recent as the middle of March, the share price was as low as two cents. A month later, following initial news of the acquisition, shares of Mercurius rose to as high as 10 cents on July 8.
Some of the rise in trading volume was contributed by Chang himself. On July 13, he sold 18.4 million shares for a total of $1.74 million, which works out to around 9.4 cents each, near the recent peak. On the same day, he bought back 2.54 million shares at 8.8 cents each. He now holds some 312.17 million shares or 23.54%.
According to Mercurius’ chief finance officer, Mah Seong Kung, the transactions are a “personal financial management decision in his own right which did not impair his controlling stake in the company.” And the subsequent buyback “demonstrates his positive view on the value” Year to date, Mercurius’ share price has more than trebled to close at 6.3 cents on July 26, valuing the company at $77.6 million.
Two-brand positioning
According to Chang, before embarking on the acquisition of Songmart Holdings, Mercurius had commissioned a market study in Indonesia and Malaysia, which shows that the Songmart brand is highly recognised and favoured by the Malay-Muslim community.
And although dining-out has been curtailed after the return of heightened measures to curb a spike in Covid-19 cases, groceries remain an essential business and therefore should see stable if not growing demand.
Even with barely a dozen outlets now, Mercurius and the new partners already have ambitious plans to open more than 500 stores within the next three years. Chang’s confidence stems from his belief that the Songmart brand has a good level of recognition, especially within the Malay-Muslim community.
The expansion is estimated to cost around $100 million and the funds, according to Chang, will be raised through shareholders who are “committed to moving this business to a level that we are comfortable with. To achieve this, we will raise funds through a combination of private and public placements, and bank borrowings”.
The rapid expansion, however, will not be a reckless exercise. Mercurius plans to set up a market research team of around 10 people to fan out and work out the demographics of the various localities in Malaysia and Indonesia.
The groundwork is presumably time-consuming too, but Chang believes that it will be worthwhile. “It’s not about opening stores for the sake of opening stores, it’s more about the demographics and determining if there are underserved communities,” he explains.
Chang will also use the two different brands to go after different market segments. For example, Songmart will be targeting the Malay-Muslim markets away from the big cities. With its four decades of history, Songmart is an established brand, and within certain communities, “it is a part of their routine to buy from this mart”, which is the reason why Chang finds Songmart Holdings to be such an attractive investment.
In fact, Chang believes that the Songmart brand will find recognition even among Malay-Muslim communities in other countries such as China and Australia, and therefore, potential markets for him to go into.
On the other hand, the existing Granville supermarket, which will be renamed M Mart, where “M” stands for “Mercurius”, will be used to target a more affluent market by opening in the populous urban centres such as the Klang Valley, Penang and over in Indonesia, Surabaya, Jakarta and Medan. Likely, they will be located in the malls, and given the “explosive growth” plans, Chang believes he is a potential tenant that the malls would be keen to bring in with good rental rates.
Due to the premium nature of M Mart’s positioning, the price points will be higher as their key market is millennials and expatriates who are willing to pay extra for the quality of services received.
In return for charging a premium, Chang hopes to differentiate M Mart further with a better service level and mix of product offerings, that goes “beyond the normal of going into a mart, getting your goods and quickly leaving.”
For example, just like 7-Elevens, M Mart will provide other services including topping up of phone cards, paying for electricity and utility bills. Additional possibilities include tie-ups with third-party service providers such as plumbers or electricians on-demand round the-clock, making M Mart more like a “concierge” instead. He hopes to also win over customers’ loyalty with a range of quality products not carried elsewhere in the market.
Chang is also exploring the idea of marking out a small area in the various M Marts for reading, browsing, space for games or even a quick meal. “For example, if we sell coffee, there could be a space where they could drink it. This enables them to consume whatever we sell on the spot, or, maybe even beer and wines too,” says Chang.
Now, given how a lot of buying has gone online, Chang knows Songmart needs a meaningful online presence too. To this end, the company is “actively” developing one. In addition, with a bigger scale expected, Songmart might consider creating its own house brand. The same strategy is already used by many supermarkets and grocery chains, given how they typically sell their house brand products at a slightly lower price point.
Interestingly, the ongoing pandemic is playing out favourably for Mercurius. According to Chang, following his initial announcement in April that Mercurius is moving into groceries, other stores, facing issues of rental, inventory or other reasons, “have approached us to see if we can collaborate with them or acquire them”.
“In a crisis time, we do see people struggling in the mini-mart and grocery business, which presents for us an opportunity to acquire them using our platform to expand and open up networks”. Thus, Chang believes “there is no problem in reaching the company’s goal of 500 stores in three years”.
