In a move to streamline its businesses, Koh Brothers Group is injecting its construction arm Koh Brothers Building & Civil Engineering (Pte) Ltd (KBCE) into its listed subsidiary Koh Brothers Eco Engineering (KB Eco) for S$19 million.
This will allow Koh Brothers Group to focus on property development, building materials as well as leisure and hospitality businesses with plans to expand regionally, while the enlarged KB Eco will become a one-stop engineering solutions company with greater cost efficiencies from shared overheads with KBCE.
Being part of KB Eco, KBCE will be able to raise funds more easily as it guns for potential merger and acquisition (M&A) targets, said Koh Brothers Group managing director and group CEO Francis Koh. He is also non-executive chairman of KB Eco.
One area that the enlarged KB Eco entity wants to expand into through M&A is mechanical and electrical engineering. There could also be cross-selling between KBCE and KB Eco, whereby KB Eco could refer clients to KBCE in overseas markets, Mr Koh told BT in an interview.
As the payment by KB Eco will be made via issuance of 369.15 million new shares at 5.15 Singapore cents apiece, this will shore up the group's stake in KB Eco from the current 41 per cent to 70.1-72.3 per cent, depending on whether the outstanding warrants held by Koh Brothers Group and an unrelated third-party Lee Thiam Seng under 2012 subscription agreements will be exercised.
There is no material impact on KBCE's contribution to group earnings under the new corporate structure since Koh Brothers Group consolidates the financials of KB Eco on its books.
Trading of shares in Koh Brothers Group and KB Eco was halted since Wednesday morning pending the announcement released on Thursday after market close.
Mr Koh said there were initially no plans to merge the group's construction arm with KB Eco when the group took up a 41 per cent stake in the former Metax Engineering Corporation in 2013 to tap opportunities in the water and wastewater treatment and hydro-engineering sectors.
But the group soon realised that restructuring the two entities will enable both KBCE and KB Eco to raise operational efficiencies and cost savings.
"Since Koh Brothers Group acquired a stake in KB Eco, KB Eco's financials have turned profitable through the optimisation of its processes and business strategies," he said.
With the restructuring, the enlarged KB Eco will find its niche sharpened in the hydro-engineering sector and the challenging construction sector both locally and regionally. KBCE is also well-positioned to tender for more large infrastructure projects, Mr Koh added, citing the development of the three-runway system at Changi Airport, the Deep Tunnel Sewerage System in Tuas, MRT works, and an upcoming desalination project in Marina East.
Last October, KBCE already secured a S$1.12 billion project from Changi Airport Group through an integrated joint venture with Samsung C&T Corporation for development works to effect three-runway operations at Changi Airport.
KBCE and KB Eco generally account for less than 20 per cent of Koh Brothers Group's annual net profit.
Despite the slowdown in private-sector construction activities, Mr Koh emphasised that KBCE remains resilient, thanks to its focus on public infrastructure projects, which account for 70-80 per cent of KBCE's turnover.
With a leaner focus post-restructuring, Koh Brothers Group is on the lookout to acquire hotels in Singapore and the UK to strengthen its recurring income stream. It currently owns Alocassia Apartments at Bukit Timah Road and Oxford Hotel at Queen Street in Singapore.
Mr Koh said that the group is also looking to tender for residential sites in the government land sales (GLS) programme, particularly in the east region of Singapore, but will give executive condominium (EC) sites a miss for now given the mandatory 15-month waiting time to launch the EC project from the date the land is acquired or foundation works are completed, whichever is earlier.
"We are a lean developer, so product concept is very important to us. When you take too long to launch a project, sometimes you are concerned that information will be leaked out. We want to go for projects that can be launched faster as we continue to go for lifestyle-themed developments."
Mr Koh also conceded that demand for ECs has cooled, going by market response to the group's first EC project Westwood Residences in Jurong West that is jointly developed with Heeton Holdings. By the end of last year, close to 170 units or 35 per cent of total units were sold at a median S$803 per square foot since its launch in May.
Koh Brothers shares were last traded at S$0.295 while KB Eco was traded at S$0.053.