1. INTRODUCTION
The Board of Directors of GPP (“Board”) wishes to announce that the Company (“the Lessee”) had on 21 October 2019 entered into a Long Term Leasing Agreement with Borneo Samudera Sdn Bhd (“BSSB” or “the Lessor”) (“Agreement”) whereby the Lessor is desirous of leasing and the Company is desirous of taking the lease over an oil palm mill located in Tawau, Sabah erected on a piece of land held under PT. 99100015 Land Offer L.S.1001.1.2515/109 (SHJ) (“Land”) (“Serudung Palm Oil Mill”), all buildings and structures erected thereon and all machineries and equipment installed and fixed thereon (collectively referred to as “Demised Premises”) on an “as is where is” basis for the period at the rental and upon the terms and conditions as contained in the Agreement.
2. INFORMATION ON THE LESSOR
BSSB was incorporated as a private limited company in Malaysia under the Companies Act 1965 on 27 February 1995 (Source: Search result with Companies Commission of Malaysia). It is the legal and beneficial owner or operator of Serudung Palm Oil Mill located at the Land measuring approximately 4.8 hectares.
3. SALIENT TERMS OF THE AGREEMENT
3.1 Leasing term/Tenure
The lease of the Demised Premises shall be on an “as is where is” basis for a period of 20 years (with an option to extend for a further term of 10 years), commencing from the date the Company receives physical possession of the Land from the Lessor (“Commencement Date”).
The Company is given a rent-free period of 6 months from the Commencement Date (“Interim Period”) to carry out the following:
(i) fit-out, refurbishment, alteration, renovation, reparation or whatever works to enable the commencement of the operation of Serudung Palm Oil Mill;
(ii) application for approval from relevant authorities to construct an accessing and connecting road to palm oil mills located within the Land;
(iii) application for licence, approval and permit from relevant authorities to manage, operate and administer Serudung Palm Oil Mill; process fresh fruit bunches, produce crude palm oil (“CPO”) and sale of CPO and all related products.
The Lessor shall grant an extension of time not exceeding 2 months for the Company to perform above-mentioned works upon the Company’s request at any stage within the Interim Period.
If the Company intends to extend the lease for a further term of 10 years, it shall, not less than 6 months prior to the expiry of the Agreement, give written notice to the Lessor of such desire for Lessor’s consideration. If tenure is extended, the monthly rental may be increased by not more than 15% of the rent payable in preceding year and subject in all other respects to the same stipulations in the Agreement except for the clause on renewal.
3.2 Security deposit
The Company shall pay the Lessor a sum of RM300,000 by way of bank guarantee, within 14 days from the date of the Agreement, as security for the due observance and performance by the Company of all the stipulations, terms and conditions of the Agreement (“Security Deposit”). The Security Deposit shall be maintained throughout the lease tenure.
Upon the expiry of the lease, the Company shall, at its own cost, reinstate the Demised Premises to its original state of condition. If the Company fails to do so, the Lessor shall at its discretion deduct sums from the Security Deposit for such works undertaken and refund the balance, free of interest and after deduction for rental and other sums owing by the Company to the Lessor up to the handover of the Demised Premises.
3.3 Rental
Both parties agree to a fixed monthly leasing fee for 1st to 6th years, 7th to 12th year, and 13th to 20th year.
3.4 The Lessor’s covenants and obligations
3.4.1 The Lessor agrees, undertakes and covenants to make available the Demised Premises exclusively for the purpose of the Agreement including but not limited to:
(i) the Company is assigned/granted with absolute rights to use and occupy the Demised Premises so long as it complies with the terms and conditions set forth in the Agreement; and
(ii) subject to the compliance of the terms and conditions of the Agreement by the Company, the Company shall be given quiet and uninterrupted enjoyment on and over the Demised Premises free from disturbance throughout the tenure of the Agreement.
3.4.2 If the Lessor decides, during the subsistence of the Agreement, to sell, assign or otherwise deal with the Demised Premises or any part thereof, the Lessor shall cause and procure the intended purchaser or the intended assignee or the intended party who take on the dealings to accept a novation of the Agreement or, as the case may be, to enter into a fresh agreement with the Lessee.
3.5 The Company’s covenants and obligations
3.5.1 The Company agrees that it shall bear the responsibilities, at its own cost and expenses to do the following:
(i) to construct an accessing and connecting road to palm oil mills located within the Land;
(ii) to manage, operate and administer the Demised Premises;
(iii) to sell and purchase or trade fresh fruit bunches, palm oil, palm kernel and other by-products of the palm oil mill; and
(iv) to manage, use and howsoever exploit the income generated, earned and derived from the operation of Serudung Palm Oil Mill.
3.6 Default
3.6.1 Upon reasonable notice in writing (which shall not be less than 30 days’ notice), the Agreement may be terminated immediately ‘with cause’ by either party, upon occurrence of any one of the following events:
(i) failure of either party to perform its obligations under the Agreement after the date of Agreement and after reasonable notice of failure has been given and such failure has not been rectified or remedied;
(ii) either party in breach or fail to comply with any of the terms of the Agreement or any of its obligations, responsibilities and duties stated in the Agreement;
(iii) filing of such other party of a voluntary petition in bankruptcy or insolvency, or a petition for reorganisation or protection under any bankruptcy or insolvency law;
(iv) the consent of such other party to any involuntary petition in bankruptcy or insolvency;
(v) the making of an order or judgment by any competent court, on the application of a creditor, adjudicating such other party bankrupt or insolvent, or approving a petition seeking reorganisation, or appointing a receiver, for all or a substantial part of such party’s assets which order or judgment shall continued unstayed and in effect for 60 days; and
(vi) the occurrence of any situations as specifically laid down in the Agreement.
3.6.2 If the Company terminates the Agreement with cause:
(i) the Security Deposit be fully refunded to the Company within 30 days from the date of termination;
(ii) Lessor shall pay a sum equivalent to the Security Deposit to the Company as part of damages within 30 days from the date of termination;
(iii) Lessor shall pay a sum equivalent to all capital expenditures incurred by the Company (subject to production of certified true copies of supporting documents by the Company) as at the date of termination less the depreciation cost to the Company as part of damages within 30 days from the date of termination;
(iv) the Company to retrieve all movable fixtures, furniture, equipment and machineries which are purchased and owned by the Company, from the Demised Premises;
(v) the Company be given sufficient time (in any event not exceeding 3 months) to sell and dispose of stocks produced through the use of the Demised Premises;
(vi) forthwith, the Demised Premises to be redelivered and returned to the Lessor free from encumbrances and in good and tenantable condition (fair wear and tear excepted);
thereafter, the Agreement shall cease to be valid and neither party shall have any claims against the other save for antecedent breaches.
3.6.3 If the Lessor terminates the Agreement:
(i) the Lessor forfeits the Security Deposit as agreed liquidated damages;
(ii) the Company to pay a sum equivalent to 6 months rental to the Lessor as part of damages within 30 days from date of termination;
(iii) the Company shall settle all outstanding rentals or debts owing by the Company (with interest thereon) within 30 days from date of termination;
(iv) upon full settlement of (i) to (iii) above, the Company is permitted to retrieve all movable fixtures, furniture, equipment and machineries (which are purchased and owned by the Company), from the Demised Premises;
(v) the Company be given sufficient time (in any event not exceeding 3 months) to sell and dispose of stocks produced through the use of the Demised Premises;
(vi) the Company to provide administrative assistance to the Lessor to operate the Demised Premises for a maximum period of 3 months from date of termination;
(vii) forthwith, the Demised Premises to be redelivered and returned to the Lessor free from encumbrances and in good and tenantable condition (fair wear and tear excepted);
thereafter, the Agreement shall cease to be valid and neither party shall have any claims against the other save for antecedent breaches.
3.7 Early termination
Either party may terminate the Agreement by giving 3 years written notice to the other party after the expiry of 15 years from the Commencement Date. In such termination, neither party shall have a claim against each other.
4. RATIONALE
Serudung Palm Oil Mill is currently equipped with the equipment and machineries for palm oil milling activities as well as gasifier and gas engines which could convert synthetic gas derived from empty fruit bunches (a type of biomass) (“EFB”) into electricity to power the operations of mill.
The Lessor wishes to leverage on the engineering and technical know-how of GPP and its group of companies (“GPP Group”) as well as its Executive Directors to commence the operation and enhance the operational efficiency of Serudung Palm Oil Mill. Hence, the Board has decided to enter into the Agreement and undertakes the activities set out in section 3.5.1 of this announcement, after considering the following:
(i) there is readily available EFB from Serudung Palm Oil Mill upon commencement of the operation of the mill, which the Company can use as feedstock to generate electricity (which shall be considered as a type of renewable energy) to power the operations of the mill.
The Company’s wholly-owned subsidiary, Green Energy Resources (M) Sdn Bhd (“GER”), has the engineering and technical know-how in using various types of biomass to produce renewable energy. GER has established track record in developing biogas plants that use palm oil mill effluent as feedstock and convert biogas into renewable energy. It is also involved in the design and testing of gasification plant that use animal manure to produce and convert synthetic gas into renewable energy. The Board believes that, with GER’s expertise to upgrade and calibrate the existing equipment and machineries at the mill to process the EFB, GPP can improve the processes of gasification of EFB to generate and scrub the synthetic gas as fuel for internal combustion within gas engines, as well as maximise the generation of renewable energy (“Improvement”). Upon successful implementation of the Improvement, the Board expects to further improve the operation efficiency at Serudung Palm Oil Mill and have cost saving arising from the usage of renewable energy to power mill operation.
The Company intends to leverage on the successful implementation of the Improvement to bid for similar projects with other palm oil mill owners / operators within Malaysia, which shall augur well for the business and future financial performance of GPP Group;
(ii) in view of the costs to be incurred by GPP to upgrade and calibrate the existing equipment and machineries as well as improving infrastructure within the Demised Premises, the Lessor allows the Company to trade and sell CPO, palm kernel and other by-products arising from the milling activities at the mill during the lease tenure. This arrangement presents an opportunity for GPP Group to generate long-term recurring income stream, which shall augur well for the business and future financial performance of GPP Group; and
(iii) The Company’s Executive Directors have relevant expertise and vast experience to undertake the activities stipulated in the Agreement. They have experience over various fields of palm oil milling, machine design and fabrication, and mechanical and engineering services for power plants and related equipment.
5. RISK FACTORS
The Board is of the view that the Agreement will not subject GPP Group to new industry risk as it is already exposed to inherent risk associated with palm oil industry. The Board is of the view that it can leverage on the technical knowledge and vast experiences of its Executive Directors across various fields of palm oil industry to implement the Improvement.
Notwithstanding the above, the potential risk factors relating to the Agreement, which may not be exhaustive, are as follows:
(i) Regulatory approval for activities to be undertaken by GPP at the Demised Premises
GPP will apply to relevant authorities for approval or permit to undertake the activities as set out in section 3.1 of this announcement. If the Company is not able to procure such approval or permits, the potential benefits arising from the Agreement will not materialise. The Company will take all reasonable steps to obtain the regulatory approval for such activities.
(ii) Fluctuation in CPO prices
The prices of palm oil fluctuate over time based on demand and supply conditions in the global market. Such other factors are beyond GPP Group’s control. Any fluctuation in CPO prices will affect GPP Group’s profitability. In mitigating this risk, the management will adopt a prudent management approach with the objectives of enhancing cost effectiveness and optimisation of returns and focusing on efforts to improve the overall operational efficiency of the mill.
(iii) Financing risk
The Company need to incur capital expenditure to implement the Improvement. Such capital expenditures may increase the borrowings and gearing level of GPP Group correspondingly, it will expose GPP Group to interest rate and debt servicing risks whilst any utilisation of internal funds is expected to result in depletion of funds available for working capital purposes, which may have an effect on the cash flow position of GPP Group. Nevertheless, GPP Group will endeavour to manage its cash flow position and funding requirement prudently, to mitigate this risk.
6. FINANCIAL EFFECTS
6.1 Share capital and substantial shareholders’ shareholdings
The Agreement will not have any effect on the issued share capital of the Company and substantial shareholders’ shareholdings in the Company as it does not involve issuance of new ordinary shares in the Company.
6.2 Earnings, net assets and gearing
The Agreement is not expected to have any immediate effect on the earnings and net assets of GPP Group for financial year ending 31 December 2019. Upon successful implementation of the Improvement, it will contribute positively to the future earnings of GPP Group. The Company intends to use a combination of internal funds and bank borrowings to finance the Improvement, the breakdown of which has not been determined by the management of the Company at this juncture. GPP Group’s gearing is expected to increase if it uses bank borrowings to finance the Improvement.
7. APPROVALS REQUIRED
Save for the relevant regulatory approvals as disclosed in section 3.1 of this announcement, the Agreement is not subject to the approval of the shareholders of GPP at this juncture. In the event there is material contribution (revenue or net profit) from the operation of palm oil mill in the future, subject to consultation with Bursa Malaysia Securities Berhad, the Board may seek approval from the shareholders of GPP for diversification of GPP Group’s business activities to include operation of palm oil mill.
8. INTERESTS OF DIRECTORS, MAJOR SHAREHOLDERS AND PERSONS CONNECTED WITH THEM
None of the Directors and/or major shareholders of GPP and/or persons connected with to them has any interest, whether direct and/or indirect, in the Agreement.
9. STATEMENT BY THE DIRECTORS
The Board of Directors of GPP, having considered all aspects of the Agreement, is of the opinion that the Agreement is in the best interest of GPP Group and that the terms of the Agreement are fair, reasonable, and on normal commercial terms.
This announcement is dated 21 October 2019
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