Due to the huge strides that oil and coal prices have made over the year, energy counters have generally outperformed other sectors of the market.

That is probably why FM Holdings (FM), a counter that used to trade beneath the radar screen of investors came under the spotlight when its management recently announced the company’s intention to diversify into the energy sector.

On 3 July 2008, FM inked an MOU to acquire TriStar Global Services (TriStar), which has 2 coal tenements at Desa Rindu Hati and Desa Tanjung Raman, Indonesia. The purchase was made on the belief that “there is growing need for coal worldwide and we see bountiful opportunities in this industry.” While the payoff for coal mining may be lucrative, the industry is capital intensive and requires substantial investment in opening up the mines and building the necessary infrastructure.

Of course, capital is a rare commodity in a financial crunch. But securing it, proves to be not much of a problem for FM. Coming on the heels of the purchase of TriStar, FM secured the backing of 5 parties including a prominent Middle East investor, Mubarak Ahmad Mohd Bin Fahad, director of Injaz Asia Equity Partners and CEO of Investment and Development for the Private office of HH Dr Shaeikh Sultan, in a private share placement.

Pursuant to the placement, FM agreed to issue 17m new shares at $0.30 apiece, raising an aggregate of $5.1m. Mubarak Ahmad will take up 23.5% of the placement.

In re-inventing itself into a coal player, FM joins another Catalist counterpart, Jade Technologies Holdings, which recently divested its electronics business to hop onto the coal wagon. But unlike Jade, FM still plans to retain its core business.

Coal As A Hedge

Under its core business, FM manufactures and sells a wide range of polyresin giftware products, functional giftware, stationery, household and gardening products.

Operating in Hong Kong with manufacturing operations in China, the products are sold to ODM and OEM customers across the globe, principally Europe and America.

Demand for the company’s products remains robust as evidenced by the growing turnover in FY08 - revenue increased 7.9% to HK$180.2m. Nonetheless, the strengthening of the Rmb versus the US dollar, rising labour cost, intensive competition as well as increasing oil prices took their toll on the bottom line - earnings almost halved to HK$5m in the same period.

Despite the decline in profit, FM continued to engage in factory renovation and expansion in Dongguan, as higher production will lead to increased economies of scale and more cost saving.

Polyresin, the main raw material that FM uses in its product is manufactured from petroleum, hence the price of polyresin moves in direct correlation to oil.

While oil prices have receded in recent weeks, they are still trading at an uncomfortably high level. However, if oil futures continue to dip, FM will be one of the beneficiaries.

Rather than depending on the vicissitudes of the energy market or buying oil futures, FM has created a hedge to its core business by making the coal acquisition. As oil prices increase, demand for coal, as an alternative supply will move in tandem. As such, the coal business will buttress any increase in raw material price and provide another useful stream of revenue.

The hedge, of course is not perfect – perfection exists only in textbooks. In the short term, expect some boost to FM’s sales from the upcoming Beijing Olympics.