Case Study: AcroMeta’s Reallocation of Resources to its Profitable Businesses Segments.
This article serves as a case study to dissect the nuances of AcroMeta's pivotal decision and the lessons it holds for other businesses.
Introduction
On 31 October 2023, Catalist-listed AcroMeta Group Limited (“Acrometa”), announced that the Company’s indirect subsidiary, Acropower Pte. Ltd. In which it had an effective interest holding of 56%, had placed its wholly owned subsidiary, Neo Tiew Power Pte. Ltd. under creditors’ voluntary liquidation.
Neo Tiew Power was incorporated in February 2020 to produce renewable energy by converting biomass poultry waste into green electricity through the process of pyrolysis. However, due to the Covid-19 pandemic and changes to regulations for the safe handling of potentially dangerous animal waste products, the Company has not been able to commence operations.
In an ever-changing economic landscape, corporate agility and adaptability are a necessity for businesses seeking long-term profitability and sustainability. This principle is exemplified in the corporate action taken by AcroMeta a publicly listed company primarily in the business of laboratory construction and the development of co-working laboratory spaces.
When their renewable energy initiative became untenable due to unforeseen challenges, AcroMeta made a strategic decision to reallocate resources.
Strategic Resource Re-allocation
Capital and human resources from Neo Tiew Power were channelled into two of AcroMeta’s profitable and cash flow-positive ventures:
In the past 24 months, the contract wins and corporate developments in the two businesses have been encouraging and strong growth is expected to continue as these are businesses that leverage on Singapore’s position as a regional biomedical R&D and manufacturing hub; a position that is integral to the country's Future Economy Roadmap.
See https://www.edb.gov.sg/en/our-industries/pharmaceuticals-and-biotechnology.html
Contracts and corporate developments in the past 24 months. Reference: Acrometa’s SGX announcements and press releases
Economic Rationality: ROI and Opportunity Costs
The economics of this decision lie in the basic principles of ROI (Return on Investment) and opportunity costs. The renewable energy venture was untenable. On the other hand, the laboratory construction and co-working lab spaces businesses were cash flow positive and saw increasing business opportunities and contract awards and deals.
Thus, reallocating resources to these ventures was not just a strategic move but an economically rational one.
Positive impact on the Group’s Financials
A fact often forgotten by investors is that liquidating an unprofitable subsidiary can have a positive impact on the Group’s Financials. Here’s why:
Impact on Net Tangible Assets
Net Tangible Assets (NTA) are calculated by subtracting the total liabilities and intangible assets from the total assets of a company. When a loss-making subsidiary like Neo Tiew Power is liquidated, its associated liabilities—like debts, payables, and other financial obligations—are either paid off or written down. The removal of these liabilities from the consolidated balance sheet can result in an increase in the Net Tangible Assets of the parent company, AcroMeta Group, assuming that the liquidation process does not incur more costs than the liabilities eliminated.
Impact on Earnings Per Share (EPS)
Earnings Per Share is calculated as the net income of a company divided by the number of outstanding shares. A loss-making subsidiary like Neo Tiew Power would typically drag down the net income of the entire group, thereby negatively affecting the EPS. Once the subsidiary is liquidated, its losses will no longer impact the group's consolidated net income. As a result, the Earnings Per Share would likely improve, assuming other business operations remain constant or improve.
Additional Considerations
Lessons and Takeaways
AcroMeta's case offers vital lessons in corporate agility:
For original article, please visit: Strategic Shifts: A Dialog On Corporate Adaptability- Investor-One