Thursday 10 May 2012

TRC (FV RM0.84 - TRADING BUY) Corporate News Flash: MRT Contract in The Bag?


THE BUZZ
Southern Steel informed Bursa Malaysia that it has entered into a joint venture agreement on 8 May 2012 with NV Bekaert SA (Bekaert), a company incorporated in Belgium, to form a joint venture company (JV Co.) in Singapore for the manufacture and sale of specified steel. The terms and conditions set under the proposed JV Co. include:

- Southern Steel shall sell its entire equity interests in wholly-owned subsidiaries, Southern Speciality Wire SB and Southern Wire Industries (Malaysia) SB plus Cempaka Raya SB, to the JV Co.

- Separately, Bekaert shall sell its entire galvanized and multi-coated wire business in Indonesia  (currently undertaken by its Indonesian subsidiary, PT Bekaert Indonesia) to the JV Co.

- The above transaction will result  in  Southern Steel and Bekaert holding approximately 67% and 33% of the enlarged share capital of the JV Co. respectively.

- Concurrently, Southern Steel shall sell such number of ordinary shares that amount to approximately 22% of the enlarged share capital in the JV Co. to Bekeart, such that the final participation ratio in the JV Co. remains at Southern Steel – 45%: Bekeart – 55%.

OUR TAKE
Briefly on Bekaert. Bekaert, founded in 1880, is a global technological and market leader in advanced solutions based on metal transformation and coatings. Bekaert is also the world’s largest independent manufacturer of drawn steel wire products. Headquartered in Belgium and  listed on Euronext,  it is a global company  that  serves customers in more than 120 countries worldwide. Bekaert pursues sustainable profits for all its business activities and its combined sales amounted to EUR1.1bn as of 1QFY12. In 2011, the company generated EUR4.6bn in combined sales, while posting a net profit of EUR193.0m.

Moving up the value chain. Southern Steel has been focusing on the higher grade wire rods and downstream products in  recent years.  Since Bekaert has  expertise  in drawn steel wire products and advanced solutions based on metal transformation and coatings, Southern Steel will now have the opportunity to expand its steel wire manufacturing and sale business. It will also be able to jointly promote Southern Steel and Bekaert brands in the ASEAN market since the  JV Co. will have the exclusive rights (directly or indirectly) to manufacture and sell  such  products in the ASEAN region. Under the agreement, Bekeart shall grant the JV Co. an exclusive licence to use and exploit some of its technology to manufacture, sell, market and distribute products in the ASEAN region in exchange for a 1% royalty on net annual sales. In return, Southern Steel shall grant the JV Co. the rights to use some of its product trademarks in exchange for a 0.5% royalty  on net annual sales. All in all, we think the proposed JV will  provide long-term synergies to  the  Southern Steel group despite the dilution of equity, as the JV may eventually lead to the creation of a bigger and sweeter pie for both parties.

Source: OSK188

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