THE BUZZ
IJM has entered into an agreement with Scomi Group to take up a stake of up to 25.1% in the latter for a total consideration of RM149.3m.
OUR TAKE
Details on the proposal. IJM has agreed take up to a 25.1% stake in Scomi Group for a total investment of RM149.3m via the following:
i) A subscription of 119.1m new shares in Scomi Group for a cash consideration of RM39.3m; and
ii) A subscription of redeemable convertible secured bonds of an aggregate nominal value of RM110m in cash.
The terms of the bonds. The bonds to be issued will have a three-year with zero coupons attached. Scomi has the option to redeem all or part of the outstanding bonds in cash at each anniversary of the issue date. The redemption price will be the nominal value of the bonds plus a 10% yield for each full year that the bonds remain outstanding.
Entry cost at RM0.355/share. From our calculation, IJM’s potential 25.1% stake in Scomi works out to the cost average of RM0.355 per share, taking into account the potential bonds conversion at a stipulated price of RM0.365 per share.
Surprise, surprise. The announcement caught us by surprise as IJM previously had not revealed its intention to establish a foothold in the O&G business. Having said that, the valuation pegged for its initial investment of RM39.3m translates into a FY12 PE of 11.4x, which is reasonable though with some risks involved given Scomi’s ongoing restructuring, if we were to annualise Scomi’s 1HFY12 net profit of RM19.5m.
Brief summary on Scomi. Scomi Group has existing business presence in oilfield services and transport solutions through its 67.3% stake in Scomi Engineering as well as in energy logistics via its 42.8%-owned associate in Scomi Marine. In FY11, the group registered revenue of RM1.38bn while core earnings closed in the red with net losses of RM232.3m due to one-off expenses of RM244.8m, which were impairment losses charged during the year as well as the slower-than-expected progress in its ongoing monorail project in Mumbai. That being said, its 1HFY12 numbers showed a substantial improvement, registering revenue of RM850.1m as profitability returned to the black with core earnings of RM19.5m for the period.
IJM has entered into an agreement with Scomi Group to take up a stake of up to 25.1% in the latter for a total consideration of RM149.3m.
OUR TAKE
Details on the proposal. IJM has agreed take up to a 25.1% stake in Scomi Group for a total investment of RM149.3m via the following:
i) A subscription of 119.1m new shares in Scomi Group for a cash consideration of RM39.3m; and
ii) A subscription of redeemable convertible secured bonds of an aggregate nominal value of RM110m in cash.
The terms of the bonds. The bonds to be issued will have a three-year with zero coupons attached. Scomi has the option to redeem all or part of the outstanding bonds in cash at each anniversary of the issue date. The redemption price will be the nominal value of the bonds plus a 10% yield for each full year that the bonds remain outstanding.
Entry cost at RM0.355/share. From our calculation, IJM’s potential 25.1% stake in Scomi works out to the cost average of RM0.355 per share, taking into account the potential bonds conversion at a stipulated price of RM0.365 per share.
Surprise, surprise. The announcement caught us by surprise as IJM previously had not revealed its intention to establish a foothold in the O&G business. Having said that, the valuation pegged for its initial investment of RM39.3m translates into a FY12 PE of 11.4x, which is reasonable though with some risks involved given Scomi’s ongoing restructuring, if we were to annualise Scomi’s 1HFY12 net profit of RM19.5m.
Brief summary on Scomi. Scomi Group has existing business presence in oilfield services and transport solutions through its 67.3% stake in Scomi Engineering as well as in energy logistics via its 42.8%-owned associate in Scomi Marine. In FY11, the group registered revenue of RM1.38bn while core earnings closed in the red with net losses of RM232.3m due to one-off expenses of RM244.8m, which were impairment losses charged during the year as well as the slower-than-expected progress in its ongoing monorail project in Mumbai. That being said, its 1HFY12 numbers showed a substantial improvement, registering revenue of RM850.1m as profitability returned to the black with core earnings of RM19.5m for the period.
Establishing an O&G foothold. As of 1HFY12, Scomi’s oilfield services recorded a segmental profit of RM44.9m. On its future prospects, the group is believed to be the frontrunner for two risk-service contracts, to be awarded by Petronas for the Tembikai and Cenang marginal fields off Peninsular Malaysia. Each of these is reported to be worth USD200m-USD400m. This coincides with recent comments by Scomi’s group Managing Director Shah Hakim Zain which mentioned that the company is looking to tender for about USD1bn in O&G services contracts within the next year.
Monorail presence a plus. Scomi has also carved out its niche in the provision of rolling stocks for train systems. On the domestic front, the group is involved in the RM494m KL Monorail Fleet Expansion Project to refurbish 1,500 wagons by June 2013. At this juncture, the bulk of its works are centered in Brazil as the company has bagged the RM2.6bn contract on a 17.6km Monorail Line 17 in Sao Paulo as well as the RM2.6bn job on a 20km monorail project in Manaus. Earlier, the group has proposed setting up a new manufacturing plant in Brazil with two local partners for the provision of rolling stock.
A growing Indian presence. Other than that, Scomi is in the midst of growing its presence in India. It is currently involved in the RM18.4bn19.5km monorail project in Mumbai to provide 15 sets of four-car trains. Going forward, the group has highlighted its intention to bid for more jobs in India, including a 300km monorail system in Chennai and a proposed 60km job in Bangalore.
Monorail presence a plus. Scomi has also carved out its niche in the provision of rolling stocks for train systems. On the domestic front, the group is involved in the RM494m KL Monorail Fleet Expansion Project to refurbish 1,500 wagons by June 2013. At this juncture, the bulk of its works are centered in Brazil as the company has bagged the RM2.6bn contract on a 17.6km Monorail Line 17 in Sao Paulo as well as the RM2.6bn job on a 20km monorail project in Manaus. Earlier, the group has proposed setting up a new manufacturing plant in Brazil with two local partners for the provision of rolling stock.
A growing Indian presence. Other than that, Scomi is in the midst of growing its presence in India. It is currently involved in the RM18.4bn19.5km monorail project in Mumbai to provide 15 sets of four-car trains. Going forward, the group has highlighted its intention to bid for more jobs in India, including a 300km monorail system in Chennai and a proposed 60km job in Bangalore.
IJM to be the second largest shareholder. Scomi’s largest shareholders are Shah Hakim Zain and Dato’ Kamaluddin Abdullah who both hold a combined 172.3m shares in Scomi through Kaspadu and Onsteam Marine SB. Should the proposed stake acquisition go through, IJM would emerge as the second largest shareholder in Scomi with 119.1m shares, or potentially up to 539.6m shares assuming the full conversion of its bonds. Next in line would be Tan Sri Abu Sahid Mohamed and Datuk Siew Mun Chuang at 104.2m and 66.8m shares respectively.
An insignificant contribution to books. Funding should not be an issue given IJM’s cash coffers of RM1.83bn as of June 2012. Accretion to earnings would be rather insignificant as well, as IJM’s stake of a minimum 10% and a maximum 25% translates into RM3.9m and RM9.8m respectively for its share of profit on Scomi vis-à-vis its current earnings base of RM500m-RM600m. Hence, we make no adjustments to our forecasts for the time being.
Neutral to slight negative. Overall, while the acquisition price paid is fairly reasonable in our view, we are largely neutral to slightly negative on this proposed stake acquisition in the light that Scomi’s proposed corporate restructuring program is still ongoing. On top of that, MARC has recently downgraded Scomi’s rating over a RM200m debt due to delays it encountered in its previously proposed asset sale in Nigeria. Moreover, investors may perceive IJM’s move largely as a bail-out measure, given that Scomi has an existing bond due for repayment later this month (previously postponed from Sept 2011) at a magnitude of
RM100m. That said, we make no changes to our call and recommendation for now, pending more affirmative findings from IJM’s and Scomi’s management. Maintain TRADING BUY for the time being, with our FV maintained at RM6.32.
Neutral to slight negative. Overall, while the acquisition price paid is fairly reasonable in our view, we are largely neutral to slightly negative on this proposed stake acquisition in the light that Scomi’s proposed corporate restructuring program is still ongoing. On top of that, MARC has recently downgraded Scomi’s rating over a RM200m debt due to delays it encountered in its previously proposed asset sale in Nigeria. Moreover, investors may perceive IJM’s move largely as a bail-out measure, given that Scomi has an existing bond due for repayment later this month (previously postponed from Sept 2011) at a magnitude of
RM100m. That said, we make no changes to our call and recommendation for now, pending more affirmative findings from IJM’s and Scomi’s management. Maintain TRADING BUY for the time being, with our FV maintained at RM6.32.
Source: OSK
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