News IJM
Corp Bhd (“IJM”) has proposed an investment of
up to a 25.08% stake in Scomi Group Bhd (“SGB”) for a total consideration
of RM149.3m via (1) 10% shares valued at RM0.33 per share and (2) subscription
of redeemable convertible secured bonds (SGB Bonds) of an aggregate nominal
value of RM110.0m in cash.
IJM shares will be
suspended for one hour from 9.00 a.m to 10.00 a.m today.
Comments This
news came as a surprise to us as we had never anticipated that IJM will venture
into the oil and gas industry. Based on its latest financials (1Q13), IJM’s
cash balance stood at RM1.8b and its
operating cash flow generated c. RM223m. This will be enough to finance the
acquisition of RM149m.
IJM will immediately
pay RM39m in cash for the first tranche of the transaction, which will be for
the 10% stake in SGB. The next tranche will be for the subscription of SGB
bonds at RM110m. The SGB bond will have a tenure of up to 3 years bearing 0% coupon rate. Interestingly,
there is a clause for SGB to redeem the bonds, which are that in the event that
(1) SGB shares have been traded at not less than 50 sen for 90 consecutive days
and (2) SGB has recorded net profits for the latest 2 quarters. We believe that
the clause was mainly to ensure that SGB’s business is financially viable in
order for IJM to ring fence its return from the investment.
SGB’s order book
stands at RM1.3b and it is currently bidding for additional contracts (oil
& gas and civil engineering works) worth about RM3b. Based on market talks,
SGB is bidding for marginal field contracts which could potentially be worth
about USD800m. With the assumption of a debt to equity ratio of 80:20 and a 30%
local stake in the project, SGB will be able to finance the equity portion by
using the proceeds of RM149m. As at 1H12, SGB’ cash stood at RM250m with debts
of RM1.1b.
For IJM, this will be
a long term investment and we have not factored in any contributions from this
investment in our forecast.
Outlook We see a hefty cash outflow and capital needed
for IJM as it needs to execute its
upcoming projects like the WCE highway and other potential projects under the
ETP. Its gearing level is still manageable at 0.5x as at 1Q13 and we do not see
any problem for it to finance these projects and its investments.
Forecast No changes in our FY13-14E forecasts.
Rating Downgrade
to MARKET PERFORM
Due to the limited
upside (+9%) and the execution risk ahead of the upcoming election, we reckon
that the stock performance will be weaker.
Valuation We
have trimmed down our TP to RM5.55 (RM5.65 previously) following our downward
revision of IJMLand’s valuation. Our TP is based on SoP valuation and pegged
16x PER FY13 to its construction earnings.
Risks Execution risk and prolonged finalisation of
the concession agreement (WCE Expressway).
Source: Kenanga
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