Friday, 9 December 2011

Toyo has ink on paper, but not yet the power

KUALA LUMPUR: Toyo Ink Group Bhd’s share price has benefited from the letter of approval it received from the Vietnamese government for a US$2.5 billion (RM7.8 billion) power plant, but realising the earnings may be a long way off.

It has taken over three years of hard work to obtain the letter, but Steven KC Song, managing director of Toyo, revealed at a press conference yesterday that the plant will take three to four years to build and estimated that it would only begin operating in 2017 or 2018.

It should be at least six to seven years before the US$2.5 billion project even begins turning in cash, yet Toyo’s share price surged as high as RM1.88 on Tuesday, with a 50 sen or 36.23% gain for the month.

Furthermore, Song told the press that Toyo has yet to secure funding as it has not yet nominated a merchant bank to provide financial advice.

He declined to comment which merchant banks the group is in talks with but noted that the merchant banks the company is courting would have an international presence.

Toyo announced on Wednesday that it received a letter from the Vietnamese government with regard to the building of a two times 1000MW coal-fired power plant in Hau Giang province.

According to its announcement to Bursa Malaysia, the award is for “the Toyo group to have research and development of Song Hau 2 Thermo Power Plant Project, capacity of two times 1000MW at Song Hau Power Centre, Hau Giang Province”.


The announcement added that “the Ministry of Industry and Trade (of Vietnam) will preside, cooperate with the People’s Committee of Hau Giang Province in providing guidance to Toyo Ink in the setting up of the investment project and implementation of next steps of the project, organisation of assessment and submission for approval as required by laws”.

A market observer noted that the wording of the letter is rather vague, as it does not outwardly say that the project has been awarded to Toyo, but rather “the research and development”.

Furthermore, Toyo has yet to sign a power-purchase agreement (PPA) with the Vietnamese government although Song said, “Hopefully, it won’t take too long. Once we have negotiated the PPA and agreed upon a rate with the Vietnamese government, we will know our revenue.”

The terms of a PPA are crucial to determine the viability of a project, its returns and the ability to obtain financing.

Likewise, Song could not provide a gearing ratio for the project, citing a lack of financial advice but indicated gearing would depend on the amount of cash its partners would bring to the multi-billion dollar project.

In comparison, Toyo’s market cap yesterday for its 42.8 million shares was only RM75.76 million.

A quick look at Toyo’s balance sheet reveals that the group’s cash and bank balances stood at RM1.78 million as at Sept 30 with a total of RM106.78 million in current assets against RM89.45 million in current liabilities.

With so little cash on its balance sheet, Toyo will have to raise a substantial amount of equity to leverage against if it hopes to raise US$2.5 billion, even if it brings in several cash rich partners. Song also revealed that Toyo is still looking to bring in a partner with the technical expertise to help the group set up the power station as it has no prior experience with setting up power plants, a highly technical industry.

“Toyo Ink will continue with its core operations. We will set up a new company to undertake the power plant project,” said Song. “Any partners we wish to work with have to be approved by the Vietnamese government.

“The Vietnamese are struggling with power supply issues. They know we won’t undertake the project unless it is beneficial to us as well, so we expect a reasonable rate.”

“How long it takes for us to recoup our investment will depend on the price per megawatt the government gives us in the PPA,” said Song who estimated that return on investment will take seven to nine years.

“Once the plant is up and running we can issue an initial public offering to pay off some of the debt used to finance the plant,” said Song but declined to comment on when this would happen. The biggest risk to the project is inflation, but Song believes that the Vietnamese government is dealing with it.

Toyo’s share price fell 11 sen yesterday to RM1.77 after the suspension of its shares throughout Wednesday was lifted.


This article appeared in The Edge Financial Daily, December 9, 2011.



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Deadline for MRT underground bids may be extended

SHAH ALAM: Gamuda Bhd said the closing of the tender for the Klang Valley mass rapid transit (MRT) underground works may be extended from early January 2012.

Its managing director Datuk Lin Yun Ling said to his knowledge the only local entity bidding for the underground contract is MMC-Gamuda while the rest are foreigners.

It has been reported that five players including MMC-Gamuda are eyeing the huge component of the MRT project, which has been reported to cost some RM40 billion.

“It will take another three to four months for technical evaluation, and MRT Co will do it (announce the winning bid),” he said after the company’s AGM yesterday.

Asked how confident Gamuda is in getting the job, Lin said: “We can only do our best.”

He also has “no clue” what are the profit margins for the MRT project, which is expected to be completed over two phases.

Analysts said winning the underground work for the MRT project is crucial for Gamuda replenish its outstanding order book of RM3 billion, which may last for only another two or three years.

An artist's impression of a MRT station.


Under the first phase of the MRT project, the most critical, high-demand stretches in and around the city centre are scheduled to be completed by 2020. Meanwhile, under the second phase, the suburban elevated routes are to be completed by 2030.

Gamuda is playing two distinct roles in this project, with the first being the project delivery partner. To facilitate this role, Gamuda has a 50:50 joint venture (JV) with MMC Corp Bhd that was mandated to lead the implementation and delivery of MRT. The company’s second role is that of a main contractor for the underground works in the city centre.

Lin said Gamuda’s chances of securing the underground job is good, and it is not under pressure from the “Swiss challenge” for the contract.

Meanwhile, Lin said the completion date of the electrified double-tracking project, which is 80% completed, has been pushed forward to November 2014 following the granting of a second time extension by the government.

He said the main line from Padang Besar to Ipoh will be completed by 2013 while the line to Penang by 2014.

On its property projects in Vietnam, Lin said although demand has slowed down, it has seen “good take up” for its projects in Hanoi, which has a gross development value of RM10 billion.

“I believe it (the economic situation in Vietnam) can’t get any worse,” he added.

Vietnam’s economy has suffered from a huge budget deficit and rising inflationary pressures, prompting the tightening of credit there, which in turn impacted property sales.

On the local front, Lin said that demand for properties is still strong, which will augurs well for the company’s property projects, including its Horizon Hills in Johor.

However, he also believes property prices here have peaked, based on the ratio of property prices to income.


This article appeared in The Edge Financial Daily, December 9, 2011.



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DRB-Hicom and SAAB to collaborate on AEWC

LANGKAWI/PETALING JAYA: DRB-Hicom Bhd and SAAB AB, the Swedish aerospace and defence company, yesterday signed an agreement to collaborate in a bid to supply an Airborne Early Warning and Control (AEWC) System for the Royal Malaysian Air Force.

The AEWC system will enable the government to detect, track and monitor its territorial and international domain to combat piracy, smuggling, illegal fishing and terrorism within and around the Malaysian borders.

Through this programme, the integration of SAAB’s Eyerie Radar and the incorporation of the “Eye in the Sky” will provide a significant data link to the Royal Malaysian Navy and Malaysian Maritime Enforcement Agency, said DRB-Hicom in an announcement to Bursa Malaysia.

The partnership between these two companies is based on the extensive experience, strength and capabilities of both companies, in supporting the government’s defence programme with solutions that will enhance Malaysia’s operational capabilities. DRB-Hicom will provide a significant local involvement in the entire project cycle starting from production to testing and eventually to support AEWC operations.

“The collaboration entrenched in the agreement between these two companies is a major step taken towards upgrading Malaysia’s defence aviation technologies and capabilities specifically in the Aeronautics System Integration and Command & Control areas.

“The collaboration will also strengthen the current expertise in terms of competencies in project management, system engineering as well as supply chain management,” it stated.

The collaboration between DRB-Hicom and SAAB augurs well with DRB-Hicom’s strategic plan to strengthen its position in the area of defence and aerospace, not only in Malaysia but also in the region.


This article appeared in The Edge Financial Daily, December 9, 2011.



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Boustead inks defence and aerospace deals during LIMA

PETALING JAYA: The Boustead Holdings Bhd group yesterday clinched some RM162 million contracts as well as marketing agreements during the Langkawi International Maritime and Aerospace Exhibition (LIMA).

Its 51% subsidiary Atlas Hall Sdn Bhd secured an exclusive two-year agency agreement with W Giertsen Hallsystem AS (Giertsen) of Norway to market and sells its products in Malaysia. The products covered under the agreement are rub halls, aircraft hangars, and future products to be developed by Giertsen.

Another subsidiary, Boustead Naval Shipyard Sdn Bhd, had secured a RM62 million contract from the Malaysian government for the supply and delivery of spares, maintenance, integrated logistic support and training for the 17th patrol vessel squadron of the Royal Malaysian Navy.

Meanwhile, Boustead Heavy Industries Corp Bhd (BHIC), a listed subsidiary of the Boustead group, had entered into an agreement with Rhienmetall Defence Electronics GmbH for the manufacture and supply of cargo loading system assemblies for Airbus A400M, A380, A330 aircraft.

The agreement includes a comprehensive technology transfer programme and investment in facilities for aerospace electronics manufacturing, according to a statement by BHIC.

The value of the initial two phases of the project is likely to exceed RM100 million and, if all options are exercised, the value of the subsequent phases is likely to exceed RM500 million over 10 years.

In the first phase of the project, Contraves Advanced Devices Sdn Bhd, a unit of BHIC, will establish a dedicated facility in Malaysia for the manufacture of aerospace electronics to ISO 9100 standards, and will undertake a vendor development programme with local SMEs for the manufacture of housing and mechanical components. The second phase will deliver 180 production shipments for confirmed European customers with associated spares, it stated.

“Subsequent phases are planned for expected new A400M aircraft orders, to expand the scope to include the manufacturing of Airbus A330 and A380 aircraft electronics sub-assemblies, and to establish a regionally oriented MRO (maintenance, repair and overhaul) capability for aircraft cargo loading systems,” BHIC stated.


This article appeared in The Edge Financial Daily, December 9, 2011.



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Bumi Armada secures RM1.1b long-term financing

KUALA LUMPUR: Bumi Armada Bhd subsidiary, Armada TGT Ltd, has signed a US$341.1 million (RM1.07 billion) facility agreement with seven international and local financial institutions.

The financing will used for capital expenditure related to its floating production storage and offloading (FPSO) vessel, Armada TGT 1, that was deployed in the Te Giac Tran Field, offshore Vietnam.

The Armada TGT 1 was completed on schedule and it achieved first oil on Aug 22, 2011, with final acceptance received from the client on Nov 30.

It is worth noting that the financing facility has come at the end of the conversion of the FPSO Armada TGT 1, and while the vessel is already in operation.

“We used bridging loans to fund the FPSO capex. These were short-term loans that we had to repay within one year’s time, so now we are replacing them with long-term financing of seven years (with the US$341.1 million facility),” said Bumi Armada chief financial officer Shaharul Rezza Hassan.

He added that the facility will only raise Bumi Armada’s gross gearing level to 0.9 times from 0.8 currently, as it is a replacement of existing bridging loans instead of a new loan.

Sumitomo Mitsui Banking Corp is the coordinating bank, mandated lead arranger, facility agent, security agent, and account bank for the US$341.1 million facility, with CIMB Bank Bhd, ING Bank NV, Maybank Investment Bank Bhd, OCBC Bank (M) Bhd, RHB Investment Bank Bhd and The Bank of Tokyo-Mitsubishi UFJ Ltd as mandated lead arrangers.

As at end-September, Bumi Armada had total short-term debt of RM846.26 million (which includes RM468.85 million of bridging loans) and total long-term debt of RM1.837 billion, translating to total borrowings of RM2.683 billion. Its cash reserves stood at RM992.83 million.

Bumi Armada closed six sen lower to RM3.99 yesterday. Its stock has climbed 31.7% from its IPO price of RM3.03 on July 2, 2011.


This article appeared in The Edge Financial Daily, December 9, 2011.



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George Kent’s 3Q falls 56.3%

KUALA LUMPUR: George Kent (M) Bhd’s net profit fell 56.3% to RM3.59 million for 3QFY12 ended Oct 31, from RM8.21 million a year earlier, due to the deferment of water-related infrastructure projects.

In a filing with Bursa Malaysia, George Kent said the lower profit was also attributed to the deferment in the award of certain tenders for the supply of meters.

Revenue for 3Q fell 31.7% to RM31.24 million, while basic earnings per share was 1.6 sen against 3.6 sen. For 9MFY12, George Kent’s net profit fell 88.1% to RM12.3 million or 5.5 sen a share, on a revenue of RM103.32 million.

Chairman Tan Sri Tan Kay Hock said the results were in line with expectations, and reflect the cautious sentiments due to eurozone crisis and global economic slowdown.

“Although we experienced a softer market for our original equipment manufacturer (OEM) meters, we are pleased to see that exports of our non-OEM meters continue to improve, with healthy demand generating from the Indo-China markets,” he said.

Tan said George Kent will continue to upgrade its water meter plant in Puchong, and is on track to increase its production capacity to two million water meters and meter housings per year by year-end, from 1.3 million pieces. It is investing RM50 million to upgrade the plant to meet future demand.

On its infrastructure investments, water and construction division, George Kent said works on two water-related infrastructure projects had commenced and would contribute to the group’s earnings in the next financial year.

Tan said George Kent is actively tendering for meter contracts in Malaysia and abroad, and is also looking at securing more infrastructure projects under the 10th Malaysia Plan and Economic Transformation Programme.

George Kent gained two sen to close at RM1 yesterday.


This article appeared in The Edge Financial Daily, December 9, 2011.



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Hwang-DBS 1Q down 34%

KUALA LUMPUR: Hwang-DBS (M) Bhd’s net profit fell 34% to RM14.19 million for 1QFY12 ended Oct 31 from RM21.5 million a year earlier, due to reduction in stockbroking income, and lower mark-to-market gain on securities held for trading.

In a filing with Bursa Malaysia, Hwang-DBS also attributed its lower net interest income to narrowing of interest margin and net loss incurred on derivatives. However, it noted that the losses were cushioned by net foreign exchange gain and an insurance receipt by a subsidiary.

Its net interest income was RM21.07 million, 16.4% lower than RM25.21 million a year earlier. Hwang-DBS’ revenue fell 13.43% to RM83.43 million from RM96.37 million a year ago. It posted basic earnings per share of 5.56 sen versus 8.42 sen.

“The operating revenue for the period under review is impacted by the lower stockbroking brokerage income in line with lower value traded by the investment banking subsidiary and decrease in interest income derived from loan portfolios,” it said. These were, however, mitigated by higher management fees and gains from securities trading.

Hwang-DBS gained eight sen to close at RM2.33 with 11,000 shares traded.


This article appeared in The Edge Financial Daily, December 9, 2011.



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Time not right to buy call warrants

KUALA LUMPUR: Structured call warrants may be especially lucrative for investment bankers at the moment, but not as palatable for retail investors in the current conditions, with relatively higher prices and lower upside potential.

“I would not advise anyone to go into warrants at the moment, especially short-term warrants with a tenure of less than 12 months,” said Alan Voon, CEO of Warrants Capital Sdn Bhd.

The cost of higher volatility has already been priced into the warrants, according to Voon.

“Is volatility high at the moment? Yes. Are costs for warrant issuers higher? Yes. Therefore, the issuers will quote warrants at higher prices to factor in their higher costs,” he said.

“Traders will be hard pressed to make gains unless the market moves substantially in their favour because the volatility has been priced in. Even if the movement is in the right direction, if it is small, there will be no room for profit,” said Voon.

On a more general note, Voon said it is disadvantageous to buy warrants that have just been issued.

“It is better to let time value decay. Time value tends to be the highest in the first two months of the warrant’s life.”

He said the time value of a warrant decays in a non-linear manner; flat at the beginning and accelerating towards the end of its life.

Voon said: “The way warrants are marketed on Bursa Malaysia, the price tends to be high at the beginning due to a lack of competition.

“In theory, in a perfectly competitive market, the greater the proportion of the warrants held by the issuer, the better. In practice, however, there is a relatively high bid-ask spread for warrants because issuers do not want to cross the spread as they need to make a profit.

“Even if the share price moves in the right direction, there has to be a spike to justify buying a warrant early [soon after it is issued].”

Voon suggested Delta-1 products as an alternative to structured call warrants. “Callable bull/bear contracts (CBBC) and Delta-1 products are better from the perspective of the player,” said Voon, but noted that these products are not readily available in Malaysia.

CBBCs are traded on the Hong Kong Stock Exchange and are a type of structured product that closely tracks the performance of the underlying asset (delta close to one), although if the underlying asset trades close to the call price CBBCs may become more volatile.

Bull contracts have a call price equal to or above the strike price while bear contracts have a call price equal to or below the strike price.

“The call warrant business is very lucrative for the investment banks,” said Voon.

Call warrants are basically seen as a zero-sum game. Ignoring hedging and transaction costs, if the investment banks are making money, overall, this suggests investors must be losing the same amount of money.

While warrants allow investors to tap into the volatility of an underlying stock relatively cheaply, on the whole, the risk to return is very high.

Another analyst said: “The timing may not be the best for investors to have picked up these warrants.”

He explained that investors who buy into call warrants have to rely on bullish markets, but that does not seem to be the case based on current market sentiment for 2012.

On the other hand, this is a good deal for the investment banks, said the analyst. Just like an IPO, banks benefit the most if they issue call warrants when the market is at its peak.

Furthermore, the window to arrive at the settlement price for the call warrants is quite restrictive, typically five market days leading up to and including the expiry date.

This sometimes opens up the stock to unusual price volatility.

On Aug 1, The Edge Financial Daily reported unusual price movements of DRB-Hicom Bhd shares during the exercise period of DRB-Hicom’s call warrants issued by OSK Investment Bank Bhd.

The stock plummeted 14% or 33 sen to RM1.95 in the final minutes of trading, which was coincidentally the strike price of the warrants. The share price eventually rebounded allowing investors to recoup their losses.

“A good time to buy warrants will be after the election,” said Voon who pointed out that the coming polls have fuelled volatility in the market which is making the warrants relatively expensive at the moment.

Once speculative buys have been sold down following the election, warrants will become much more attractive.

CIMB Investment Bank Bhd recently issued eight call warrants on the underlying shares of AirAsia Bhd, DiGi.Com Bhd, DRB-Hicom Bhd, Hartalega Holdings Bhd, IJM Corp Bhd, Malaysian Bulk Carriers Bhd, Proton Holdings Bhd and Malaysia Marine and Heavy Engineering Bhd.

The European-style cash-settled warrants are with tenures of one year and an issue size of up to 50 million, each priced at 15 sen.


This article appeared in The Edge Financial Daily, December 9, 2011.



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