Sime Darby-Bucyrus deal concluded

Sime Darby
(Dec 15, RM8.95)

Maintain hold with revised target price of RM8.50 from RM8.36: Sime Darby has completed the acquisition of the former Bucyrus distribution assets (in Australasia) and rights under Sime’s dealership territories for US$360 million (RM1.2 billion).

While earnings impact is neutral in the short term, the inclusion of Bucyrus product offerings will be positive in the longer term. We maintain “hold” but raise our target price to

RM8.50 (from RM8.36; based on unchanged 16 times FY13 price-earnings ratio) on revised earnings.
Yesterday, Sime completed the acquisition of assets used in the former Bucyrus distribution in Sime’s Caterpillar dealership service territories in Queensland and the Northern

Territory of Australia, Papua New Guinea and New Caledonia for US$360 million cash. The acquisition comes with distribution rights for former Bucyrus products where Sime’s industrial division operates: Malaysia, Singapore, the Maldives, Christmas Island and parts of China.

While the breakdown of the acquisition price was not made known, we consider the price somewhat high as it is almost double our earlier estimates of RM537 million.

The key difference is that our earlier price estimate only accounted for the Australian assets. The current order book for Bucyrus in Australia stands at RM2 billion (to be delivered over the

next 18 to 24 months). This adds to Sime’s existing order book of RM3.5 billion for the industrial segment, providing good earnings visibility.

We understand Sime is buying the Bucyrus assets at about 10 times enterprise value/earnings before interest, tax, depreciation and amortisation (EV/Ebitda). At 10 times EV/Ebitda, the additional Ebitda contribution to Sime is about RM110 million.

Assuming about 4% borrowing cost and 25% corporate tax rate, the incremental profit to Sime is some RM50 million per year, raising our FY12 to FY14 net profit by 1% to1.6%. This excludes potential synergies that Sime could tap into post the merger of operations in Australia. — Maybank IB Research, Dec 15


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MyEG: Tricubes not a ‘significant competitor’

KUALA LUMPUR: MyEG Services Bhd does not see Tricubes Bhd as a “significant competitor”.

Tricubes recently secured a contract from the Royal Malaysian Police for the collection of and enquiries about traffic summonses.

“[Tricubes] primarily focus on click-and-pay services, which we are moving away from. The value-add for click-and-pay services is too low,” said Wong Thean Soon, MyEG managing director, after the company’s AGM yesterday.

Wong said MyEG, which provides e-service for several government departments, is shifting its focus to develop more complex services that have higher value creation, for which the company can charge a higher fee.

“Any service that involves a security document can be considered high value added,” said Wong, citing passports, MyKads, licences and permits as examples.

He noted that click-and-pay services might have very high transaction volumes but the fee is “very low”. In fact, click-and-pay services only contribute about 10% to MyEG’s profit.

To climb the value chain, MyEG is going to launch the second phase of its vehicle ownership transfer service next month. The service will allow the electronic transfer of ownership to eventual buyers, which is currently only available via Road Transport Department (RTD) counters.

Wong explained that the service is more complex than traditional click-and-pay services. It involves the transfer of road tax and registration on the RTD’s database.

Wong declined to give an earnings forecast for the new service, but he said the size of the market is roughly RM50 million a year and earnings would depend on how much of it MyEG can capture.

MyEG will charge users a RM25 convenience fee. Industry statistics indicate that there are one million car ownership transfers and one million motorcycle ownership transfers a year.

“RTD-related services contribute roughly 60% of MyEG’s revenue,” said Wong, who explained that MyEG has been providing services to the RTD for over 10 years and its products are well established. The first phase of the vehicle ownership transfer e-Government service, which MyEG is currently providing, only allows for the temporary transfer of ownership and liability to used car dealers.

Wong said the company is in talks with government departments to secure more projects. He said the company does not want to limit its services to only a few government departments.

“We aim to provide our services to all of them.”

He disclosed that there are several projects in the pipeline but declined to reveal the details.

“It is the prerogative of the government to announce the services as and when they are ready because they are the owners of the service,” he said.

“We aim to release one or two major services each year and we have several already in the pipeline. It takes about two to three years from conceptualising a service, to research and development, to actualising it.”

MyEG started its FY12 with a big jump in earnings. The company’s net profit surged 92% to RM5.4 million or 0.9 sen per share for 1QFY12 ended Sept 30 from RM2.8 million or 0.5 sen per share in the same period last year. Revenue grew 18% to RM14.2 million from RM12 million previously.

MyEG closed unchanged at 67 sen yesterday with 141,300 shares traded.


This article appeared in The Edge Financial Daily, December 16, 2011.



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Dialog to bid for marginal field projects

Dialog Group
(Dec 15, RM2.44)

Maintain outperform with target price RM3.64: The investor meeting we arranged for Dialog’s management yielded a nice surprise — its aggressive plan to bid for two or three more marginal field contracts next year.

This exciting development comes hot on the heels of the award of the Balai marginal field contract in August.

We are thrilled with this latest development which could give Dialog additional sources of long-term earnings. We maintain our “outperform” call and continue to value the stock at its sum-of-parts (SOP), which does not factor in the new marginal fields.

Yesterday, we took Chew Eng Kar, Dialog’s executive director of corporate services, and Sue Ngau, manager of corporate services, to meet with 15 fund managers.

A pleasant surprise from the meeting was Dialog’s ambitious plan to bid for two or three more marginal field developments in CY12 after securing the 15-year Balai contract in August together with Petronas Carigali Bhd and Australia-based Roc.

The development cost for a marginal field is around US$500 million (RM1.6 billion) to US$1 billion and we understand that Dialog is vying for at least a 30% stake. Management assured that it will not make anymore cash calls to finance its marginal field venture other than the ongoing rights issue.

Slated for completion in Feb 12, the rights issue is expected to raise around RM500 million.

As at end-September, Dialog had RM92 million (4.6 sen per share) net cash.

We are encouraged by its hard-hitting marginal field strategy which will allow it to undertake more upstream works. The marginal field contracts add to Dialog’s earnings visibility and give it steady income streams in addition to the Balai contract, tank terminal concessions (Kertih, Tanjung Langsat and Pengerang) and a supply base (Jubail, Saudi Arabia).

Stay invested. We believe that things can only get more exciting for Dialog as it moves up the value chain. Already, the company is the sector’s biggest Economic Transformation Programme winner through the Balai contract and the Pengerang tank terminal. — CIMB IB Research, Dec 15

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Pavilion: New REIT on the block

Pavilion Real Estate Investment Trust made a solid debut on Bursa Malaysia last week. The trust unit rose as high as RM1.04 and was the most actively traded counter on its first day of trading. It has since retraced slightly to RM1.02, but remains comfortably above the initial public offering price of 90 sen.

Interest in the REIT is unsurprising given prevailing uncertainties in Europe and the potential impact on the health of the global economy. Currently, the general consensus is that the global economy will continue to grow in 2012, albeit at a slower pace. However, the eurozone debt crisis remains a wild card and further deterioration in the situation could
throw even modest expectations into disarray.

Meanwhile, the latest 3QFY11 earnings reporting season for companies listed on the local bourse was muted, weighed down by the gloomier outlook. A fair percentage of results have fallen short of expectations and we could see further earnings downgrades over the next few months.

As such, many investors are staying on the defensive, picking companies with more resilient businesses and earnings as well as higher than market average dividend yields. In view of the slowing economic growth, interest rates are unlikely to head higher anytime soon. In fact, central banks have started to loosen monetary policy in recent days. REITs are among the highest yielding instruments on the local bourse and most have fairly low beta relative to the broader market.

Portfolio valued at RM3.54 billion
Pavilion REIT’s portfolio consists of only two properties — Pavilion Kuala Lumpur Mall and Pavilion Tower — valued at a combined RM3.54 billion.

Pavilion Mall is the among the few premium fashion shopping malls in the country, catering for the mid- to high-end segment of the population. The shopping centre also attracts more than its fair share of tourist numbers, thanks to its location in the heart of the Golden Triangle and commercial business district.

The shopping mall is valued at RM3.42 billion and has a total net lettable area of almost 1.34 million sq ft. Occupancy rate for Pavilion Mall has averaged above 98% over the past
four years.

Pavilion Tower is a 20-storey office block connected to the mall. Contributions from Pavilion Tower are small relative to the REIT’s total revenue.

The trust intends to stay focused on properties used solely or predominantly for retail purposes. It has the rights of first refusal for two other shopping malls — fahrenheit88
(located across the street from Pavilion Mall) and a yet-to-be developed mall in Subang Jaya — as well as for the future expansion of Pavilion Mall.

This retail property market segment is, arguably, among the most resilient given that consumer spending is expected to remain fairly robust despite the global financial turmoil.

Indeed, rental rates for well-managed and well-located shopping malls have been trending higher, even through the 2008 global financial crisis.
This, compared to say, earnings risks for REIT exposed to the commercial market segment are erceived to be higher on the back of expectations of excess office space supply coming onto the market in the next few years.

Comparing retail-focused REIT
There are now 15 REIT listed on the Bursa Malaysia. Aside from Pavilion REIT, some of the other primarily retail-focused REIT are Sunway REIT, CapitaMalls Malaysia Trust (CMMT) and Hektar REIT.

In terms of total asset size, Pavilion REIT is second only to Sunway REIT. While the shopping mall accounts for nearly all of Pavilion REIT’s turnover, Sunway REIT has a more diversified portfolio. Retail properties account for roughly 73% of the latter’s turnover with the largest earnings contributor being Sunway Pyramid Shopping Mall in Bandar Sunway, an 324ha integrated township in the Klang Valley. The hospitality and office sectors contribute the remaining 17% and 10% of turnover.

Both CMMT and Hektar are pure retail-focused REIT. The former owns four shopping malls, including Sungei Wang Plaza, just a stone’s throw away from Pavilion Mall. The shopping

centre is one of the oldest in the country but has continued to draw traffic despite the sharp increase in the number of newer malls.

CMMT has done quite well since its listing in July 2010, currently trading at around RM1.40 per unit compared with its IPO institutional price of RM1.

Hektar owns three shopping malls — Subang Parade, Mahkota Parade in Malacca and Wetex Parade in Muar — valued at a combined RM752 million.

Pavilion REIT intends to distribute all of its income from the listing date through December 2012. Based on its forecast earnings, distribution per unit is estimated at 5.73 sen next year. That translates into gross yield of roughly 5.6% based on the prevailing price of RM1.02, in line with our estimated yield for CMMT but lower than that for Sunway REIT and Hektar.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.



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MMC-Gamuda good choice for MRT tunnelling

SHAH ALAM: Tun Dr Mahathir Mohamad has lent weight to MMC-Gamuda Joint Venture Sdn Bhd as the appropriate candidate to undertake the RM7 billion tunnelling job for the proposed Klang Valley mass rapid transit (MRT) project.

Mahathir explained that the consortium, in which MMC Corp Bhd and Gamuda Bhd hold 50% equity interest each, has the track record in tunnelling jobs.

“They are the only [local company] with the experience. MMC-Gamuda should be a good choice,” Mahathir told reporters after opening the MMC-Gamuda Tunnelling Training Academy yesterday.

Tycoon Tan Sri Syed Mokhtar Al-Bukhary is the single largest shareholder in MMC with a 52% equity stake.

Being the project delivery partner, MMC-Gamuda is already granted the right to match the lowest rival offer for the tunnelling job under the Swiss challenge system. This gives the consortium an edge over other bidders for the tunnelling works.

The MMC-Gamuda track record includes the team’s 9.7km Stormwater Management and Road Tunnel that cost RM1.93 billion.

MMC-Gamuda Tunelling Training Academy students posing for a photograph after former prime minister Tun Dr Mahathir Mohamad opened the academy in Shah Alam yesterday.

Gamuda managing director Datuk Lin Yun Ling said the consortium “will do its best” to secure the MRT tunnelling project. Lin said the government is expected to announce the winning bidder for the tunnelling job by May next year.

In its statement, Gamuda outlined compelling reasons why a local contractor should undertake the tunnelling job. These include job opportunities for locals and the usage of domestically sourced materials to undertake the job.

The MMC-Gamuda consortium was the only Malaysian entity shortlisted for the RM7 billion MRT tunnelling project. Its global rivals include South Korea’s SK Holdings, two bidders from China and one from Japan. One of the Chinese bidders is China’s Sinohydro Group Ltd.

It was reported that these companies had three months to submit their tenders for the project.

This is the second business entity linked to Syed Mokhtar that the former prime minister has said should be granted its wish.

Over the past weekend, Mahathir, the adviser to Proton, remarked that DRB-Hicom Bhd, which is also controlled by Syed Mokhtar, is deemed the “preferred candidate” to take over the 42.7% stake in Proton held by Khazanah Nasional Bhd.

Mahathir said the national carmaker should remain as a national entity as this will entitle the firm to government support.

While technology transfers are crucial for the survival of Proton, Mahathir said it is not appropriate for the company, to divest a strategic stake in a state-owned asset to foreign partners in order to have access to overseas technology.

“Proton can have access to automotive technology from smaller entities,” said Mahathir.

Apart from DRB-Hicom, Naza Group and UMW Holdings Bhd are said to be keen on buying Khazanah’s stake in Proton.

Mahathir said it is an open bid and it is up to Khazanah to decide who it wants to dispose of its equity stake to.


This article appeared in The Edge Financial Daily, December 16, 2011.



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Gamuda lacks fresh catalysts

Gamuda Bhd
(Dec 15, RM3.03)

Maintain neutral with unchanged target price of RM3.20: The 18.9% drop in Gamuda’s share price year-to-date against a 3.1% decline in the FBM KLCI was due to:
(i) the recent selloff on the equity market amid rising concern over the external environment;
(ii) declining stock interest following its removal from KLCI; and (iii) slowdown in Vietnam property sales due to the weak economy.

Although the valuation looks attractive, the stock is trading at 14 times price-earnings ratio (PER) against its five-year average PER of 25 times, we believe the upside potential is limited due to lack of fresh catalysts apart from the possibility of winning the award for the tunnelling portion of the Klang Valley MRT project.

Gamuda will be removed from KLCI from Dec 19. This should erode interest in the stock especially from foreign investors.

Gamuda’s foreign shareholding fell to about 26% as at Dec 14 from 31% at the beginning of 2011.

Gamuda will announce its 1QFY12 results today. We are expecting net profit to fall by 12% quarter-on-quarter (q-o-q) to RM111.5 million owing to lower contribution from its
construction and property divisions.

We believe this is due to:

(i) slower construction activities during the festive season (Ramadan and Hari Raya Aidilfitri (August and September); and
(ii) margin contraction for the construction division amid high building material costs during the quarter.

Looking at Gamuda’s construction division, the only major ongoing project is the double-tracking (Ipoh-Padang Besar) project, with the balance gross development value (GDV) at RM2.1 billion.

As for its property division, we expect earnings to continue coming from the domestic markets like Bandar Botanic, Horizon Hills, and Jade Hills. Contribution from its Vietnam property operation will slow down in view of the economic slowdown.

We have decided to retain our forecasts for now pending the announcement of the results today.

On that note, we reiterate our target price at RM3.20 which we derive based on a PER of 14 times based on 0.75 standard deviation below its 10-year average PERs and earnings per share of 22.7sen using FY12. We maintain our “neutral” recommendation. — MIDF Research, Dec 15



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VS Industry gets new revenue boost but risks remain

VS Industry Bhd
(Dec 15, RM1.53)

Maintain underperform with fair value of RM1.40: We attended the opening ceremony of a new factory that will be dedicated to the production of Keurig Coffee Brewers. VSI has already commenced production of the first model, the Mini-Plus Brewing System, and will begin its maiden shipment in 3QFY12.

VSI’s production capacity for this model is about 23,000 to 25,000 units per month. We understand that VSI will add another assembly line with a capacity of 30,000 to 40,000 units per month for the shipment of another brewer model by FY13.

Presently, VSI’s capacity will only represent 11% to 13.9% of total brewer shipments of 5.8 million for Keurig. This could present VSI with an opportunity for higher sales volume with additional models.

Keurig is a pioneer and leading manufacturer of gourmet single-cup brewing systems for both household and corporate users and mainly caters for the US and Canada markets.

According to market research firm NPD, Keurig is estimated to have 20% to 25% of the total market for single-cup brewing systems in the US. The brewing system uses portion packs called the “K-Cup”, which contain ingredients to brew single servings of beverages.

The brewer provides a faster and a more convenient setup than conventional coffee machines.

Keurig is a wholly-owned subsidiary of US-based company Green Mountain Coffee Roasters (GMCR), which develops its own brand of portion pack K-Cup beverages. GMCR is listed on Nasdaq.

Keurig mainly markets its coffee brewers to North America. These brewers are considered high-end, with a price range of US$99.99 (RM320) to US$249.99 per unit, a 15% to 20% premium to its closest alternative. With the onset of a slowdown in economic growth especially in the US, this could result in down-trading by customers. The key risk is deterioration in the global macroeconomic environment. We maintain our forecasts for now.

Although VSI has yet to see a slowdown in orders, we remain wary on the global economic outlook. However, following the recent run-up to the share price, valuations are no longer compelling.

We downgrade our call to “underperform” (from “market perform”) with a fair value estimate of RM1.40 per share based on six times CY12 earnings per share. However, net dividend yield of 6.8% to 7.4% should provide some support to the share price. — RHB Research, Dec 15


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UMW associate receives takeover offer

KUALA LUMPUR: UMW Holdings Bhd’s 22.3% associate company, WSP Holdings Ltd, has received a takeover bid in New York.

The group yesterday also refuted rumours it has submitted a bid for Khazanah Nasional Bhd’s 42.7% equity stake in Proton Holdings Bhd.

According to WSP’s filing with the New York Stock Exchange (NYSE), the company said it had received a non-binding proposal letter from HDS Investments LLC notifying of its interest in acquiring all of WSP’s shares for US$0.60 per share. This is to be paid in cash. At the price tag of US$0.60, UMW’s 22.3% stake in WSP would translate into US$13.7 million (RM43.8 million).

Following the proposed acquisition, the WSP board formed a special committee of independent directors to consider strategic alternatives to enhance shareholder value.

In its filing with NYSE, WSP said its majority shareholder Expert Master Holdings Ltd, which has a 50.9% stake and is wholly-owned by WSP chairman and CEO Longhua Piao, has had preliminary and informal communications with HDS.

HDS had proposed to acquire all of the shares held publicly and by certain significant shareholders through a special purpose vehicle. However, WSP said the special committee has made no decisions pertaining to the proposal.

“There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated,” it said.

WSP, which had been listed on the NYSE since 2007, is a Chinese manufacturer of seamless oil country tubular goods (OCTG) including equipment used for the exploration, drilling and extraction of oil and natural gas.

It has seen its earnings erode steadily over the past few years. WSP registered a net loss of US$118.8 million for its financial year ended Dec 31, 2010, from a profit of US$4.18 million the year before. Revenue dwindled to US$470.5 million last year from US$5.7 billion in 2009.

The company said it suffered a significant operating loss, working capital deficiency and negative operating cash flow last year.

Additionally, it said there was a significant amount of short-term borrowings to be refinanced. Its current liabilities stood at US$877.9 million in 2010, from US$764.4 million the year before.

It also said sales in the US had declined substantially in the past two years due to the anti-dumping and countervailing duty on seamless pipes manufactured in China.

Shares in WSP closed higher at US$0.46 on Wednesday from US$0.44 the day before. The stock has lost 65.7% year-to-date.

UMW told Bursa Malaysia yesterday it had not submitted a bid to buy Khazanah’s stake in Proton. The statement was in response to a media article.


This article appeared in The Edge Financial Daily, December 16, 2011.



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