MISC Bhd could use the proceeds from the initial public offering (IPO) of its engineering unit, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE), for further expansion such as acquiring more very large crude carriers (VLCC) for its petroleum business, said a research house.
MIDF Research said MISC could leverage on its synergies with VTTI BV (provider of storage space for fossil fuels), in which it recently acquired a 50% stake, and fund MMHE’s expansion plans, including increased activities in Turkmenistan.
“Although there would be dilution to MISC’s income from MMHE, we expect the impact to be minimal. We estimate that with a 74.5% stake, FY11 earnings would drop by 17.7% in a worst-case scenario in which the cash raised did not generate any returns,” said the research house.
MIDF said after considering returns generated from expansion, the drop in FY11 would likely moderate to 5.8%.
The RM300 million cash dividend from MMHE and the potential RM1.6 billion raised from the IPO would reduce MISC’s gearing level from 0.37 times to 0.29 times.
MISC announced last Friday that it proposed to offer 25.5% of MMHE pursuant to the IPO by the fourth quarter of this year.
Under the IPO, MISC would sell 9.1%, or 146 million shares, to institutional investors, and MMHE will propose a public issue of 16.4%, or 262 million shares.
MIDF said although it viewed the IPO positively, it was maintaining a neutral stance on MISC, with a revised target price of RM8.92 (from RM8.70) as it believed that the planned IPO had already been factored in by the market.
“However, we are not discounting a re-rating in the future, should there be a sustainable recovery to shipping rates,” it added.
Meanwhile, OSK Research said MMHE was among MISC’s key earnings contributors and the company had grown to become a significant contributor in recent years by helping to cushion the impact of decelerating earnings from other divisions, especially losses at MISC’s liner division.
“In the preceding year (FY10), MMHE was one of the leading revenue contributors of MISC group, accounting for revenue of RM6.1 billion and PAT (profit after tax) of RM284.1 million.
“We reckon the thin margins in FY3/10 were mainly due to a large recognition of procurement activities that fetched thin margins during the financial year,” it noted.
The research house believed margins were likely to be higher going forward as the unit benefited from the potential upturn in the oil and gas cycle on the back of sizeable orderbook replenishment.
OSK said MISC’s cost of investment in MMHE from Oct 11, 1991 to Jan 14, 2008 stood at RM303.8 million, representing an investment cost of about 22.7 sen per MMHE share.
It said the listing exercise might involve the revaluation of some key assets owned by MMHE, which would translate into a one-off exceptional gain for MISC.
It added the offer for sale of 146 million shares by MISC would also give rise to a disposal gain which could amount to RM655 million (a gain of RM4.48 per share based on the IPO price of RM4.71).
“While this type of profit is usually categorised as an exceptional gain by the investment community, we remain upbeat as this would eventually unlock MISC’s long term investment and bump up its group shareholders’ funds and NTA per share,” OSK said.
This article appeared in The Edge Financial Daily, July 27, 2010.
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