Scomi to be cash rich from exercise

Scomi Group Bhd
(July 13, 41 sen)
Maintain buy at 40 sen with fair value of 76 sen: Scomi Group Bhd’s (SGB) associate company, Scomi Marine Bhd (SMB), has entered into heads of agreement (HOA) with PT Rig Tenders (PTRT), an 84%-owned subsidiary of SMB, and Port Offshore Inc (POI) to dispose of its marine logistics business to POI for US$172 million (RM550 million). The acquisition will be funded through US$100 million in bank borrowings and a US$72 million rights issue.

After this sale, PTRT will no longer be a subsidiary of Scomi Marine. It will be a 24.75%-owned associate of the group and POI will become the major shareholder of PTRT.

We are positive on this disposal mainly because of the introduction of a cabotage law in Indonesia which will come into effect end-2010, which will pose more challenges to SMB. The cabotage rule requires vessels to be at least 51%-owned by an Indonesian party. With this rule in place, SMB’s earnings could be at risk with contracts hard to come by and less favourable rates.

However, SMB is keen to remain a partner to try to capture the upside potential of the strong Indonesian market. It believes that POI, given its financial strength and operational background, will be able to enhance its marine logistics business.

But we feel that SMB should have disposed of its entire stake in PTRT rather than remaining as a minority partner where earnings risk remains. This would have made more cash available to the group as well.

From this disposal, SMB will make losses of RM433 million (including forex losses of RM100 million). Admittedly, there will be some impact to our SGB estimates, but we are maintaining our estimates as the deal is in the preliminary stages.

The silver lining to this exercise is that SMB will be cash rich — RM552 million (about 75 sen per share) will be available to the company.

Management has not decided on to how to use this cash, but it did indicate the possibility of purchasing more offshore support vessels, injecting/acquiring a marine-related business or returning cash to the shareholders.

Elsewhere, we gather that there are more tenders for transport jobs in Brazil for the preparation of the 2014 FIFA World Cup, although decision-making remains rather slow. The group is also interested in getting a slice of the Kuala Lumpur MRT job via M&E works, given the sheer size of the project.

We maintain our buy rating on Scomi Group with an unchanged fair value of 76 sen, pegging a PER of 12 times. — AmResearch, July 13



This article appeared in The Edge Financial Daily, July 14, 2010.