SCOMI’s pull factor

Analysts bullish about company’s prospects in global monorail business

THE one-time darling of the investment community, Scomi Group Bhd is once again at the nascent stage of drawing investor interest, this time because of its ventures in the global monorail business.

Since the start of the year, the company has piqued much interest largely due to its major rebranding plans. It previously garnered a strong following as an oil and gas player, but today the theme has shifted to urban transportation, or monorail to be exact.

“Valuations are quite decent now with Scomi Group at six times earnings (for its 2010 financial year),” says an analyst.

While Scomi Group is expected to benefit from a pick-up in oil and gas drilling activities as the price of crude oil has crossed the US$80 a barrel range, analysts seem more enthused over the monorail angle.

Analysts see potential in Scomi Group, through its 69.3% subsidiary Scomi Engineering Bhd, securing a sweet slice of the multi-billion ringgit project to upgrade the urban transportation network in the Klang Valley.

AmResearch, in a note late last month, said that some RM1.1bil public transport jobs might be awarded soon.

On the cards is also Scomi’s role in the upgrade of the KL Monorail. Scomi has acknowledged that it is in discussion with Syarikat Prasarana Nasional Bhd (SPNB) for the upgrade, which reports indicate would be an upgrade of the current two-car configuration to a four-car configuration.

The job is estimated to be worth RM600mil and could lift Scomi Engineering’s earnings by between 21% and 23%.

The second job, which also involves SPNB and is estimated to be worth RM500mil, involves the supply of 400 buses to expand the bus coverage in the Klang Valley.

There’s potential for further earnings upgrades for Scomi Engineering should it secure work from the planned RM7bil upgrade of the LRT network in the Klang Valley, or if it manages to bag a portion of the massive MRT project for greater Kuala Lumpur.

There’s more to whet investor appetite when it comes to clinching jobs abroad. Scomi Engineering is said to be bidding for monorail jobs worth around US$11bil, or at an average of US$35mil to US$40mil per km, in Brazil, India, Saudi Arabia and Nigeria.

As such, AmResearch expects Scomi Engineering’s future contribution to be at par with its oil and gas business, which previously accounted for 60% to 70% of group earnings.

A source close to the company says the future revenue breakdown among its three core businesses – oil and gas, urban transportation and marine logistics – will be 40:40:20.

AmResearch also plays down concerns of political patronage, saying that regardless of political influence, Scomi Engineering does have a pedigree in monorail works based on its track record.

“Furthermore its oil and gas business is not fully concentrated domestically,” it says.

Scomi Marine Bhd’s recent disposal of its marine logistics business to PT Rig Tenders Indonesia (PTRT), in the short-term, may impact its profit and loss negatively.

According to TA Securities research head Kaladher Govindan, the marine logistics disposal has a negative short-term effect for Scomi Marine as it will result in a one-time loss on disposal of RM433mil and this will be reflected on the group’s earnings (Scomi Group’s 42.7% stake in Scomi Marine translates into RM184.9mil) when the deal is completed next quarter.

“The news does not come as a surprise due to tighter regulations in Indonesia that make it difficult for non-Indonesian flagged vessels to ply its waters when the cabotage laws are enforced next year,” he says in a recent report on Scomi Group.

Because the marine logistics business accounts for about 77% and 85% of Scomi Marine’s sales and gross profit respectively, Kaladher says there is a high degree of uncertainty over the terms and conditions when the current five-year contract with PT Adaro expires in 2012.

Scomi Marine services two coal miners, PT Adaro and PT Arutmin in Indonesia, with an annual tonnage of 18 million and nine million tonnes respectively.

“The painting is already on the wall when PT Arutmin reduced its two-year contract with Scomi Marine to annual renewals. Apparently, the latest renewal did not approve the group’s request for an increase in charter rates,” he says.

On the brighter side, Kaladher says Scomi Marine will emerge with RM552.2mil cash in its coffers post the PTRT deal.

“This translates into cash and net cash per share of 75 sen and 66 sen respectively, which is a big pull factor if it intends to pay out the proceeds as capital repayment. The current share price is trading at a hefty discount of 42.9% and 34.6% respectively,” he says.

Also post the PTRT deal, he says gross gearing will reduce to 0.12 times from 0.16 times.

“The disposal will effectively remove RM83.6mil debt from its balance sheet and total borrowings will reduce to RM70.8mil post disposal,” he says.

With the extra cash, Kaladher says Scomi Marine has many options to utilise the proceeds.

“But, as there were minimal details in the announcement and management was noncommittal and tight lipped on its exact plans, we have to do some guesstimate on its options, which includes reinvestment in the Indonesian joint-venture, buying more marine assets and capital repayment,” he says.


By SHARIDAN M. ALI