Loh & Loh Corporation Bhd
(Sept 30, RM4.75)
Buy (under review) at RM4.49 with target price of RM4.85 (GO price): PetroSaudi’s offer for UBG shares, which came after more than nine months (since mid-January), has triggered multiple general offers (GO) affecting UBG’s subsidiaries, Loh & Loh and Putrajaya Perdana. The GO price for Loh & Loh is a disappointment as it did not consider its strong order book and its potential in water infrastructure. The ball is in the authorities’ court to approve this deal, as it does not require shareholders’ approval.
PetroSaudi International’s offer to UBG’s major shareholders became unconditional on Wednesday. Accordingly, it made a RM2.50 offer on Wednesday to UBG major shareholders to take over their combined 89.8% stake in UBG. This has triggered a mandatory GO for the remaining 10.2% UBG shares, and also 19.7% of Loh & Loh and 14.2% of Putrajaya Perdana shares not owned by UBG. The offer price for Loh & Loh and Putrajaya Perdana shares is RM4.85 each.
The offer prices for all three stocks are the same as when Abu Dhabi-Kuwait Malaysia Investment Corp (ADKM) injected Loh & Loh and Putrajaya Perdana into UBG in July 2008 in return for new UBG shares. At that time, the deal also resulted in GOs for all three companies: RM2.50 for UBG and RM4.85 each for Loh & Loh and Putrajaya Perdana. The deal then resulted in ADKM emerging as the largest shareholder of UBG (52.6%), which in turn ended up with 80.3% of Loh & Loh and 85.9% of Putrajaya Perdana.
PetroSaudi’s offer price seems to have disregarded the value created in Loh & Loh, where the BVPS has risen 24% from RM2.57 as at end-2007 (to which the GO by ADKM was cross referenced), to RM3.19 as at end-2009. Also, PetroSaudi’s offer values Loh & Loh at just 0.33 time, as a ratio of its outstanding construction order book, against 0.42 time in the ADKM offer, 21% lower. This is derived using RM330 million in market value at the RM4.85 offer price over RM1 billion estimated outstanding order book now, against RM780 million during ADKM’s offer.
PetroSaudi’s offer values Loh & Loh at 9.2 times 2011 PER based on our earnings estimates, significantly below its peers in niche construction services. A close comparison is Hock Seng Lee, which has a niche in marine engineering, now trading at 11.9 times 2011 PER. Excluding a huge cash reserve of RM113 million in Loh & Loh as at June 2010, the offer values the stock at just six times 2011 PER. Loh & Loh’s expertise is in water infrastructure works with a huge potential in water infrastructure and the construction of hydroelectric dams in Sarawak. — Maybank IB Research, Sept 30
This article appeared in The Edge Financial Daily, October 1, 2010.
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