Ramunia/Sime Darby ... May 09

Lembaga Tabung Haji, the second largest shareholder of oil and gas player Ramunia Holdings Bhd, is in favour of Ramunia disposing of its fabrication assets and liabilities as a way to stave off financial distress. The fund is hoping that with the proceeds, the loss-making Ramunia can fare better by entering another business.

The Ramunia board of directors accepted Sime Darby Bhd’s offer to acquire Ramunia’s business and undertaking for RM232mil provisionally. The completion of the deal is subject to the agreement of the Ramunia shareholders, among other things.

Tabung Haji chief investment officer Md Noor A Rahman said that the fund saw no reason to reject the Sime Darby offer. The deal is good because it will solve a whole lot of problems for Ramunia. The problems included tight working capital, halted orders and high staff turnover, which largely stemmed from the global financial crisis and the scrapping of the proposed reverse takeover (RTO) of Ramunia by MISC Bhd.

On the fact that Ramunia would no longer have the yard if the Sime Darby deal went through, Ramunia would still have 20% of SDE. In addition, its debt burden would be lightened considerably.

It was unlikely that Ramunia would distribute the SDE shares to the Ramunia shareholders because SDE was not listed.

With the RM46mil cash, the management has to think of a new core business. It would be up to the Ramunia management to defend its new business direction when it seeks approval from the shareholders.

It may also be timely for Tabung Haji to seek board representation in Ramunia.

Should LTH Take The Offer …

It should not …

First and foremost, the fund is supposed to be in the business of investment and not in the business of running companies. From a purely investment standpoint, Ramunia will be stripped of its sole income generating asset – its 170 acre fabrication yard – and face uncertain prospects at best.

Without a core business, Ramunia is in danger of being delisted, and the value of the 20% stake in SDE will be largely depend on how well the latter can execute its O&G strategy.


LTH will continue to hold 30% Ramunia at the end of the day, but it will be holding on to a vessel that has been emptied of its contents, save for a 20% shareholding in SDE and Rm46 million cash.

Despite the prospects of SDE landing major deals in the near futures are bright, the margins are thin in the fabrication business – about 5% on average – and premised upon the cost of raw materials and efficiency in the execution of jobs. Which means, at the end of the day LTH would very much have to depend on the management skills of SDE to see returns from the 20% stake.

Furthermore, there is no indication what Ramunia intends to do with the RM46 million, nor is there any guarantee that the problems that presently plague the company will not continue.

A possible silver lining, however, is speculation that LTH will be given some board representation post disposal. At least then, the fund will have some say in Ramunia’s direction and the utilization of its RM46 million cash. The question is, does LTH want to have a say in the management of Ramunia?

A second consideration is whether the purchase by Sime Darby really represents good value for LTH. There is no doubt that the acquisition is good for Ramunia, which from all reports is in financial trouble.

LTH, however, as an investment fund – demand more value from the exchange. A more equitable deal would involve the exchange of Sime Darby shares rather than a stake in the uulisted SDE.

How well SDE performs would be reflected in the parent company, and LTH would not only reap the benefit, albeit on a smaller scale, but it will also have the security and flexibility of dealing wit tradeable shares.

The valuation of SDE is also, another consideration. At Rm186 million, the 20% stake in SDE is coming in a hefty premium of 36 times PER.

Understandably, Ramunia will not be distributing the shares in SDE to its shareholders. This means that LTH’s share of the pie from the 20% stake in SDE will depend on the dividends paid out by Ramunia, which, in turn, will be dependent on the dividends SDE pays.

Indirectly, LTH will take up a 6% ownership in SDE. Assuming SDE declares its entire earnings as dividends and Ramunia does the same, the SDE stake will not really mean much to LTH in terms of annual dividend contribution.

Putting it all together, LTH could see staring at an investment proposition that in time to come, will leave it no better off than where it is now.

Even a straight cash deal from Sime Darby would have been better. The cash could be utilised to buy shares in the undervalued Sime Darby.


LTH needs to exit Ramunia, but in doing so, it should get the best possible deal. In this case, that means getting its hands on some assets that can provide better and more certain returns than equity in SDE. The counter argument is that SDE shares are not publicly available whereas Sime Darby shares are. This then offers a unique entry point for Ramunia and LTH into SDE.

Assuming that SDE is listed in the future, Ramunia would be able to cash out. But then, it should be noted that LTH does not control Ramunia. Hence it does not determine the fate of the company.

A question lingers over Sime Darby’s mode of takeover. By taking the companies Act route, it is proposing to strip a troubled company of its business without taking it over entirely. Using this mode of takeover, Sime Darby only requires a simple majority of 51% to buy up the assets. A more equitable mode would be for it to adopt the Malaysian Code On Takeover and Mergers, where it would require 75% shareholder approval.

As it is now, an agreement by Ramunia’s two major shareholders – LTH and Datuk Azizul – would sew up the deal for Sime Darby.

As for LTH, Ramunia is becoming less of an investment by the day and the pilgrims fund should strive to reduce its holding as much as possible.

Another consideration is whether LTH has a choice. If this is Ramunia’s only hope of avoiding PN17 status, the point may be moot.