Petra Group ... Nov09

It issued a circular to shareholders on the proposed disposal of three new vessels to its 55% owned subsidiary Petra Energy Bhd.

On top of this, in Sept 2009, PPB disposed of a 5% stake in PEB at RM1.53 apiece for Rm16.06 million to TA First Credit Sdn Bhd.

Are these moves a preclude to something more? Can shareholders expect further inter company transactions or dealings between the two?

Whatever it is, the two deals raise some interesting questions?

The sale of the vessels marks the first time PPB is disposing of new vessels. It usually sells old vessels – some more than 30 years of age – to upgrade its fleet.

The argument for the proposed sale is that PPB is disposing of new vessels to its 55% owned subsidiary and should thus be able to get back some earnings. But why does PPB have to sell off the assets? Why not simply lease the vessels to its subsidiary? After all, there is certainly in a leasing contract as it is a transaction between two connected parties.

One of the reasons for the disposal is that PEB has a RM1 billion contract with Shell that had tied up the only two offshore support vessels that the former has. As a result, PEB is in immediate need of additional vessels to facilitate the timely and efficient performance of the contract, which the company notes, is expected to consequently contribute positively to the consolidated earnings PPB.

Industry observers say the sale of the vessels ensures the commitment of the companies to the Shell project and therefore avoids disruption in execution. It also eliminates concerns that PPB is not chartering the vessels of PEB at an arm’s length pricing as well as removes the concern of related party transaction issues.

But considering that it is an inter company disposal, is the selling price fair?

The gross proceeds of the disposals come up to RM213 million. PPB will net RM58 million after stripping out costs. The sale will increase its gearing from 0.88 times to 1.07 times.

In addition of the disposal, PPB disposed of 10.5 million PEB shares or a 5.38% stake at RM1.53 apiece for a total consideration of RM16.06 million. PPB incurred a loss of Rm500,000 from the share sale.

The process from the divestment shall be utilized to pare down bank borrowings.

Sources are claiming that the sale of PEB shares was supposedly at a higher discount than was approved by PPB’s shareholders.

The 5.38% stake was sold to TA First Credit, a company linked to the TA group. TA First Credit then disposed of two million shares or a 1% stake on Sept 30, 2009, ceasing to be a substantial shareholder.

It is unclear who bough the two million shares but market talk is that it may be related to possible changes in the shareholding structure of PPB and PEB.

There is a possibility of PPB selling its stake of up to 60% in PEB to focus on its marine charter operations, provided there is an attractive discount.

The disposal of the vessels will need to get shareholders’ approval in a meeting.

PPB holds 55% of PEB. Skim Amanah Saham holds 6% and LTH holds 5%.

PPB’s short term borrowings fell 63% to RM133 million as at June 30, 2009. Its long term borrowings, increase to RM380 million over the same period.