Tenaga ... Jul12

ZJ Research ...

3QFY12 Results Review
• Tenaga Nasional Bhd (TNB) reported a net profit of RM3.2 bln in 9MFY12, which included fuel
compensation amounting to RM2.8 bln, offset by foreign translation loss of RM323.8 mln. The
RM2.8 bln payment comprised RM1.7 bln reimbursement for additional fuel costs incurred prior
to FY12 while the balance RM1.1 bln was compensation for the current financial year. Stripping
off the translation loss, the results were ahead of our expectation.

• For the quarter under review, reported net profit of RM619.1 mln was augmented by fuel
compensation amounting to RM777.8 mln. Without the fuel compensation and foreign
translation loss, core operating net profit would be approximately RM570 mln.

• For 9MFY12, turnover rose 14.8% y-o-y to RM26.5 bln, driven by 4.2% y-o-y increase in
electricity units sold in Peninsular Malaysia, as well as effect from the tariff hike in June 2011.
The 144.6% y-o-y increase in net profit was mainly due to the RM2.8 bln compensation as
mentioned earlier. Meanwhile, operating expenses increased 8.2% y-o-y on higher generation
costs, higher average coal price as well as coal consumption. Average coal price in 9MFY12
was USD107.5/mt against USD103.0/mt a year ago. Coal consumption too, was 11.5% higher
y-o-y at 15.5 mln mt in 9FY12.

• As for the gas curtailment issue, management explained that the fuel cost sharing mechanism
will be in place until the LNG re-gasification terminal in Melaka starts operations in September
2012. This should help cover two-third of the additional costs incurred by Tenaga in using
alternative fuels instead of gas. We also understand that while the gas supplied from the regasification
plant will be at market price, the Government would ensure the impact to Tenaga
would be neutral.

• Looking forward, we remain broadly positive on TNB’s prospects. Our optimism is underpinned
by several factors, such as, i) the additional fuel costs arising from the gas curtailment issue is
now partially mitigated by the fuel cost sharing mechanism, ii) assurance of neutral impact from
the gas supply from the LNG re-gasification plant, iii) coal prices that are trending down, and iv) fairly stable expected annual electricity demand growth of between 4%-5%. Earnings-wise, we
raised our FY12 earnings estimates to RM3.80 bln after imputing higher gas compensation from
the Government.

• No dividend was declared for the quarter under review.

Recommendation
We maintain our Buy recommendation with a higher DCF-derived fair value of RM7.54 (from RM7.20)
following our earnings revision and updating of valuation parameters. We believe the worst days are
over for TNB and outlooks are gradually improving based on reasons stated earlier. Moderating
factors include unexpected drop in gas supply, and uncertainty in tariff review given the impending
general election.

Pantech ... Jul12

- Sales up 52.3% y-y and 13.1% q-q
- Net profit doubled y-y and up 16.7%q-q to RM12.5 mil
- Expect strong double-digit growth in FY13-FY15
- FY13E P/E of only 5.1x with estimated 7.5% net yield

Pantech Group Holdings’ earnings results for 1QFYFeb2013 were ahead of our expectations.

The company reported a strong start to its financial year ending February 2013. Turnover was up 52.3% y-y and 13.1% q-q to RM145.2 million, with improved activities in both the trading and manufacturing arms.
Trading sales totaled RM90.2 million, up 38% y-y, accounting for about 62% of total turnover.

Meanwhile, manufacturing sales jumped to RM55.1 million, from RM30.2 million in the previous corresponding quarter. Sales included maiden contribution from UK-based Nautic Steels, which was acquired at the beginning of the current financial year.

Both the company’s carbon steel and stainless steel manufacturing plants are running near capacity on the back of strong demand. Whilst the latter is still in the red, losses were much smaller than that in the preceding quarters – and were more than offset by earnings from the carbon steel plant and Nautic Steels. The manufacturing arm reported earnings before interest and tax (EBIT) of RM5.4 million, compared with RM1.3 million in 1QFY12.

Net profit totaled RM12.5 million in 1QFY13, double the RM6.2 million reported in 1QFY12 and 16.7% higher than the RM10.7 million made in 4QFY12.

Gearing and net assets stood at 37% and 78 sen per share, respectively. The company proposed an interim dividend of 1 sen per share. The stock will trade ex-entitlement October 5th. Before this, the stock will trade exentitlement for final dividends of 1.3 sen per share September 3rd.

Pantech’s latest 1QFY13 earnings result reaffirms our upbeat outlook for the company.
Despite prevailing uncertainties on the global economic outlook, demand for the company’s pipes, fittings and flow control (PFF) products – in both the domestic and overseas markets – remains buoyant underpinned by continued spending in the oil & gas industry. This will likely remain the case barring a major downside shift in the global economy.

On the domestic front, national oil company, Petroliam Nasional intends to spend some RM250 billion over five years, to develop new projects, including new deepwater and marginal oil fields, as well as undertake enhanced oil recovery from existing oil fields. Contracts have begun to flow and would gradually filter down to the downstream support services and equipment.

With an extensive range of over 22,000 product items of various sizes, grades, types, categories and brand names, Pantech provides its customers a one-stop solution for the transmission of fluids and gases.
Sales at its trading arm, which caters primarily to domestic demand, have been gaining traction, especially in the last two quarters. The manufacturing arm, which caters primarily to the export market, has also
been doing well. Crude oil futures on the New York Mercantile Exchange are currently hovering around US$90 per barrel, a level that remains supportive of exploration and production activities in the oil & gas sector.

Pantech’s order book for its carbon steel PFF products now stretches right up to April 2013. The new machineries acquired earlier this year, to manufacture high frequency induction long bends, have been up and
running. Indeed, all the lines are operating at full capacity.

The company is adding one more line at its manufacturing facility in Klang that will raise capacity by 1,500 tonnes per annum. Currently, total production capacity stands at some 16,500 tonnes. The new line is expected to commission by October 2012.

Additionally, the underlying strength in demand has allowed Pantech to raise selling prices, by about 7-15%, for its products. Impact from the higher prices will be gradually evident over the next few months as new orders are delivered – and should be reflected in the company’s 2HFY13 earnings. As it is, we expect both sales and net profit to strengthen further in 2QFY13, from the first quarter’s results.

Meanwhile, the order book for stainless steel pipes and fittings is full for the next three months. The plant in Johor is also running near full capacity. About half of the output is sold in the domestic market, substituting products previously sourced externally by the trading division. The remainder is exported.

The company has now commissioned all ten production lines, from the initial six, bringing total capacity to 12,000 tonnes per annum. The final line, to manufacture larger sized pipes, only just started production.
The stainless steel plant was loss-making in FY12, due to start up expenses and initial production hiccups. But following a steep learning curve, losses have narrowed significantly in 1QFY13. At this pace, it is likely to breakeven in 2HFY13 and should contribute positively in FY14.

Operations at newly acquired UK-based manufacturing outfit, Nautic Steels too are going to plan. Recall that Pantech bought over the company in early- March 2012 for some GBP9.2 million. As mentioned above, the unit is already profitable and had contributed positively to earnings in 1QFY13.

Nautic specializes in niche market PFF, including high value copper nickel, duplex and super duplex stainless steel and other alloy products. These products are widely used in highly corrosive, acidic, salt saturated water and high temperature environments such as marine oil industry and water desalination plants. More importantly, Nautic’s products are approved by most of the oil majors such as Aramco, Petrobras, Qatar Petroleum, BP and Shell.

The acquisition complements Pantech’s existing range of carbon steel and stainless steel products – and will expand the company’s geographical reach and clientele.

Pantech has begun to re-jig Nautic’s production processes to optimize operations and enhance profitability. It is also in the midst of planning more machineries to cater to rising demand. Its customers are diverse, including from Brazil, the Middle East, Asia and Europe. The company is upbeat that it can improve on sales and margins by FY14.

Valuation and Recommendation
Based on prevailing operating conditions, Pantech is on track to achieve strong double-digit sales and profit growth over the next few years. The company targets to hit the RM1 billion mark in sales by 2015.

We estimate net profit of RM52.6 million in FY13, up 52% from the RM34.5 million recorded in FY12. Earnings are expected to expand further to RM64 million in FY14.

Based on our forecast, the stock is trading at very modest P/E valuations of only 5.1 and 4.2 times, respectively, for the two financial years. Pantech’s valuations compare very favourably against that for most oil & gas stocks listed on the local bourse – and the broader market’s average valuations – as well as against its own projected growth.

Plus, the stock is trading well below its net asset of 78 sen per share as at end-May 2012. With the gradual crystallization of its earnings growth, we believe the stock is due for a positive re-rating. Thus, we maintain our BUY recommendation on the stock.

Furthermore, Pantech has taken to paying quarterly dividends, giving shareholders a dependable income stream. The company proposed a first interim dividend of 1 sen per share. Net dividends totaled 3.5 sen per share in FY12, up from 3.3 sen per share in the previous financial year, including the as yet unpaid final dividend of 1.3 sen per share.

In view of the company’s stronger earnings, we estimate dividends will rise to 4.5 and 5.5 sen per share in FY13-FY14. This will earn shareholders an attractive net yield of 7.5-9.2% at the current share price.

CBIP ... Jul12

Further growing its order book by targeting to secure projects worth about RM500mil from plantation companies such as Felda Ventures Hldg Bhd, Kuala Lumpur Kepong Bhd and TSH Resources Bhd.

CBIP is expected to ride on the expanding plantation sector in Indonesia and Africa. A mill is required for every 7,000-8,000ha of oil palm trees. Given the huge planting activities in recent years, demand for palm oil mills has also increased.

Also, CBIP is targeting Papua New Guinea as a new emerging market to grow its orderbook.

Since June 12 2012, CBIP has been awarded by Wilmar International Ltd, Sime Darby Bhd and PT Astra Agro Lestari Tbk.

CBIP's Modipalm CS system offers better OER and lower oil losses from condensation as well as unquantified oil loss (for example oil and loose fruit spillage). Compared with conventional mills, its CS system could increase OER by 1 to 2 percentage points. Modipalm mill requires less labour as compared with a conventional mill.

As at the end first quarter of 2012 (Q1'12), CBIP has about RM356mil of unbilled sales. Of this, about RM150mil will be recognised during the remaining months in 2012.

Also, it has secured about RM76mil worth of new contracts in Q2'12.

Its focus on high-margin mechanical supply business, which has a 20 to 25% operating margin versus palm oil mill construction's margin of 15 to 20%. In Q1'12, CBIP recorded a much higher operating margin of 17.9% mainly due to the rising mechanical supply business (about 35% to 40% of sales from mechanical supply business versus 25% to 30% previously).

CBIP expects to further expand its mechanical supply business and targets to further increase the total sales portion coming from mechanical supply business from 35 to 40% in Q1'12 to 50% in the coming year.

Besides growing its order book, CBIP is also targeting to grow recurring contribution from different segments such as replacement and upgrading works for older and underperforming mills. Currently this segment is contributing about 10% of CBIP's revenue.

Post-disposal of its Malaysia plantation assets, CBIP has about 8,000ha of landbank in Kalimantan. CBIP started planting in 2010, and this landbank is expected to start contributing in 2014.

It has also acquired about 29,273ha of plantation landbank in Kalimantan, which increases its total landbank in Kalimantan to 37,273ha. Expect to start planting on its newly acquired landbanks in 2013 and it targets to plant about 5,000ha-8,000ha every year. CBIP targets to increase its plantation landbank in Indonesia to 100,000ha. It is also looking to acquire another 30,000 to 40,000ha of landbank near its existing landbank in Kalimantan Tengah.

CBIP has a dividend policy of paying out one-third of its net profit.

As CBIP's cash position would remain high after the disposal of its plantation assets (net proceeds of RM268.1mil or 97sen per share), there might be another year of payout that is greater than its policy dividend in 2012.

SKPetro ... Jul12

It will be well-positioned to target large-scale and lucrative oil and gas projects in and outside Malaysia given its acquisition of Quippo Prakash Marine Holdings Pte Ltd (QP).

SKP's wholly-owned subsidiary, Geomark Sdn Bhd, had entered into a share sale agreement with QP, MDL Energy Pvt Ltd, Quippo Oil and Gas Infrastructure Ltd to acquire 74,000 ordinary shares of SGD1.00 each in QP, equivalent to 74 per cent of the issued and paid-up capital of QP, for US$22.5 million.

The merged entity will be a full-fledged engineering, procurement, construction, installation and commissioning O&G provider. As a one-stop solution provider, SKP will be able to take on the role of main contractor and hence reap higher project margins as it is likely to be awarded entire contracts rather than given piecemeal jobs.

The acquisition would enable SKP to gain full control of QP's vessels in order to better manage the latter's operational schedules and costs.

Going forward, there are still many opportunities for SKP to beef up its orderbook further in the coming months, especially from Petronas which should also be increasing its local exploration and production capital expenditure to temporarily substitute the loss of production from its Sudan operation.

As of May 2012, SKP held an orderbook of close to RM14.3 billion with more than 50 per cent constituting international contracts. Its current tenderbook is around RM7 billion.

It is a good strategic and tactical move by SKP as they would have more autonomy and control to utilise QP 2000 (a derrick lay barge, one of the largest of its kind in the South Asian region).

As QP 2000 has shallow-water and deep-sea capabilities, SKP will have an added edge over other players in the South East Asian region where the average age for similar ships in this region is over 25 years old.

CIMB ... Jul12

CIMB Group Singapore is still keen to have a Qualifying Full Bank (QFB) licence in Singapore despite the republic requiring foreign banks with large deposits to incorporate their retail operations locally.

Late June 2012, the Monetary Authority of Singapore (MAS) said foreign banks that fell under the QFB programme must also meet the republic’s stringent capital requirements.

 

CIMB was not deterred by the new rules. Instead CIMB Group Singapore was encouraged by MAS’ announcement that it would continue to consider awarding new QFBs to foreign banks operating in Singapore .

 

Such licences were awarded by MAS under the free trade agreement negotiations.

 

QFBs enjoy greater privileges, such as being able to open several branches in the city-state and accept retail deposits. MAS is considering granting foreign banks that incorporate locally and are sufficiently localised to open an additional 25 places of business, of which up to 10 may be branches.

 

CIMB Group Singapore currently has a two-branch banking operation that was once part of Malaysia ’s Southern Bank, which it acquired in 2006.

 

Without the QFB, CIMB expansion in the city state is limited.

 

CIMB also has stockbroking and corporate-finance businesses in Singapore when it acquired GK Goh in 2005.

 

CIMB Bank Singapore hopes to account for 10 per cent of the group’s earnings by 2016, with Indonesia and Malaysia contributing 35 per cent each, Thailand 10 per cent and the final 10 per cent from the businesses in other markets.

 

Ingress ... Jul12

For the rm960 million Ampang LRT project Ingress is in a consortium with Balfour Beatty Rail and Invensys in bidding for the job. It has been rumoured to be a strong frontrunner until controversy broke in late June 2012 when it was reported that George Kent (M) Bhd would likely emerge as the winner for the Ampang LRT extension.

Speculation has also been rife that major shareholders of Ingress are mulling taking the company private in a deal worth more than RM300 million. However, Rameli, who directly and indirectly owns 31.2 per cent of Ingress, said currently, there are no plans to take the company private.

The major shareholders of Ingress are Rameli, Shamsudin@Samad Kassim and Datuk Vaseehar Hassan Abdul Razack.

Ingress, through its subsidiaries, manufactures roll-formed plastic moldings and weather strips, automotive door assemblies and other automotive components.

For the Indonesian plant, Ingress is using funds from its private placement completed in March 2011, where it raised some RM7.6mil. Ingress is partnering Katayama Kogyo Co Ltd and Yonei Co Ltd, which have a 25% stake and 10% stake respectively in the joint venture company, PT Ingress Malindo Ventures for its Indonesian venture.

Ingress is also looking to penetrate the Indian market which has a total industry volume (TIV) of some three million.

Its energy division provides engineering services to power, utility, oil and gas, and railway industries.

For the financial year ended January 31 2012, Ingress posted a pre-tax profit of RM27.3 million on revenue of RM658.7 million. More than 80 per cent of the pre-tax profit and revenue was derived from its manufacturing business. The rest of the income came from its energy division, which includes power and railway.

Meanwhile, Ingress is looking to grow its energy division and is bidding for more jobs in Malaysia , including contracts from Keretapi Tanah Melayu Bhd (KTMB). Ingress submitted a bid to lease diesel locomotives to KTMB in 2011.

Axiata ... Jul12

It is likely eyeing a telecoms license that may be available in Myanmar . Axiata’s US$1.5 billion multi currency sukuk programme Axiata announced in early July 2012 for general corporate purposes gives the company the flexibility to raise funds within weeks should the need arise.

 

Laws are being changed in Myanmar to allow foreigners to have telecom license.  Market watchers reckon bigger players like Axiata and Singtel may opt to work with state owned operator Myanmar Post and Telecommunications should a strategic stake be available.

Axiata already has controlling interests in mobile operators in Indonesia , Sri Lanka , Bangladesh and Cambodia as well as associate stake in India ’s Ideal Celular Ltd and Singapore ’s M1 Ltd.

 

Apart from Myanmar , Axiata’s sukuk programme giving it bigger war chest to strengthen and consolidate its positions in countries. The Sukuk programme is not a preclude to a special dividend payout.  The dividend hopes in early July 2012 run up in stock prices may have fuelled by a speculation that Axiata is  a potential candidate open to hiving off its telecoms tower assets into a business trust for up front cash, while still retaining control.

 

Where there are no imminent M&A on the table, Axiata remains interested in strengthening its position by being a consolidating in Bangladesh and India . Axiata is keen to take control of India ’s Idea Cellular Ltd, in which it currently owns 19.3% stake. However, do not expect Axiata to make up any significant moves in India until the regulatory issues clear up.

APEX ... Jul12

A brewing shareholdingg tussle at Apex Equity may eventually lead to a hostile takeover. It is learnt that insurance firm P&O is accumulating shares on the open market. However it is not known if the shares are purchased for trading purpose or to assist a substantial shareholders in the brewing shareholding battle. Speculation that a general offer is possibly on the cards following the failed bid by former executive Chan Guan Seng and former director Lew Lup Seong to seek re election to the board at the AGM late June 2012. However the board, which was then left with only two directors after the AGM, re appointed Chan executive director two days after the shareholders’ meeting. Having flexed its muscles at the AGM, the faction against Chan is expected to oust the entire board of the stockbroking firm. But if that happens, it would mean triggering a MGO under Bursa Malaysia ’s listing rules.

Fun Sheung Development Ltd is the single largest shareholder of Apex Equity with a 14.96% stake. Chan, who has been at the helm of Apex for a long time, owns direct and indirect stakes of 12.55%. The other major shareholders of Apex include Datuk Azizian Abdul Rahman with a 3.86% stake and companies aligned to Lim Siew Kim of Metroplex Bhd. Lim could possibly be a key figure in Apex’s showdown. She is the daughter of Tan Sri Lim Goh Tong and the spouse of Dick Chan, the elder brother of Guan Seng. However Lim is said not aligned to Chan in his fight to keep control of Apex. Metroplex owns 6.3% stake in Apex Equity pledged to Arab Malaysian Credit Bhd. Apart from Metroplex, there are other companies holding shares in Apex linked to Lim.

A block of 13.5 million of Apex shares changed hands at 0.92 each. The shares are believed to be the block that Metroplex had pledged to Arab Malaysian Credit.

The beneficiary of the large block of shares is believed to be a friendly party related to Lim, considering the large discount to the market price.  Sources said the faction opposing Chan seems to be taking strategic moves to oust the board. If it is true that the 6.3% block is used as a launching pad to gain control of the company, a general offer, if it happens would be priced only at about 0.92.

IHH ... Jul12

Its Fair Price: 2.98 (PBB), 3.00 (JF Apex), 3.33 (TA)

 

It is sitting on a profit of rm5.5 billion as group goes public. Khazanah paid almost rm8 billion take Parkway Holdings Ltd private.  The bulk of the rm5.5 billion comes in the form of Khazanah’s 47% stake or 3.85 billion shares in IHH Healthcare Bhd post listing that comes to rm4.9 billion. Its average cost per share is rm1.58 while the IHH IPO price is rm2.85 per share. The balance of the gain comes from Khazanah’s divestment of a portion of is stake to Mitsui Co Ltd of Japan in Feb 2011 and the sale of 60% stake in Pantai Holdings to IHH.

 

Khazanah’s outlay for taking Parkway private was close to rm7.5 billion. Now (July 2012) it is sitting on a gain of rm5.5 billion, part of which is already realized.

 

Khazanah took Parkway off the market in 2010 after paying S$3.5 billion (rm8.6 billion) for the 76.1% stake it did not own. It fought a tough batter against Fortis Healthcare group in Singapore .

 

Khazanah took out the concession assets in Pantai and injected the remaining 60% stake into IHH. It also injected 100% of IMU and 13% in Apollo Hospital Group of India into IHH.

 

In Feb 2011, Khazanah divested 30% stake of IHH to Japan Mitsui Co Ltd. Mitsui paid rm3.3 billion for its stake. IHH’s shares were valued at rm2 in the deal. Out of the proceeds of mr3.3 billion, rm1.3 billion went to Khazanah, which made a profit of more than rm250 million from the deal.

 

IHH now (July 2012) includes the company’s acquisition of a 75% stake in Acibadem for rm3.7 billion. Acbadem is Turkey ’s largest private healthcare provider, with a network of 14 hospitals across Turkey and Macedonia . Abraaj Capital, which sold the stake in Acibadem to IHH, was provided a 7.02% stake in the latter.

 

Utilization Of IPO Proceeds …

 

IHH is offering 52 million shares or 0.65% of the enlarged share capital to Singaporeans at S$1.18 per share and 161.14 million shares or 2% to the Malaysian public.

 

IHH’s IPO will generate some rm5.13 billion in cash. The group will allocate a lion’s share of the proceeds to reduce its whopping debts in order to strengthen its balance sheet for future acquisition.

 

With the cash in hand, IHH will be able to slash its net debt to rm1.38 billion from rm6.04 billion which will reduce its gearing to 2.8 times from current (July 2012) 7.8 times.

 

Its total debt stood at around $2.4 billion as of the end of March 2012.

 

IHH had chosen not to commit to a dividend policy although it is generating cash flow of rm1 billion a year. However the group will pay dividends when appropriate.

 

After netting off the cost of IPO, IHH will receive about rm4.94 billion cash from the listing exercise, of which 90.9% will be used to pay off debts. Most of the proceeds will pay off a rm3.71 billion debt for financing the privatization of the Parkway group in 2010.

About 75% of its planned capex of rm6.9 billion has been paid for the period between 2010 to 2015.

 

Its Growth …

 

Parkway is one of Asia’s largest private healthcare providers and operates in Singapore , Malaysia , China , Hong Kong , India , Vietnam and Brunei . It earns more than half of its revenue in Singapore , where it is the largest private hospital provider with 43.9% market share.

 

Currently IHH’s Singapore operations have one of the highest margins and contribute about 28% to group revenue.

 

In Malaysia , Parkway is the second largest private healthcare provider with a 15.1% market share. Parkway’s expansion efforts will be focused in Malaysia , where it intends to spend rm454 million in the next few years (2012 & Beyond) to upgrade several Pantai and Gleaneagles hospitals in Penang, KL and the Klang Valley

 

IHH aims to add 3300 new beds in the next five years to the 4900 presently (July 2012). Its core healthcare operations and investments are located in Malaysia , Singapore and Turkey . This is in addition to other operations in China , India , HK, Brunei and Macedonia . The company diversified geographically only in recent years, as it was earnings all its revenue from Singapore in 2009.

 

IHHis vision is to be a pan Asian player in the healthcare arena. In fact, this has panned out as planned with the acquisition of Acibedem in addition to IHH’s foothold in India via its 11.2% stake in Apollo Hospitals Enterprise.

 

IHH will experience organic growth with the new hospitals it is building such as its Mount Elizabeth Novena hospital complex in Singapore . The first investment to roll out is the Mont Elizabeth Novena Hospital in Singapore in July 2012. The hospital cost IHH rm4.5 billion to build and more than 90% has been paid for.

 

Nevertheless, IHH is on the lookout for hospital management agreements within the region. IHH has HMAs in China , India , Vietnam and the Middle East .

 

The HMA business model allows IHH to carry on its core activity without taking on additional investment risks, and is useful in markets which the group is interested in but may not want to commit to right way. This is due to the high investments and risks involved.

 

IHH sees HAMs as one of the drivers of future growth for the group.

 

Key markets in India , China , Middle East and Vietnam are where they are looking to move the next step for the next phase of growth.

 

Its Shareholders …

 

Khazanah has decided to free the majority of the blue chips cornerstone investors in IHH’s IPO from any trading restrictions. Only investors with allocations of more than 50 million shares will be bound by a six month lock up clause.

 

Only seven of the cornerstone investors including the EPF and the KIA which collectively account for 900 million shares will not be able to sell their shares in the first six months after listing set for the end of July 2012.

 

The EPF and KIA were given the lion’s share of the cornerstone allotments with 8.95% and 6.71% shares on issue respectively.

 

Khazanah currently has a 62.14% stake in the group. The IPO will dilute Khazanah’s stake to 47.78% but create unrealized gains of rm4.90 billion based on its average cost of rm1.58 per share.

 

Khazanah will not be cashing in on IHH anytime soon. It makes up approximately 10% of Khazanah’s portfolio and will be one of the investment’s agency’s core businesses.

 

IHH next biggest shareholder is Mitsui & Co Ltd, which will have a diluted 20.48% stake post IPO.

 

IHH has reserved 62 percent of its IPO for cornerstone investors who must hold the shares for a minimum 180 days. This includes the Government of Singapore Investment Corp, Temasek Holdings Pte’s Fullerton Fund Management Co, Malaysian billionaire T. Ananda Krishnan’s Usaha Tegas Sdn Bhd, Kuwait Investment Authority, asset manager Blackrock.

 

The 22 cornerstone investors, who also include International Finance Corp, the private investment arm of the World Bank, will buy 1.39 billion of the 2.23 billion shares on offer - just over a quarter of the company - the biggest take-up by such investors of any recent major offering in the region. Up to 1.8 billion new shares in the IPO are on offer, while Abraaj Capital will sell 434.7 million shares in the dual Kuala Lumpur and Singapore listing.

 

Eastspring Investments, the asset management arm which is owned by Prudential PLC, and Malaysian pension funds have already committed to invest in the offering.

Roughly half of the remaining 720 million shares on offer will be taken up by the MITI. The rest will be offered to retail investors as well as employees and healthcare workers.

Of the 2.23 billion shares up for offer, about 400 million will be sold by existing shareholders while the rest will be new issuances.

 

Khazanah is the largest shareholder with a 62% stake while Japan ’s Mitsui & Co owns a 26.6% stake. Dubai based Abraaj Capital has 7.1% stake and Turkish hospital group Acibadem’s chief Mehmet Ali Aydinlar owns 4.2% stake.

 

Its Valuations … dated July 2012

 

Its recent acquisitions may weigh down the group’s earnings with depreciation and amortization charges. Khazanah, its major shareholder paid a premium for its healthcare assets, as high as 26 to 30 times PER. Khazanah was believed to have paid almost 40 times PER for the Singapore healthcare group. Parkway after bidding against India ’s Fortis Group.

 

Khazanah’s healthcare investment arm, IHH is set to come to market at one of the highest PER among companies making their debut on Bursa Malaysia . IHH already has 22 cornerstone investors lined up, a list of comprising a mix of local and foreign, institutional and sovereign investors.

IHH’s cornerstone offering of 1.3 billion shares comprises 62.09% of the IPO shares offerd and 17.22% of the enlarged shares capital after the listing.

Based on the cornerstone offer price of rm2.85, IHH is priced at 93 times pro forma FY2011 earnings per share of 3.05 sen. In comparison, the median PERs for healthcare operators in the Asia Pacific’s emerging markets is only 15.3 times. IHH also looks expensive compared with healthcare service providers operating in similar markets. The median PER for five of these players is 33.2 times (historical) and 26.1 times (forward).

No forecast was provided in IHH’s draft prospectus released but based on pro forma EPS of 2.04 sen for the quarter ended March 31 2012 the offer price of rm2.85 translates to a PER of 34.9 times based on annualized EPS of 8.16 sen.

IHH reported pro forma earnings of RM165 million for the 1QFY2012 ended March 31 with an annualized earnings per share of 8.16 sen and a retail offer price of rm2.85, the stock is being valued at 35 times earnings. The valuation appears high but it can be justified because of the capex that will increase IHH’s 4900 beds by 63%.

 

However, PER may not be the most suitable method to value the stock.

Healthcare providers are a peculiar breed, with some having aggressive depreciation policies for their hospital equipment and other fixed assets. IHH will be adding more than 3000 beds with the new hospitals coming onstream.

 

IHH should not be compared with some of the regional healthcare players due to differing depreciation policies. Furthermore IHH offers investors an opportunity to tap into markets where tourism healthcare is set to grow, namely Malaysia and Turkey , via its indirect 60% owned Acibadem Holdings AS.

More than 90% of the RM4.9 billion in net proceeds raised from the IPO will go paying off the capex to date (July 2012) that has been mostly funded by debt. This leave IHH with rm1.6 billion in capex for some2200 beds to be added by 2015.

 

IHH will have no problem funding the remaining capex with internally generated funds backed by a strong cash flow of about rm1 billion annually.

 

The company has also declared that it would not commit itself to a dividend policy.

 

Khazanah’s acquisition of Parkway Holdings in 2010 resulted in high levels of intangibles on IHH’s books. Due to largely to its past mergers and acquisitions, goodwill and other intangible assets represent a substantial portion of assets.

The group’s goodwill and other intangible were approximately rm11.6 billion as at March 31, 2012 on a historical combined basis, representing approximately 49.8% of its total assets and 93.6% of its consolidated total equity.

 

Goodwill arising from mergers and acquisitions account for most of the group’s intangibles and are worth some rm8.5 billion, half of which can be attributed to the Parkway Group. In total, Parkway’s intangibles are worth some rm6 billion in IHH’s books.

 

IHH has been growing its global footprint, going on an acquisition spree to capture expanding demand for healthcare services. However, almost of the funds raised will be allocated to paying off debts used to acquire its prized healthcare assets in the last two years (2010-2011).

IHH plans to use 90.9% of the rm6.37 billion raised from the IPO to pay off debts within 12 months. As at March 31, 2012 IHH had rm7.63 billion in total borrowings and net gearing of 0.49 times.

The high debt levels were pinned on the group’s aggressive expansion in the past two years (2010-2011).

The group noted that a lower gearing would give it the flexibility to expand operations locally or overseas and to raise financing as and when attractive opportunities arise.

In fact, IHH is not committed to a dividend policy to pay out a minimum amount of its earnings.

NIAM ... Jul12

TA Security Research ...

Secured Package S4 of KVMRT Line 1
Mass Rapid Transit Corporation Sdn Bhd (MRT Corp) has awarded the Package S4, which is for the construction and completion of the Section 16, Pusat Bandar Damansara and Semantan elevated stations and other associated works, worth RM208.2m to Naim Engineering Sdn Bhd, a wholly-owned subsidiary of Naim Holdings Bhd (Naim).

It is understood that 11 out of the 14 pre-qualified tenderers submitted their bids for this package.

This is one of the first two station works packages awarded by the MRT Corp and Naim is the 1st contractor in East Malaysia who has secured a main package of the KVMRT works.

Based on the tender procurement schedule, the works are expected to be completed by 2Q15.

We are positive on the job secured by Naim as the penetration into the KVMRT project would allow the group to price more competitively in future packages, which include those of line 2 and line 3 due to partial saving from the costs of mobilization of construction team and some preliminary items.

Forecast
As the job secured is within part of our forecast job replenishment expected by the company for FY12, we maintain our FY12-14 earnings projections. We maintain our new jobs assumptions of RM700m FY12, and RM600m each for FY13 and FY14.

Valuation
Based on 10x CY13 construction earnings, 4x property earnings and a 20% holding discount to 14x O&G earnings, we arrive at the fair value of RM2.26/share. Given the potential upside of 30.6%, we maintain Buy call on Naim.

IPO ... AirasiaX

Is the long haul low cost model for airlines works?

Such concerns are not unfounded, especially many long haul low cost carriers have had their wings clipped since the 2008/2009 global financial crisis.

New entrant Scoot – a subsidiary of SIA may give Airasia X a run for its money.

In reality this business is highly capex and the gestation period before it reaches a stage where it generates sufficient cash is long.

It is worth nothing here that Airasia X has had a few rounds of capital injection since its birth. The first was when Virgin subscribed for a 20% stake in Airasia X, Then it was the private placement in 2008, which brought in Manara Consortium and Orix Corp. The third was a rights issue involving most of the shareholders. Following the private placement and rights issue, Virgin’s 20% stake was diluted to 10%.

In March 2012, Airasia X proposed to raise US$200 million via a sukuk, but it has postponed the plan for at least another 12 months.

However, Airasia had hinted that it may exit Airasia X via the IPO although, the former later stated that the exit was one of the options that would require further deliberation by its board.

For now (July 2012), the more pressing question is will the other shareholders of Airasia X hold on their stakes or will they also be looking to depart?

Genting ... Jul12

TA Securities Research...

Signing of power purchase agreement with PLN
Genting has made a significant inroad into the IPP development in Indonesia after its 95%-owned subsidiary PT Lestari Banten Energi and its local partner, namely PT Hero Into Pratama, entered into a 25-year power
purchase agreement with PT PLN, the Indonesian state-owned electricity company. Genting’s bid for the project involves the financing, design, procurement, construction, commissioning, operation and maintenance of a coal-fired power plant with a gross generating capacity of 660MW and its support facilities in Banten Province, West Java, Indonesia. The plant shall be developed and operated on a build, own, operate and transfer basis for a period of 25 years, following which, the Banten plant shall be transferred to PLN for a nominal consideration.

US$1bn development cost needed
The successful bid has increased Genting group’s combined power generating capacity to 2,110MW in Malaysia, China, India and Indonesia. The estimated cost of Banten plant is approximately US$1bn or
US$1.5mn/MW. It is expected to be completed by 2017.

Positive to future income
We are positive on this development as future electricity demand is expected to increase based on the official forecasts. Essentially, the government forecast that GDP will grow by 6.2% p.a. in the 2010 – 2019 period (Rencana Usaha Penyediaan Tenaga Listrik 2010 – 2019). The electrification ratio is expected to increase to 91% by 2019, which translates into an implied electricity demand growth by 7% - 9% p.a. Concurrently, the installed capacity is projected to grow to 81.6GW by 2019 vs. 30.9GW currently. We expect this acquisition to generate positive future income beginning 2017. Also, it would help the group to diversify
its income base.

Forecast
We maintain our FY12-14 earnings projections as the commencement of commercial operation will only begin in 2017. Meanwhile, the capitalized interest cost shall not affect the group’s near-term profitability. In term of funding requirement, it is expected to come from the MTN issued by the group recently.

Maintain Buy on Genting
Reiterate Buy recommendation on Genting for its foreign gaming growth prospects. Our target price remains unchanged at RM11.88/share using Sum-of-Parts valuation methodology.

SPSetia ... Jul12

Following June 2012’s joint bid by SP Setia Bhd and Sime Darby Property Bhd to acquire the Battersea Power Station for £400mil (RM1.97bil), the two companies have now formed a 40:40:20 joint venture (JV) with the Employees Provident Fund to develop the London-based site.

The land cost remains unchanged at £400mil, with another £200mil earmarked for development in the first two years. However, SP Setia's stake has been lowered to 40% from the 50% that was previously guided.

The 39.1-acre site is to host mixed-residential and commercial units that will be developed over a period of 15 years and will include a new underground station costing £212mil, which will be shared among 10 developers in the vicinity.

The higher stake of 50% would have required more than RM700mil in funding requirements for SP Setia. This would have stretched its net gearing to more than 0.5 times and necessitate a higher level of equity fund-raising, at a time when share price still remains below RM4.00. Even with a 40% stake in the JV company, estimate SP Setia would still require an initial capital of RM590mil. This is assuming the JV company uses an equal mix of debt and equity. With its current net gearing estimated at 0.5 times, and given its need to fund other ongoing projects in addition to Battersea, expect a right issue to take place soon.

The Battersea project JV is consistent with the view that SP Setia is increasingly reliant on overseas projects to meet its sales targets. SP Setia is targeting 50% of its sales to come from overseas projects in five years' time.

Risks for the company include a slowdown in sales, escalation in construction and raw material costs, and delays in launches.

Going forward there is a long gestation period and lack of details regarding the first phase of the project.

Unfortunately, it is no longer the most liquid property stock in Malaysia as Tan Sri Liew Kee Sin's stake has been reduced from 8.0% to 5.9%.

Supermx ... Jul12

CIMB Research ...

Results highlights
• 1Q bounces back. A 17% yoy bounce in Supermax’s 1Q12 core net profit took it to
23% of our and consensus full-year forecasts, which is in line as the remaining
quarters will be better. The 1Q yoy rise reflects lower interest cost, illustrating the
impact of financial leverage in Supermax’s model. Management’s guidance of a
20% yoy increase in FY12 core EPS was in line with our expectations. This will be
underpinned by the expansion of its surgical and nitrile glovemaking divisions. We
are maintaining our Outperform call and valuation basis of 9.8x forward P/E, which
is 25% below Top Glove’s two-year average.

• Core EPS up by 17% yoy. 1Q12 revenue rose by 3% yoy to RM249m due to
higher demand and average selling prices. Costs edged up by 2.8% to RM209m as
a result of an increase in production output. As a result, EBITDA margins expanded
by 0.1% pts and EBITDA rose by 4% to RM39m. Yet, pretax profit jumped by 20%
due to a 22% drop in financing costs. Even with a 4% pt increase in the tax rate,
core net profit still rose by 17%.

• Surgical and nitrile will underpin FY12 growth. Supermax has commissioned two
of the seven surgical glovemaking lines planned for its Sungai Buloh plant. Earnings
from this will be reflected in 2Q onwards. The remaining five manufacturing lines will
be commissioned throughout FY12. We assume that Supermax will add 28m
pairs/month of capacity in FY12, generating annual pretax profits of RM23m. In
addition, management intends to add to its capacity 5.3bn pieces of nitrile gloves
p.a., taking total nitrile capacity to 10.5bn pieces annually by end-FY13 or 52% of
Supermax’s total capacity. The cash cost of nitrile is 28% below NR, illustrating its
relative attractiveness.

Gunung ... Jul12

To bid for a Saudi BRT network will a big test for land transport charter outfit Gunung Capital Bhd whose current core business of bus chartering relies heavily on concessions from the Malaysian government.

It had already submitted the pre-qualification documents on July 31, 2012.

It expects to bring in additional revenue of rm60 million over the five year duration of the contract.

Perak based Gunung made a complete business turnaround two years ago, ceasing its loss making latex concentrate business in 2010 and venturing into land based passenger transport chartering. It underwent a capital raising and restructuring exercise, which included the acquisition of transport outfit GPB Corp Sdn Bhd from Datuk Syed Abu Hussin Hafix Syed Abdul Fasal, who then became Gunung’s executive chairman and CEO.

Hussin previously served as deputy head of Bukit Gantang UMNO division and before that, director of the National Civic Bureau (Perak), a unit of PM’s Department. He retired from politics in 2005 and ventured into various businesses. He got his break when GPB secured a rm321.5 million NS coach supply contract from the MOD that currently contributes to the bulk of Gunung’s revenue.

Having raised funds from selling his stake in GPB to Gunung, Hussin emerged as Gunung’s substantial shareholder with an 18% stake, the majority of which he purchased from former’s CEO. Earyear Equity owns about 15.03% stake while Hussin has 19.92%.

Unlike other struggling bus operators in Malaysia that depend on ticket sales, Gunung has a unique business model that has been the key to its success so far. Comparing its operations with that of the chartering of vessels in the oil and gas support industry, Gunung essentially owns, operates and maintains land based tramsport assets (namely buses and speciality vehicles) in return for a monthly fixed fee.

This concept of chartering is only economically feasible with large fleets, which is why Gunung’s target customers have been the government and government linked companies.

In FY2011 ended Dec 31, the company reported a 378% surge in net profits to rm9.57 million from rm2 million in the previous year.

Close of 70% of Gunung’s revenue is derived from the NS charters. The company currently holds ongoing charter contracts worth rm356 million, which are expected to drive earnings up to 2014.

Most of these contracts are for three to five years including Gunung’s agreement with MinDef that is set to expire in 20114. The challenge for Gunung is to negotiate contract renewals while acquiring enough new contracts to sustain its growth.

Hoping to reduce its reliance on revenue collections from MinDef, Gunung has rolled out several pilot projects, including public bus services in the Manjung district in Perak. The contract with the Perak government is worth estimated rm4.32 million.

WCT ... Jul12

TA Securities Research ...

RM391m North-South Expressway Fourth Lane Widening Works
WCT Berhad (WCT) has bagged a contract for the Proposed Fourth Lane Widening between Nilai (Km280.4) and Seremban (Km258.5), Package E, worth RM391mn, from UEMB-MRCB JV Sdn Bhd. This was one of the potential projects we expect WCT to secure, as highlighted in our previous report.

The contract sum is approximately RM391mn which include provisional sum of RM10mn and prime cost sum of RM216mn respectively, and the works are expected to be completed in December 2014 and contribute positively to the group’s FY12-14 earnings and net assets.

The scope of works under the Contract include demolition and clearing, earthworks for widening of formation in re-cutting of existing cut slopes and widening existing embankment, retaining walls, ground improvement, extension of drainage culverts, construction of new surface drains, widening of bridges, extension of vehicular box culverts, relocation of existing utilities, pavement and shoulder construction, overlay of existing pavement, guardrail and fencing, traffic signs and road marking; and traffic management during construction.

This brings the number of projects secured year to date to four with a total contract sum of approximately RM1.1bn. With the remaining 6 months in FY12, the group is on track to achieve its target order book replenishment of RM1.63bn for FY12.

We understand that the group is bidding for the northern portion of the widening works between Duta and Rawang as well.

Forecasts
As the job secured is within part of our forecast job replenishment expected by the company for FY12, we maintain our FY12-14 earnings projections. We maintain our new jobs assumptions of RM1.5bn for FY12-13 and RM2bn for FY14.

Valuation
We roll forward our valuation to FY13 earnings and derive at a fair value of RM3.52/share, based on 14x CY13 construction earnings and 10x CY13 property earnings. Given an upside of 43.7%, we maintain BUY call.

Brahims ... Jul12

It, which has an exclusive deal to provider catering services for MAS in a 25 year concession, is now venturing into sugar refining – another potentially lucrative business.

It acquired a 60% stake in Admuda Sdn Bhd, which holds a license to manufacture refined sugar and molasses in Sabah and Sarawak.

As sugar is a regulated commodity, Admuda’s license is only the third awarded by the government in over 20 years. The other two licenses are held by FELDA unit MSM and tycoon Tan Sri Syed Mokhtar’s Central Sugar Refinery Sdn Bhd.

The license was awarded to Admuda by MITI so that it could manufacture refined sugar for the Sabah and Sarawak market. Currently, refined sugar is imported from the Peninsula. Thus, it is a huge potential.

Its executive chairman is Datuk Ibrahim Ahmad Badawi who is the brother of former Tun Abdullah Ahmad Badawi.

Brahim has already secured a supply of raw sugar comes with a guaranteed buyback if the company cannot sell its products. Moreover, the sugar refining license, which is not easy to obtain does not limit Ibrahim’s market to Sabah and Sarawak. It allows exports as well.

Brahim’s is acquiring the 60% stake in Admuda for rm20 million via a combination of cash and shares and will invest rm130 million in setting up a sugar refinery in Kuching, Sarawak.

The group expects full earnings contribution from the refinery in FY2014 ended Dec 31.

Admuda has tied up with Thailand based Thia Roung Ruang Sugar Group, one of the world’s biggest suppliers of raw sugar, for its sugar refinery venture.

However the buyback is just a backup plan in case it cannot sell its sugar locally. Its intention is to meet Sabah and Sarawak’s demand. Currently (July 2012) all the sugar (in these two states) is imported from the peninsula at marked up prices and there is usually a shortage. The new refinery will address this problem.

Brahim will leverage TRR’s expertise in sugar refining. TTR’s owns and operates seven sugar refineries in Thailand.

A bonus for Brahim’s is that the sugar refining license does not limit its sales to the Sabah and Sarawak market. The best thing about the license is that they are allowed to export its products. The opportunity will be huge when AFTA opens up regional trade in 2015.

It also plans to produce value added sugar products in the future.

Aside from venturing from sugar refining, it is also fortifying its airline catering business. It is acquiring the remaining 49% stake in Brahim’s-LSG Sky Chefs Holdings Sdn Bhd from LSG Asia GmbH for rm130 million.

BLH controls 70% of LSG Sky Chefs-Brahims’s Sdn Bhd, which will be providing inflight catering services for MAS until 2028. MAS holds the remaining 30% stake in LSGB.

The proposed acquisition is part of Brahim’s strategy to penetrate new markets in in flight catering and kitchen services.

Once Barhim’s has a 100% stake in BLH, the group plans to work with airport operator MAHB to tap new markets overseas.

Barhim’s is expected to benefit from MAS taking delivery of the new A380s.

MAS is currently Brahim’s bugegst customers and contributes to its revenue.

Barhim’s provides in flight catering for over 30 airlines in KLIA and Penang Airport.

With the new acquisitions, Barhim’s will be kept busy for the next few years.

WCT ... Jul12

Its RM5.5bil tender book, a strong balance sheet and efficient cost structure, could see it clinch more jobs in the next two years (2012-2013). Year-to-date contract wins is RM704mil. Larger jobs in the pipeline are My Rapid Transit stations, PLUS highway widening, and expressways in the United Arab Emirates and Oman . WCT is keen to get its maiden railway project, something it lacks in its 31-year history.

Its current strategy is to maintain construction margins going forward. This is achievable in the near term given accelerating recognition for its Qatar building job (RM1.1bil outstanding).

Its RM493mil unbilled sales are anchored by Bandar Parklands and 1 Medini.

Opportunistic landbanking in recent years has also created a mix of products. Its 56-acre land in Bandar Bukit Tinggi may be launched this year and is earmarked for high-end homes. This will benefit from the matured surrounding township and nearby AEON Mall. For affordable homes, it has a project in Rawang with a gross development value (GDV) of RM4bil.

WCT has 1.7 million sq ft of retail space now with the opening of Paradigm Mall.

Its 57-acre OUG land (of RM4bil GDV) will include another one million sq ft mall and other residential or commercial developments.

WCT has announced the following related to the ongoing arbitration for the Nad Al Sheba Dubai racecourse project. First, the dispute and claims of the joint venture (JV) between WCT and Arabetec had been revised several times and is about 2.8 billion emirati dirhams currently (July 2012). Second, Meydan has taken the position that the case has expired by effluxion of time. After deliberation, the Arbitration Tribunal had on June 9 rejected conclusively Meydan's submission that the arbitration proceedings have expired. Third, the JV had received a civil suit/counter claim from Meydan on June 26, 2012 for a sum of 3.5 billion emirati dirhams. Lastly, WCT will continue to pursue its claim pursuant to the on going arbitration proceedings and will take all necessary steps to defend and/or oppose the civil suit filed by Meydan.

Its officials said there are no little grounds for Meydan's civil suit. This is because there is an ongoing valid and binding arbitration between Meydan and the JV, and it is clearly stated in the contract that any disagreements shall be settled via this process.

Hektar ... Jul12

Hektar Asset Management Sdn Bhd, the Manager of Hektar Real Estate Investment Trust (Hektar REIT), is set to acquire two prime shopping malls in Kedah for RM181 million.

The malls, the Landmark Central in Kulim and Central Square in Sungai Petani, are to be acquired for a purchase consideration of RM98 million and RM83 million, respectively.

The two malls in Kedah would further enhance the long-term value of Hektar REIT’s property portfolio. With that, we can now spread our portfolio to the entire west coast of Peninsula Malaysia, augmenting our presence in Selangor, Melaka and Johor.

Additionally, the acquisition is in line with the REIT's investment strategy to create and enhance the value of its acquired assets.

The acquisition of both malls signifies Hektar REIT's expansion to the northern region.

It is in accordance with its investment strategy of targeting prime neighbourhood malls, as they are more resilient during times of an economic downturn, capitalising on the economic growth and vibrancy of the retail market.

Currently, Hektar REIT's portfolio comprises Subang Parade, Mahkota Parade (Melaka) and Wetex Parade (Johor).

The acquisition will also increase the REIT's gross asset value to RM1.04 billion.

The enlarged net lettable area (NLA) of Hektar REIT is expected to increase by 54 per cent, from 1.1 million square feet to 1.7 million square feet, after the proposed acquisition of both malls.

UMW ... Jul12

After learning the hard way that the pipes segment in the oil and gas industry is a cut throat business, UMW is now building up its drilling assets to drive the division to profitability.

Towards this end, it is looking to expand its fleet to rigs as the O&G division returns to profitability. UMW, a PNB controlled company that is also in the automotive and heavy equipment businesses has the option to purchase another option to purchase another rig priced at US$212 million after acquiring a jack up rig for US$214 million and to be delivered by Feb 2013. UMW’s total fleet of oil rigs that currently (June 2012) stands at three. The new rig does not have a charter yet but UMW will land a contract soon.

Two of the three rigs – Naga 2 and Naga 3 – have long term charters while Naga 1 is being refurbished to enhance its lifespan and is expected to start contributing by end 2012.

UMW’s oil and gas division, anchored by its pipe manufacturing activities, was supposed to have been listed a few years ago. But the plans were up in tatters as the pipe manufacturing business was hit by intense competition.

The operations of UMW’s oil and gas division are expected to improve for the rest of 2012. The improvements in the oil and gas division are to come from the increased charter rates for the Naga 3 jack up rig and three contract service secured by the division in recent months.

CanOne ... Jul12

Can-One Bhd acquired F&B Nutrition Sdn Bhd, the original equipment manufacturer of sweetened condensed milk, in 2006 and this has seen a strong value-added impact to the group.

Evidently, the revenue contribution from its food products segment to the total sales had increased from zero to 60% within a short span of six years representing a five-year compound annual growth rate (CAGR) of 107%, and has for the first time in 2011, contributed more than the general cans sales to the group.

Furthermore, as its food products are carried in Can-One's own manufactured cans, this also actually helps its general cans segment to grow further, which has a higher margin of ranging from 7% to as high as 30% (on quarterly basis) as compared with the food products segment (2%-7%).

Market observers do not rule out any potential synergies between Can-One and Kian Joo after the acquisition of the associate stake and with two directors of Can-One now sitting on the board of Kian Joo.

Considering that Can-One is one of the market leaders of general cans while Kian Joo is one of the market leaders of aluminum cans in the domestic market, many synergies between the two could be reaped in the future, which will likely help both companies to grow further locally and regionally together especially under the stewardship of their professional management teams. For instance, there could be cost savings where raw materials could be bought in bulk to bring down the cost per unit, which would help both companies to expand their margins as well as bottom lines.

Can-One's revenue grew by 39% year-on-year while its core net profit (NP) more than doubled to about RM10.1mil in first quarter of 2012.

It is worth nothing that even without the Kian Joo stake, Can-One's existing business itself is already worth RM3.15.

IPO ... IHH

It is sitting on a profit of rm5.5 billion as group goes public. Khazanah paid almost rm8 billion take Parkway Holdings Ltd private.  The bulk of the rm5.5 billion comes in the form of Khazanah’s 47% stake or 3.85 billion shares in IHH Healthcare Bhd post listing that comes to rm4.9 billion. Its average cost per share is rm1.58 while the IHH IPO price is rm2.85 per share. The balance of the gain comes from Khazanah’s divestment of a portion of is stake to Mitsui Co Ltd of Japan in Feb 2011 and the sale of 60% stake in Pantai Holdings to IHH.

Khazanah’s outlay for taking Parkway private was close to rm7.5 billion. Now (July 2012) it is sitting on a gain of rm5.5 billion, part of which is already realized.

Khazanah took Parkway off the market in 2010 after paying S$3.5 billion (rm8.6 billion) for the 76.1% stake it did not own. It fought a tough batter against Fortis Healthcare group in Singapore .

Khazanah took out the concession assets in Pantai and injected the remaining 60% stake into IHH. It also injected 100% of IMU and 13% in Apollo Hospital Group of India into IHH.

In Feb 2011, Khazanah divested 30% stake of IHH to Japan Mitsui Co Ltd. Mitsui paid rm3.3 billion for its stake. IHH’s shares were valued at rm2 in the deal. Out of the proceeds of mr3.3 billion, rm1.3 billion went to Khazanah, which made a profit of more than rm250 million from the deal.

IHH now (July 2012) includes the company’s acquisition of a 75% stake in Acibadem for rm3.7 billion. Acbadem is Turkey ’s largest private healthcare provider, with a network of 14 hospitals across Turkey and Macedonia . Abraaj Capital, which sold the stake in Acibadem to IHH, was provided a 7.02% stake in the latter.

Utilization Of IPO Proceeds …

IHH is offering 52 million shares or 0.65% of the enlarged share capital to Singaporeans at S$1.18 per share and 161.14 million shares or 2% to the Malaysian public.

IHH’s IPO will generate some rm5.13 billion in cash. The group will allocate a lion’s share of the proceeds to reduce its whopping debts in order to strengthen its balance sheet for future acquisition.

With the cash in hand, IHH will be able to slash its net debt to rm1.38 billion from rm6.04 billion which will reduce its gearing to 2.8 times from current (July 2012) 7.8 times.

Its total debt stood at around $2.4 billion as of the end of March 2012.

IHH had chosen not to commit to a dividend policy although it is generating cash flow of rm1 billion a year. However the group will pay dividends when appropriate.

After netting off the cost of IPO, IHH will receive about rm4.94 billion cash from the listing exercise, of which 90.9% will be used to pay off debts. Most of the proceeds will pay off a rm3.71 billion debt for financing the privatization of the Parkway group in 2010.

About 75% of its planned capex of rm6.9 billion has been paid for the period between 2010 to 2015.

Its Growth …

Parkway is one of Asia’s largest private healthcare providers and operates in Singapore, Malaysia, China, Hong Kong, India, Vietnam and Brunei. It earns more than half of its revenue in Singapore, where it is the largest private hospital provider with 43.9% market share.

Currently IHH’s Singapore operations have one of the highest margins and contribute about 28% to group revenue.

In Malaysia, Parkway is the second largest private healthcare provider with a 15.1% market share. Parkway’s expansion efforts will be focused in Malaysia, where it intends to spend rm454 million in the next few years (2012 & Beyond) to upgrade several Pantai and Gleaneagles hospitals in Penang, KL and the Klang Valley

IHH aims to add 3300 new beds in the next five years to the 4900 presently (July 2012). Its core healthcare operations and investments are located in Malaysia, Singapore and Turkey. This is in addition to other operations in China, India , HK, Brunei and Macedonia. The company diversified geographically only in recent years, as it was earnings all its revenue from Singapore in 2009.

IHHis vision is to be a pan Asian player in the healthcare arena. In fact, this has panned out as planned with the acquisition of Acibedem in addition to IHH’s foothold in India via its 11.2% stake in Apollo Hospitals Enterprise.

IHH will experience organic growth with the new hospitals it is building such as its Mount Elizabeth Novena hospital complex in Singapore. The first investment to roll out is the Mont Elizabeth Novena Hospital in Singapore in July 2012. The hospital cost IHH rm4.5 billion to build and more than 90% has been paid for.

Nevertheless, IHH is on the lookout for hospital management agreements within the region. IHH has HMAs in China, India, Vietnam and the Middle East.

The HMA business model allows IHH to carry on its core activity without taking on additional investment risks, and is useful in markets which the group is interested in but may not want to commit to right way. This is due to the high investments and risks involved.

IHH sees HAMs as one of the drivers of future growth for the group.

Key markets in India, China, Middle East and Vietnam are where they are looking to move the next step for the next phase of growth.

Its Shareholders …

Khazanah has decided to free the majority of the blue chips cornerstone investors in IHH’s IPO from any trading restrictions. Only investors with allocations of more than 50 million shares will be bound by a six month lock up clause.

Only seven of the cornerstone investors including the EPF and the KIA which collectively account for 900 million shares will not be able to sell their shares in the first six months after listing set for the end of July 2012.

The EPF and KIA were given the lion’s share of the cornerstone allotments with 8.95% and 6.71% shares on issue respectively.

Khazanah currently has a 62.14% stake in the group. The IPO will dilute Khazanah’s stake to 47.78% but create unrealized gains of rm4.90 billion based on its average cost of rm1.58 per share.

Khazanah will not be cashing in on IHH anytime soon. It makes up approximately 10% of Khazanah’s portfolio and will be one of the investment’s agency’s core businesses.

IHH next biggest shareholder is Mitsui & Co Ltd, which will have a diluted 20.48% stake post IPO.

IHH has reserved 62 percent of its IPO for cornerstone investors who must hold the shares for a minimum 180 days. This includes the Government of Singapore Investment Corp, Temasek Holdings Pte’s Fullerton Fund Management Co, Malaysian billionaire T. Ananda Krishnan’s Usaha Tegas Sdn Bhd, Kuwait Investment Authority, asset manager Blackrock.

The 22 cornerstone investors, who also include International Finance Corp, the private investment arm of the World Bank, will buy 1.39 billion of the 2.23 billion shares on offer - just over a quarter of the company - the biggest take-up by such investors of any recent major offering in the region. Up to 1.8 billion new shares in the IPO are on offer, while Abraaj Capital will sell 434.7 million shares in the dual Kuala Lumpur and Singapore listing.

Eastspring Investments, the asset management arm which is owned by Prudential PLC, and Malaysian pension funds have already committed to invest in the offering.

Roughly half of the remaining 720 million shares on offer will be taken up by the MITI. The rest will be offered to retail investors as well as employees and healthcare workers.

Of the 2.23 billion shares up for offer, about 400 million will be sold by existing shareholders while the rest will be new issuances.

Khazanah is the largest shareholder with a 62% stake while Japan ’s Mitsui & Co owns a 26.6% stake. Dubai based Abraaj Capital has 7.1% stake and Turkish hospital group Acibadem’s chief Mehmet Ali Aydinlar owns 4.2% stake.

Its Valuations … dated July 2012

Its recent acquisitions may weigh down the group’s earnings with depreciation and amortization charges. Khazanah, its major shareholder paid a premium for its healthcare assets, as high as 26 to 30 times PER. Khazanah was believed to have paid almost 40 times PER for the Singapore healthcare group. Parkway after bidding against India’s Fortis Group.

Khazanah’s healthcare investment arm, IHH is set to come to market at one of the highest PER among companies making their debut on Bursa Malaysia . IHH already has 22 cornerstone investors lined up, a list of comprising a mix of local and foreign, institutional and sovereign investors.

IHH’s cornerstone offering of 1.3 billion shares comprises 62.09% of the IPO shares offerd and 17.22% of the enlarged shares capital after the listing.

Based on the cornerstone offer price of rm2.85, IHH is priced at 93 times pro forma FY2011 earnings per share of 3.05 sen. In comparison, the median PERs for healthcare operators in the Asia Pacific’s emerging markets is only 15.3 times. IHH also looks expensive compared with healthcare service providers operating in similar markets. The median PER for five of these players is 33.2 times (historical) and 26.1 times (forward).

No forecast was provided in IHH’s draft prospectus released but based on pro forma EPS of 2.04 sen for the quarter ended March 31 2012 the offer price of rm2.85 translates to a PER of 34.9 times based on annualized EPS of 8.16 sen.

IHH reported pro forma earnings of RM165 million for the 1QFY2012 ended March 31 with an annualized earnings per share of 8.16 sen and a retail offer price of rm2.85, the stock is being valued at 35 times earnings. The valuation appears high but it can be justified because of the capex that will increase IHH’s 4900 beds by 63%.

However, PER may not be the most suitable method to value the stock.

Healthcare providers are a peculiar breed, with some having aggressive depreciation policies for their hospital equipment and other fixed assets. IHH will be adding more than 3000 beds with the new hospitals coming onstream.

IHH should not be compared with some of the regional healthcare players due to differing depreciation policies. Furthermore IHH offers investors an opportunity to tap into markets where tourism healthcare is set to grow, namely Malaysia and Turkey , via its indirect 60% owned Acibadem Holdings AS.

More than 90% of the RM4.9 billion in net proceeds raised from the IPO will go paying off the capex to date (July 2012) that has been mostly funded by debt. This leave IHH with rm1.6 billion in capex for some2200 beds to be added by 2015.

IHH will have no problem funding the remaining capex with internally generated funds backed by a strong cash flow of about rm1 billion annually.

The company has also declared that it would not commit itself to a dividend policy.

Khazanah’s acquisition of Parkway Holdings in 2010 resulted in high levels of intangibles on IHH’s books. Due to largely to its past mergers and acquisitions, goodwill and other intangible assets represent a substantial portion of assets.

The group’s goodwill and other intangible were approximately rm11.6 billion as at March 31, 2012 on a historical combined basis, representing approximately 49.8% of its total assets and 93.6% of its consolidated total equity.

Goodwill arising from mergers and acquisitions account for most of the group’s intangibles and are worth some rm8.5 billion, half of which can be attributed to the Parkway Group. In total, Parkway’s intangibles are worth some rm6 billion in IHH’s books.

IHH has been growing its global footprint, going on an acquisition spree to capture expanding demand for healthcare services. However, almost of the funds raised will be allocated to paying off debts used to acquire its prized healthcare assets in the last two years (2010-2011).

IHH plans to use 90.9% of the rm6.37 billion raised from the IPO to pay off debts within 12 months. As at March 31, 2012 IHH had rm7.63 billion in total borrowings and net gearing of 0.49 times.

The high debt levels were pinned on the group’s aggressive expansion in the past two years (2010-2011).

The group noted that a lower gearing would give it the flexibility to expand operations locally or overseas and to raise financing as and when attractive opportunities arise.

In fact, IHH is not committed to a dividend policy to pay out a minimum amount of its earnings.