SKPetro ... Jun12

The construction of seven new vessels, two drilling rigs, two derrick lay vessels and three pipelay diving support vessels, is on track. The delivery of the new assets in CY14 will allow SKPetro to undertake larger and more complex jobs.

Armed with rm15 billion worth of existing contracts, the management was visibly upbeat about the prospects in Malaysia and Brzail.

The company has set its sights on rm12.5 billion worth of projects, not including potential new marginal field jobs. The company is bidding to another marginal field project with UK’s petrofac.

SKPetro offers attractive growth story from Berantai and swift fleet expansion. Earnings visibility is good given a solid and long term order book that will last up to FY2020.

Going forward, SapuraKencana is a strong contender for Malaysian O&G tenders in the pipeline.

Business as usual after Seadrill sells 300m shares; JV operations still gaining momentum.

Expect Petronas to award more contracts in 2H12 after delays in 1H12. SapuraKencana is a frontrunner for Petronas' inspection, repair & maintenance tender (RM900m) given its market lead via 100%-owned Allied Marine & Equipment.

It may also bid for Petronas' RM5bn and Shell's RM2bn hook-up & commissioning (HUC) tenders, expected to be awarded by year end 20120.

Its under-utilised fabrication yard in Lumut also makes it a prime candidate for more fabrication contracts amid the rising capex cycle. SapuraKencana is among the strongest candidates, if not the best, for these tenders because of its lead in the respective services.

Sendai ... Jun12

Its orderbook and earnings growth are still rising. The construction landscape in Middle East is still vibrant and Eversendai is the frontrunner for the RM850mil Abu Dhabi International Airport (ADIA) structural steel job.

The main contractor for the US$6bil five-year ADIA expansion project will be officially announced in June 2012. It is reported that the Arabtec-TAV-CCC consortium is the likeliest winner for the key component job (midfield terminal building) with the lowest bid of US$3bil. The tender process started in Jan 2011 and there are another three shortlisted bidders.

Eversendai is in a strong position to clinch the structural steel works worth RM850mil as Eversendai is the only structural steel contractor which submitted its bid with a bond, it has a strong track record, being the only structural steel contractor appointed for the New Doha International Airport (NDIA Phase 1-3), despite changes in the main contractors, and ADIA is less challenging than NDIA, with ADIA's steel requirement of 70,000 tonnes versus NDIA's 90,000 tonnes (Phase 1-3).

The structural steel award may be given to the sub-contractor in two to three months after the appointment of the main contractor. The construction is slated to begin in end-2012 and the airport is expected to be operational by 2017.

If Eversendai clinches this job, its outstanding orderbook will jump from its already historical high of RM1.9bil to RM2.8bil (+ 1.5 times), on par to big-cap WCT Bhd (RM2.8bil).

Eversendai is also on the cusp of securing another two high-value structural steel jobs (worth RM700mil) in Azerbaijan.

Meanwhile via its subsidiary, Shineversendai Engineering (M) Sdn Bhd, has been appointed as a supplier for the iron ore distribution project at Teluk Rubiah, Manjung, Perak.

The contract value between Shineversendai and Vale Malaysia Minerals Sdn Bhd is worth RM45.9 million for a period of 12 months. The project is expected to be completed by 2013 and the scope encompasses the supply of structural steel for pipe and cable rack as well as other miscellaneous works.

YTL ... Jun12

YTL Corp armed with rm14 billion net cash is unfazed by the new pricing regime that encourages the first generation IPPs to lower their power tariffs. It can live with in a regime without PPA. To recap, TNB and five IPPs would need to offer a reduction in commercial rates to the government, paving the way for a more competitive pricing regime in the industry. The government had called for TNB and five IPPs to participate in a bidding exercise that will close end July 2012 for an extension of their PPAs. However only half of that power pacts that will expire in five years will be extended, putting spotlight on YTL Power Generation Sdn Bhd.  YTL is the only IPP that has a take or pay clause in its PPA, which obliges TNB to buy the power it produces whether or not the national utility firm requires the capacity.

 

It has cash to undertake mergers and acquisitions in assets and in various silos of businesses. The group has started identifying assets to acquire, particularly in the hospitality and retail segments. It is now seeing some deals coming through after 2008.

 

The group derives 85% of its revenue and profit from overseas which are mostly regulated, is investing a lot in its 4G infra, hotels, properties, and the ERL which connects KLIA and KL Sentral. Its ERL will be benefited when the new LCCT links up with the ERL services in 2013.

KNM ... Jun12

KNM Group Bhd’s proposed US$222 million waste to energy projects in Sri Lanka awarded by Octagon Consolidated Bhd may encounter obstacles as the latter undergoes a restructuring under Sect 176. This is in anticipation that Octagon will not have enough adequate funds to finance its projects in Sri Lanka as the company restructures its debt. The impact could be substantial for KNM as the rm706 million job accounts for about 20% of the process equipment manufacturer’s rm3.2 billion order book.

 

KNM had finalized most of its kitchen sinking exercise which included provisions for doubtful debts and foreseeable losses in 2011. KNM is starting on a clean slate for FY2012 ending Dec 31.

 

KNM’s rm3.2 billion order book exclude the rm2.2 billion Energy Park Peterborough waste to energy project in the UK . The project has yet to secure financial closure. Including Energy Park , KNM’s order book comes to rm5.4 billion while its project tenders amount o rm16 billion.

 

In mid May 2012, the High court of Malaya approved Octagon’s application for legal protection against bankruptcy. This comes in the form of an ongoing three month restraining order between May 16 2012 and Aug 2012. The restraining order follows Octagon’s announcement in Dec 2011 of its debt restructuring scheme which may include a proposed capital reduction and debt settlement with the company’s lenders.

 

To recap, in Oct 2011 Octagon awarded two waste to energy projects in Sri Lanka with a combined value US$2.2 billion to KNM. They were the construction of a US$22 million advanced thermal gasification reactor and a US$200 million waste to energy facility in Sri Lanka ’s capital Colombo .

 

KNM is now undertaking oil sand projects in Canada where oil majors have pumped in more investments.

 

Going forward, KNM’s prospects remain uncertain:- ability to maintain its financial performance, ongoing sovereign debt crisis in Europe may curb oil demand and delay global oil and gas projects, KNM will still have to compete with rival process equipment producers from China and South Korea for more jobs.

IPO ... Felda Global

The CPO Division …

 

A large part of its plantations is old and needs to be replanted, leading to high costs. It had 323.58ha of oil palm estates in Malaysia of which 53% consist of oil palm tress that are more than 21 years old. Oil palm tress have an average life of 25 years.

 

The replanting will keep its profitability under pressure as replanting costs are charged to profit and loss under Malaysia ’s accounting practice. The cost of replanting is similar to the cost of Greenfield development which is around rm15000 per hectare up to maturity, spread over three years. This means that it will need so spend about rm2.6 billion on replanting over the next five years.

 

Bumitama Agri Ltd (Listed in SGX) Versus Felda Global …

 

To compare growth potential, 71.9% of Bumitama’s total planted area of 119162ha is made up of immature and young plants. The rest are at the prime age of 7 to 18 years. The company also owns 72786ha of plantation land waiting to be planted.

 

In contrast 30.7% of Felda Global’s planted area is made up of immature and young trees. Tree are from the age of 10 to 20 years account for 16.4% and roughly 52.9% of the planted area was of old trees.

 

However Felda Gobal is still one of the leading global plantations players with advantages in economies of scale.

 

In terms of mature oil palm planted, Felda Global was the world’s third largest player in 2011 followed by Sime Darby, Golden Agri Resources Ltd, PT astra Agro Lestari Tbk and wilmar Intl Ltd. In terms lf CPO production, Felda Global produced 3.3 million tones making it the world’s leading producer.

 

FEDLA Global owns a 51% stake in MSM Holdings the leading sugar producer in Malaysia which contributed 29.4% to its revenue in 2011.

 

It is also bolstering its downstream portfolio with the launch of new consumer products. Its downstream arm Delima Products Sdn Bhd a subsidiary of Felda Global’s 49% owned Felda Global Holdins. Its existing portfolio includes Saji cooking oil, the market leader with 27% share of the olein segment. It also produces and markets Tiara and Tiga Udang cooking oil. Other products include Seri Pelangi margarines.

 

The Sugar Division …

 

The Felda group’s acquisition of Robert Kuok’s sugar business in 2009 has given the impending listing of Felda Group Ventures Holdings Bhd considerable boost with the unit contributing 30.7% to its group revenue for financial year ended Dec, second to the plantations business’ 44%. The balance 25.3% stake was contributed by its downstream business.

 

The sugar segment is undertaken through its 54% subsidiary MSM Malaysia Holdings Bhd.

 

The Malaysian government’s sugar subsidy to FGVHB’s sugar segment declined in 2011 as the price ceiling for refined white sugar was raised. However, the subsidy is expected to increase in 2012 due to higher global sugar prices while retail prices will remain unchanged in view of the impending 13th general election.

 

Volatility in the global price of raw sugar led the government to introduce a subsidy of 60 sen per kg of refined sugar in 2009. This was raised to 80 sen per kg in 2010 before rising again to 54 sen per kg currently (May 2012).

 

MSM is the leading sugar producer in Malaysia , producing 56.9% stake of total production volume of refined sugar in 2011.

 

MSM owns Klang Gula Felda Perlis Sdn Bhd and Malayan Sugar Manufacturing Co Bhd. Fela Global Ventures also bought PPB’s Group’s sugarcane plantation for rm45 million and its 50% interest in KGFP for rm26.3 million.

 

MSM also holds a 20% stake in Tradewinds Malaysia Bhd, which operates Central Sugar Refinery Sdn Bhd and Gula Padang Terap Bhd.

 

Under Felda Global Ventures, the sugar business held under MSM was floated in June 2011, raising rm423 million.

 

Nevertheless whole the sugar business may make FELDA Global Ventures different from other plantation stocks, it will not add much to its valuation. This is due to MSM’s business model where its margins are much static.

 

In Malaysia , refined white sugar products are controlled goods and the government has historically set price ceiling for these products. In recent years, there has been a sharp increase in the price of raw sugar in the international markets. Following such increases in raw sugar price, the government introduced a sugar price subsidy in 2009 so that the increase in the price of raw sugar would not be fully passed on to consumers of refined sugar products in Malaysia . Its performance thus depends partly on the government’s policies with respect to the sugar industry such as the level of subsidy which are beyond its control.

 

It was revealed that the government has locked in new sugar prices at 26 US cents per lb for the next three years compared with 17.5 cents previously leading to higher sugar subsidy bill in 2012.

 

Under the 10th Malaysian Plan, the government had started to slash subsidies on fuel and sugar as it undertakes reform of subsidies. However subsidy rationalization has been suspended as the government prepares for the general election which must be held by early 2013.

 

For MSM however, the higher sugar subsidy may not cover fully the rise in raw sugar costs in 2012 unless the ringgit strengthens.

 

Under the new structure, Felda Global Ventures operates 340000ha of oil palm estates under tenancy agreements with the Federal Land Development Authority (FELDA).

 

However some settlers against the cooperative Koperasi Permodalan FELDA to transfer of its 51% stake in FELDA Holdings to Felda Global Ventures. This means that FELDA Holdings remains a 49% associate of FELDA Global Ventures and KPF will not own any shares in the listed vehicles. Nevertheless, sources say the door still open for KPF to come in at a later time, likely with the cooperative taking up a stake in FELDA Global Ventures.

 

The funds raised from the IPO will be used for the acquisition of assets in the upstream and downstream sectors, loan repayments, capex.

 

The Shareholders …

 

At an indicative retail price of RM4.55 a share for its 2.188 billion shares that will raise proceeds of nearly RM10bil on listing. From the 255.37mil retail offering, Felda settlers and staff have been allocated 182.40mil shares.

 

Shareholders: French trading house Louis Dreyfus and Tan Sri Quek Leng Chan and former stockbroker Tan Sri Chua Ma Yu has emerged as cornerstone investors. The other cornerstone investors are PNB, EPF and Singapore abased Fidelity and Value Partners of Hong Kong.

 

QATAR Holding LLC, a unit of the Gulf nation’s sovereign wealth fund, has agreed to take part in the planned US$3 billion (RM9.4 billion) listing of Felda Global Ventures Holdings Bhd as a cornerstone investor. It would be the first time a Middle Eastern sovereign fund has acted as a cornerstone in a Malaysian initial public offering (IPO).

 

FGVH is offering 2.19 billion new shares, which is equivalent to 60% of its enlarged capital for its IPO. Louis Drefus will be allocated a 4.9% stake in FGVH while other cornerstone investors will receive their allocations from the 27% set aside for the public institutional funds.

 

Alliance ... Jun12

TA Securities

1Q FY12 results came above expectations. Net profit accelerated by 20% to RM53.0mn vs. RM44.2mn a year ago – representing 36% and 35% of ours’ and consensus full year estimates of RM148.5mn and RM151.0mn respectively.

The better YoY performance was underpinned by higher gross earned premiums (+12.7% YoY or RM76.0mn), lower benefits and claims paid, decline in contract liabilities as well as a 14.7% drop in management expenses. The strong 1Q FY12 results were also boosted by the adoption of MFRS
1 where non participating funds surplus are recognized as earnings. Note that 1Q FY11’s PBT had also been restated to RM66.4mn (from RM33.7mn) due to the new accounting policy.

By segment, profit contribution from general business advanced 29% on the back of a 13% increase in operating revenue. The increase helped compensate for a 25% reduction in the life segment’s profit. We note that despite the 12.7% increase in the life business’s gross written premiums (GWP), benefit and claims climbed by close to
25% YoY.

2. Impact and outlook
Our earnings estimates will most likely be revised upwards in tandem with MFRS 1. However, we are
keeping our forecasts unchanged for now pending further clarifications from management in an analyst
briefing later today.

3. Valuation and recommendation
TP is maintained at RM5.70 (based on a 25% discount to industry’s target PER of 8x on FY12 EPS of RM0.949/share). We believe the discount is justified due to the stock’s tight liquidity and smaller market cap compared to larger players such as LPI Cap, Manulife and Pacificmas. Buy maintained.