MAS ... Jul12

The question many people ask now is whether Malaysia Airlines (MAS) can undertake a turnaround within its targeted timeframe, and the options available to ensure the national carrier continues to fly without having to contend with a financial turbulence time and again.

If its latest turnaround plan goes according to plan and achieves the desired results, it is possible for the airline to return to the black, but this will require a lot of cash. MAS needs cash in order to move forward to rebuild its brand name and consolidate its financial structure to ensure it remains competitive among other regional players.

Privatisation of MAS would be another way to restore the position of the national carrier and now (June 2012) would be the best time to do so as its share price was cheap.

Despite its financial woes, MAS was still relevant as it played a major role in spurring growth in related activities such as aircraft maintenance, repair and operations businesses, leasing aircraft as well as the tourism industry.

Its top management needed to further bolster efforts to save the airline by focusing on its niche business. MAS as a full services carrier should focus on attracting more passengers for its business and first class seats, which generate a higher yield compared to the economy class, which was more price sensitive.

When compare MAS with its peers, the cost structure is just about the same. However, in terms of revenue, MAS does not match them, and this is one main reason why it is still lagging behind. MAS also lags in terms of services and products.

APEX ... Jul12

There is speculation that a proxy fight could break out between two of the substantial shareholders of Apex Equity. Executive chairman chan was ousted at the company’s AGM. In an interestingly twist, Apex Equity’s existing board, which consists of only two directors Datuk Azizian and Leow Yan Seong reappointed Chan as the company’s executive director on 25 June 2012, less than two working days after the AGM in Kajang.

Meanwhile in response to Bursa’s UMA, Apex Equity said it was unaware of any material development in the company that would have cause the sharp rise on its share price.

It is learnt that Metroplex Bhdm which is controlled by the late Tan Sri Lim Goh Tong’s daughter Lim Siew Kim had voted against the re election of Chan and Lew Lup Seong on the board at the AGM. The single largest shareholder in Apex Equity is Fun Sheung Development Ltd (15.71%) followed by Chan 8.76% and Metroplex Bhd with 6.63% stake, whose shares have been pledged to Arab Malaysian Credit Bhd.

However industry observers noted that both Chan family and Metroplex together with parties acting in concert hold more than 30% each. Lim is the wife of Dick Chan, the brother of Chan Guan Seng.

This is likely to be shareholder fight caused by a family feud.

The sharp rise in Apex Equity’s share price was mainly fuelled by speculation that the stockbroking group might be in for a shareholder tussle which may lead to the disputing substantial shareholders accumulating more shares on the open market to strengthen their position in Apex Equity. Shares in Apex equity are tightly held … there is not much liquidity.

All eyes will be on the Metroplex’s next move in Apex Equity after Chan’s reappointment back to the board. Will the substantial shareholder convene an EGM to remove the present board? Also, is Metroplex mulling a move to participate in the company’s management currently led by Chan. Chan remains as the MD of Apex Equity’s subsidiaries including JF Apex Securities Bhd.

Apex Equity is one of the standalone stockbrokers that had completed one plus one merger.

Affin ... Jul12

The BEA dispelled speculation that it plans to sell a 23.5% stake in Affin, a development that pours cold water on suggestions of a possible tie up between the Armed Forces backed bank and the Hong Leong group. BEA chairman and CEO Sir David Li said that in fact hopes to increase its presence in Affin by increasing its stake to 25% which is the max allowed to hold. It considers its stake In Affin a strategic investment

Meanwhile David Li had said CaxiaBank has assured him that it is not selling. On Guoco Group’s position in BEA, Li said he has not any dialogue with the group on whether it would be interested in increasing its interest in the bank and Li welcomes Guoco as shareholders.

It was reported earlier that Bank of East Asia (BEA) could release its 23.5 percent stake in Affin Holdings Bhd as it shifts its focus to Greater China. A shift in BEA’s strategy to focus on Greater China could mean that is no longer keen on leveraging on its relationship with Affin. This leads to the conjecture that it may release its stake in Affin. It could result in the meger of Affin Holdings Bhd and HLB Bhd.

Estimating the acquisition cost of BEA’s stake in Affin at RM858 million.

Affin’s other major shareholders include Malaysia’s Armed Forces Fund Board with a 35.2 percent stake and palm oil-to-heavy industries conglomerate Boustead Holdings Bhd with 20.7 percent.

BEA has disposed of its businesses in the US and Canada where it once sought growth overseas in areas with large ethnic Chinese populations. Furthermore, media reports have indicated that BEA’s largest shareholder and Spain’s fourth largest bank, Caxia Bank, may cut its stake in the group. However, it is difficult to ascertain if Spanish regulators would force Caxia Bank to cut its stake to shore up capital and provisions to counter asset quality risks. At the very least, regulators may stop Caxia from increasing its stake in BEA. This implies a higher probability for Guoco Group, BEA’s second largest shareholder to pursue BEA for a potential takeover.

In the past three years (2009-2012), Guoco has been steadily increasing its stake in BEA to 15.3% stake as at March 31, 2012 fuelling speculation it was trying to gain control of BEA. Guoco faces one less hurdle if Caxia sells its 17% stake in BEW. Assuming Guoco does control of BEA, HLBB would emerge as a distant cousin of Affin’s. Would HLBB merge with Affin or would Affin be divested?

Market observers noted that in the current (June 2012) situation, despite a common indirect shareholder via Guoco, there would be no compulsion for HLBB to merge with Affin as Guoco’s stake in BEA is only an investment rather than a strategic stake. Guoco owns 25% stake of HLFG Bhd which in turn owns 61.3% stake in HLBB.

Even if BEA decides to sell its stake in Affin, HLBB may not necessarily be its acquirer, especially since the group completed the acquisition of EON capital bHd only in 2011 and still reaping merger synergies. It also saw little accretion to this marriage, contrary to the HLBB-EON Cap merger.

MUDAJYA ... Jun12

Mudajaya Group Bhd is expecting its 26% owned Indian associate company RKM Powergen Private Ltd to be profitable from 2013 after the coal-fired power plant there starts operations. The power plant is under construction and the full completion of the power plant is expected progressively in year 2013. Cashflows will be very positive and this will contribute substantially to the bottomline.

A 20% contribution to its bottomline from this associate company would be possible because the plant was constructed on the build, own and operate (BOO) model, with substantial recurring income from the operations of the power plant. The initial power purchase agreements that it had signed is for 20 years but beyond that there will be recurring income for it. The income will be substantial to the bottomline due to the tariffs that it had secured.

To recap, the company's Indian associate RKM Powergen had recorded a loss of RM12.21mil in the FY2011 ended December 31 because the plant has not started operations. Revenue starts coming in only when the associate starts selling power.

Mudajaya is undertaking a coal-based independent power plant producer (IPP) project in Chhattisgarh which comprises four generating units with a nominal capacity of 360 megawatts each to be set up in two phases.

Phase 1 of the IPP project is scheduled to completed by the year-end (2012) and ready for commercial operations by the first quarter of 2013. The remaining three units under Phase 2 is scheduled to come on-stream by the fourth quarter of 2013.

Mudajaya was also aiming to secure additional power plant projects whether through construction or acquisition of power plant assets in India which has a deregulated power industry.

It is looking at another power plant bigger than this current one. In India there is a supply shortage of power - a brownout situation unlike in Malaysia where we have a surplus (of power supply)). From 2012 - 2017, India aims to build another 75,000 MegaWatts (MW) of power plant.

In 2013 and 2014 it will have full recognition of the sale of power and will have surplus cash and will try to reinvest it to create even more income.

Meanwhile, the company was eyeing additional power plant, highway construction and water treatment opportunities in India, Vietnam and the Middle East and with bids for an additional RM3.6bil worth of projects aiming to top up its current outstanding orderbook of RM5bil.

The company was confident of securing about RM500mil to RM1bil of these bids and that a bulk of the bids would come from major local infrastructure projects.

Mudajaya currently derives 60% of revenue from overseas but aims to derive at least 60% to 70% of revenue from overseas recurring income in order not to rely on the cyclical construction sector.

The company could also likely be involved with a Chinese based company for the construction of the Prai Combined Cycle Gas Turbine (CCGT) power project.

The government is talking about 4,500 MW of gas fired and another 1,000 MW of coal fire.

Mudajaya Group Bhd is confident of securing projects worth between RM500 million and RM1 billion in 2012. For the first quarter 2012, it had secured projects worth about RM3.6 billion.

NHFATT ... Jun12

Automotive replacement parts manufacturer New Hoong Fatt Holdings Bhd (NHF) plans to capitalise on the growing automotive market, especially in the neighbouring region. The group would intensify its focus on overseas expansion.

Since the implementation of the Asean Free Trade Agreement (AFTA) in 2010, the group has widened its market reach and seen its export revenue increase steadily year-on-year over the last five years.

In 2011, the group recorded export revenue of RM65.1 million, a 26.1 per cent increase from RM51.8 million in 2010.

It remains committed to grow its market share in Asean countries by establishing ourselves in several countries in the region and have secured a notable position in the international automotive replacement parts market.

NHF set up two overseas subsidiaries in 2011 PT NHF Auto Supplies in Indonesia and Ampire Auto Parts (Shanghai) Co Ltd in China to capture international markets.

On the local front, NHF's branch in Gombak will be consolidated with the Segambut branch in June 2012. Its Segambut warehouse is being expanded to include a RM7 million double-storey warehouse, expected to be completed at the end of 2012.

In 2011 the group recorded revenues of RM215.6 million, down 3.1 per cent from RM222.5 million in 2010, but export revenues increased 26.1 per cent.

MRCB ...Jun12

The Government has agreed to make good on toll revenues foregone of MRCB's newly-completed wholly-owned Eastern Dispersal Link (EDL) in Johor, of which tolling did not commence on May 1 2012 as scheduled. To be paid from May 1 2012, the amount will be calculated based on the actual traffic number (that is at about 60,000 to 61,000 vehicles per day at present), multiplied by the agreed toll rate (reported to be at RM6.20 for one-way). This will be the temporary solution to the tolling issue of EDL (we understand that there is sufficient allocation to cover payments at least until December), pending a final decision by the Government.

The final decision could be, among others:

● The Government is to eventually give EDL the green light to carry out tolling in accordance with the terms of the concession agreement (at the agreed toll rate, and the agreed point of collection, namely the Custom and Immigration Complex in Johor Bahru); or

● The Government is to take over the toll road (but this raises the next question, namely pricing).

MRCB believes that the long awaited Rubber Research Institute (RRI) land redevelopment project may finally get off the ground in the second half of 2012 with the formal land acquisition by Kwasa Land, wholly-owned special purpose vehicle of the Employee's Provident Fund by June 2012, followed by the call for tender for infrastructure works and the parceling out of development land plots. MRCB is eyeing to be a contractor for Phase 1 infrastructure works worth about RM1bil; project manager for the entire development; and developer for land parcels.

MRCB's near-term earnings visibility is good on the back of strong construction and property profits.

The new jobs may come from, among others, its share of works from the RM1bil extension project for Duta-Ulu Kelang (DUKE) Expressway (MRCB owns a 30% stake in DUKE Expressway, with partner Ekovest holding the 70% controlling interest).

It is also possible to securea sizeable Government job. The RM1bil new construction orderbook expectations actually exclude potential Klang Valley My Rapid Transit work packages.

It has also emerged as the frontrunner to develop a prime 8.09-ha site on Jalan Bangsar in Kuala Lumpur where the Unilever headquarters and factory once sat. Sources said MRCB is close to inking a deal with landowner Pelaburan Hartanah Bhd (PHB).

They added that MRCB plans to build several office towers, a serviced apartment-cum-hotel, a retail mall and boutique outlets on the plot.

The project is expected to rake in more than RM5 billion in gross development value (GDV).

It will be an extension of the KL Sentral development in Brickfields, and may be linked to the Bangsar LRT station.

MRCB is the developer of KL Sentral, an integrated transport hub with GDV of over RM10 billion. The project is slated to complete in 2016.

The sources said MRCB is fine-tuning its masterplan for the project and expects to submit to the relevant authorities soon.

It is still unclear if MRCB will acquire the land outright or develop it in a joint venture with PHB. PHB may give the land to MRCB in exchange for properties in the development and cash. It may also develop the land jointly with MRCB.

Formerly a well-known landmark housing Lever Brothers’ soap and margarine factory, the land has been left unoccupied since Unilever Malaysia moved out in 2003.

The land used to belong to Railway Asset Corp (RAC) but came under the ownership of PHB in early 2011. PHB bought the land from RAC at about RM150 per sq ft two years ago.

PHB is a subsidiary of Yayasan Amanah Hartanah Bumiputera, created under Budget 2006 with an initial capital of RM2 billion, to promote Bumiputera ownership of prime real estate.

The land, if it has been converted to commercial use, could fetch about RM600 psf, given its frontage to the busy Jalan Bangsar. If it has not been converted to commercial use, then I reckon it could be worth RM400 psf to RM450 psf.

As a perspective, SP Setia had paid under RM400 per sq ft for a 10.1ha land on the former Kampung Haji Abdullah Hukum site along Jalan Bangsar, not too far from the former Unilever headquarters. It is developing KL Eco City, with a projected GDV of RM6 billion on the site. The land is said to be currently worth around RM600 per sq ft, given that several phases of the project have been launched.