DIGI ... Mar12

Concerns are pointed to increasingly aggressive MAXIS Bhd, which has just launched its new Hotlink plan and cut IDD rates in an effort to arrest its decline in market share.

DIGI also said special dividends will be a challenge for now (March 2012) as the rm692 million share premium reserve at the holding company cannot be utilized since the cash can only come from its operating subsidiary, DIGITEL, from which proceeds are upstreamed through retained earnings to pay dividends.

Market observers see the downside risks to DIGI’s earnings arising from the more aggressive MAXIS as it has more to lose in the segments that MAXIS is apparently targeting – migrant workers and value conscious customers. MAXIS

MAXIS had earlier said it is prepare to do anything to win back customers and restore its market share, which has been chipped away by DIGI, Celcom and to a lesser extent, U Mobile and Tune Talk. Also there are marketing Lethargy with regards to DIGI’s acquisition and retention campaigns, which is departure from the past when its was a nimble operator and typically led the market.

The company said it will monitor the competitive response before making any decision to retaliate as MAXIS’ packages and tariff adjustments were merely a normalization of its legacy packages, which were priced out of the market.

MAXIS said it can turn on LTE by 4QFY2012 should the company be awarded the 2.6Hz spectrum by the middle of 2012. However, it does not intend to be aggressive with the rollout as LTE devices are still lacking.

Its capex for FY2012 stood at rm700 million to rm750 million. Its network modernization exercise is slated for completion by end 2012.

TM ... Mar12

The main thing supporting TM’s share price since the de merger with Axiata Group was its promise to pay at least rm700 million in dividend annually, or up to 90% of its normalized net profits. However there are concerns of TM’s fledging fixed line voice business and the huge upfront investments needed for its HSBB business where the take up was highly uncertain. All that looks set to change in 2012. For the one, the take up for TM’s HSBB service, UnFi is coming in stronger than expected.

Since its launch in March 24, 2010, TM already has over 300000 UniFi customers. At current rate of 1000 installations per day, TM could achieve its target of 400000 Unifi customers by July 2012.

More importantly, there is a chance of TM’s normalized net profits could exceed rm700 million in 2012. This means current dividend ceiling looks set to exceed the current minimum dividend payout of rm700 million as early as 2012 if not in 2013.

And TM has promised to pay the higher number if 90% of normalized profit after tax and minority interest is more than rm700 million.

While business looks good, it would still be a challenge for TM to keep its cash generation as well as profit figures in 2012 because the group does not have significant non core assets to sell and the rm2.4 billion in HSBB grant from the government will be fully used up in 2012. Less in rm200 million in HSBB government subsidy left in the coffer for 2012 and HSBB related capex is expected to be between rm1.3 billion and rm1.5 billion for 2012 before tapering off in 2013. It needs to bolster the group’s capabilities to better to serve its SME customers going forward.

TM’s capex (HSBB and business as usual) the past two years was lower at rm1.81 billion in FY2011 and rm2.2 billion in FY2010 helped by some rm754 million HSBB grant from the government in FY2011 and rm513 million in FY2010. Its business as usual capex was rm1.13 billion in FY2010 and FY2012 which brought total capex to rm2.71 billion in FY2010 and rm2.56 billion in FY2011.

Market observers stated that TM’s total capex in 2012 to largely the same as the previous two years (rm2.71 billion and 2.56 billon) with the key difference being the lower level of HSBB government grant. The good news is that from 2013, TM is no longer obligated to roll out HSBB network to places it deems commercially unfeasible. From 2013, it would be demand driven basis.

TM’s HSBB sealed a wholesale agreements with Maxis, Celcom, Axiata and Packet One and Redtone, which gives rivals access to its network

TM’s cash and cash equivalent stood at rm4.21 billion as at end 2011.

Going forward, it will consider acquisitions to bolster its capabilities to better serve its SME customers.

SME contributed 26% of TM’s retail revenue if rm7.2 billion in FY2011, the second largest contributor after the consumer segment’s 34% and ahead of contributions from the enterprise and government business segments at 20% each.

TM is also looking to expand in the business process outsourcing market.

MEGB ... Mar12

Its group chief executive officer Datuk Seri Edmund Santhara bought more shares in his beleaguered company on 22 March 2012, forking out some RM7.7mil to mop up 7 million shares at a price of RM1.10. This acquisition raised his shareholding in the company to 23.81% or 97.6 million shares.

The rationale for his acquisition isn't yet clear. Masterskill's other substantial shareholder Siva Kumar M. Jeyapalan was just a passive shareholder, and was not aware of any upcoming plans for the company.

Siva had on Oct 5 2011 emerged as a subtantial shareholder of the education group after acquiring 41.2 million shares or a 10.05% stake in the company at approximately RM1.10 a share.

It had been rumoured earlier that Masterkill could be a takeover target by Khazanah Nasional Bhd or Ekuiti Nasional Bhd. Industry observers said that pricing was likely an issue preventing the buyout deals from materialising so far. But market observers would not rule out a potential deal involving Masterskill, perhaps one that did not take the strict privatisation model.

Masterskill still had an on-going business as well as fixed assets in the form of its campuses. Presently, its main campus is in Cheras, and it has five other smaller campuses in Johor Baru, Ipoh, Kota Baru, Kota Kinabalu and Kuching. Masterskill is also in the process of building its flagship campus in Bangi, Selangor, where it has received RM250mil in financing for the first phase of this project.

Aside from Santhara and Siva, another major shareholder of the company is private equity firm Crescent Point Investment Holdings Ltd with 21.5%.

It recorded a net loss of RM1.57mil for its fourth quarter to Dec 31, 2011 from a previous net profit of RM26.85mil on the back of a 38.81% drop in revenue to RM49.5mil.

For the full year (FY11), net profit was down almost three fold to RM38.14mil from RM102.14mil in FY10 on the back of a 20.77% drop in revenue to RM250.17mil.

The fourth-quarter results were dragged down by weak student intake and higher-than-expected staff costs. For the full year, operating margins almost halved to 26%, partly due to a surge in depreciation.

The 21% decline in full-year revenue resulted mainly from a 35% drop in student intake to 3,500, of which only 250 students enrolled in the second half of the year. The total active students in 2011 stood at 14,000.

WahSeong ... Mar12

Sources say it is believed to have secured a contract from Petronas Carigali Sdn Bhd to coat about rm90km of gas pipeline in Turkmentistan. The pipe coating deal is an extension of an existing job that Wah Seong secured in Turkmenistan in 2008.

Coating continues to be Wah Seong’s core business, it is also into the manufacturer of pipes for the oil and gas industry.

Petronas will continue to keep Wah Seong busy with its five year capex of rm300 billion on oil and gas. Wah Seong will be a beneficiary of Petronas’ plan to replace its ageing facilities, given that 60% of the Petronas’ major oil producing fields in Malaysia are around 26 years oil. And there is also vast opportunity in the pipeline rehabilitation programme, given that 800km pipelines are over 30 years and would need to be replaced soon.

Petronas’ RM15 billion North Malay Basin project is another that might require Wah Seong’s pipe coating skills. This involves the construction of a 200km long pipeline to transfer gas from nine fields to Kerteh in Terengannu. The project is expected to rolled out soon, given Petronas ambitious timeline of first production by 2013.

Meanwhile, the Gulf of Mexico would be the next growth frontier for the company with the expected commissioning of its two plants in Louisiana, United States, by the second half of 2012. These plants would be operated via a joint-venture which would springboard Wah Seong's entry into the Gulf of Mexico region by leveraging on its partner’s infrastructure.
Australia would remain a key driver for the company as it would offer huge potential due to large number of liquefied natural gas projects.

Meanwhile, Wah Seong is looking for potential mergers and acquisitions to boost the contribution for its non oil and has division which is part of the initial public offering for its de-merger exercise to unlock value for the company.

As at Dec 31, 2011, its order book stood at rm1.2 billion.

Meanwhile its planned venture into oil palm cultivation in the Republic of Congo is considered risky as the company has no experience in this field. It is also the first listed company to do so in the republic.

The concerned is due to sociopolitical risks in the country. Market observers do not see any catalysts in the short term coming from this venture as it will take some time before Wasco can reap the harvest. If it succeeds in this, the oil palm venture will be good recurring income for the long term.

On Feb 3, 2012, it had entered into an agreement with Silvermark Resources Inc and Ginat Dragon Group Ltd to subscribe for up to 51% equity interest in Atama Resources Inc (ARI) for US$25 million. Silvermark and Giant will hold the remaining 49%.

ARI has a 30 year oil oil palm plantation concession agreement with the government of the Republic of Congo. Under the concession, ARI has the right to occupy 470000 ha to develop oil plam plantations and compexes.

At this juncture, 180000ha or 38% of the concession land has been identified as highly suitable for plantation. ARI will begin planting by 2QFY2013 and the development of the 180000ha is expected to be completed in 10 phases over 15 years.

Wasco will raise half the rm75 million share subscription in ARI via bank borrowings while the rest will com from internally generated funds. As at end Sept 30, 2011 Wasco had rm515 million in cash and rm726 million in borrowings. It has a net gearing of 0.2 times based on its shareholders’ funds of rm987 million.

Although the bank borrowings portion for the share subscription in ARI will only raise Wasco’s gearing to 0.25 times, the venture might become a financial burden in the future. Estimate that it will cost between US$4000 – US$6000 per hectare to develop oil palm to maturity.

Based on the initial 180000ha that have been identified and the US$4000 per hectare development cost, the capex is estimated to be at least US$48 million per year. Wasco will also need to pay RM15 per hectare to the government.

Once ARI becomes a 51% subsidiary of Wasco, its borrowings will need to be capitalized or consolidated in the latter’s balance sheet to develop oil palm plantations. This will undermine Wasco’s ability to seek new borrowings for its oil and gas ventures. This will become a burden unless it manages to hive off its oil and gas business soon, which is currently its bread and butter.

The venture will have a long gestation period. Wasco and its partners are looking at an unplanted area, which may take about five years to see first harvest.

The foray could be a move by management to seek recurring income after hiving off the oil and gas segment. Currently, all of Wasco’s six business divisions are parked under its wholly owned subsidiary Wasco Energy Ltd (WEL).

Under thr proposed demerger exercise, the non oil and gas pipe manufacturing, renewable energy and trading businesses will be parked under Wasco, while WEL will run the oil and gas business. The demerger exercise had been slated for mid 2011, but it was postponed. However, with the new venture, Wasco may be able to complete the demerger soon as the share subscription in ARI is expected to be completed in 2012.

Once Wasco completes the share subscription, it will appoint four of the eight directors in ARI. A director of IGB is also a director in ARI. IGB’s group MD Robert Tan is also the chairman of Wasco, and his family holds a 40% direct and indirect stake in the latter.

Deleum ... Mar12

A provider of oilfield equipment and services to the upstream sector of the oil and gas industry, is partnering Petronas Carigali Sdn Bhd to form a global patent for a breakthrough product that will greatly improve oil extraction rates.

The product will be able to dissolve the layer of wax that clogs the pipes that extract the oil from ground and transport it. Towards this end, Carigali is prepared to undertake a joint venture for the commercial production of the product.

The joint venture will be the global patent holder of this product, and it expects the product to be used by most oil majors.

The sources say the new product has been tested on a pilot oilfield off the coast of Sabah and Carigali is prepared to secure the patent to monetize the opportunity.

Its net assets per share stood at rm1.20 It had rm6.96 million in cash and rm26.82 million in borrowings.

The company indicated in May 2011 that it was tendering for rm200 million worth of jobs in the inventory, services and equipment business. Its portfolio comprised rm1 billion worth projects which will run up to 2016.

EPMB ... Mar12

TA Securities Research ...

1. Recent Developments
EPMB Buying Maju Expressway? The Edge Financial Daily reported today that EPMB will be
acquiring the Maju Expressway, or popularly known as MEX. Maju Expressway is currently owned by Maju
Holdings Bhd, a Malaysian owned diversified conglomerate. According to the article, the acquisition price is about RM1.7bn, which will be funded via issuance of Sukuk (RM1.2bn) and the balance via debts.

Management is tightlipped about the rumour except for saying that it could involve a significant acquisition that
could run into a few hundred million Ringgit. The stock has been suspended until the end of today. We expect an announcement at the end of market today.

Background on MEX
The owner of MEX, Maju Expressway S/B owns the highway concession linking Kuala Lumpur with Cyberjaya and Putrajaya. It boasts the shortest link between the business capital and the administration capital (about 20 minutes). In addition, MEX is also popular indirect link (compared with PLUS highway) from Kuala Lumpur to the two main airports in the country, KLIA and LCCT Sepang (KLIA - 30 minutes). MEX also provides regional connectivity between the Middle Ring Road 1 (MRR1) and the Middle Ring Road 2 (MRR2).

A Radical Move
The acquisition, if materialises, will significantly alter the profile of the group. Its current core businesses are
manufacturing of auto-parts and sale of smart water meter system. We are not aware of the company having
previous experience in managing highway concessions. The price tag of RM1.7bn, which we believe is the
Enterprise Value of the concession, is some 10x bigger compared with EPMB’s current market capitalisation of RM166mn.

Balance Sheet is Too Small to Absorb This Acquisition Given the relatively small balance sheet, we think that
a cash call is rather unavoidable. Total debts as at Dec 31, 2011 stood at RM163.7mn while cash balance
amounted to RM73.3mn. That translates into a net gearing of 0.3x. With this acquisition, total debts
could raise to close to RM2bn. That said, since MEX is a highway concession, the acquisition could be
partially funded on project financing basis. Assuming a 80%:20% debt:equity ratio on a RM1.7bn price tag,
we estimate that the net increase in holding company debts would amount to approximately RM500mn.
Some Potential in MEX The newspaper article quoted that average daily traffic (ADT) at MEX in 2010 was 78,962. Up to June 2011, that figure rose by another 17.5% to 92,785.

Since MEX is still relatively a new highway, we think there is room for growth. In addition, we expect
traffic volume to increase further if the direct link to KLIA is built according to plan. At this juncture
though, there is not much information available publicly to assess the viability of the highway.


2. Key Investment Risk
Key risk factors are, 1) high dependency to national marques, 2) stricter loan approval guidelines negatively
impacting vehicle sales, 3) margin compression arising from stiff competition and cost cutting measures
implemented by Proton/Perodua, and 4) significant structural reform from the revised NAP (scheduled for
release by June 2012) that could adversely impact domestic auto parts manufacturers.

3. Earnings Outlook
No change in earnings forecasts at this juncture. We shall review our earnings projections once an announcement is made later today.

4. Valuation & Recommendation
Share price has risen above our target price of RM1.11 on the back of speculation on the takeover. At this juncture, for consistency sake, we are leaving our Buy recommendation unchanged and target price unchanged.