• From highway to oil & gas. SILK offers a small-cap exposure to oil & gas (O&G) offshore supply vessel (OSV) via Jasa Merin (JM). JM has been providing OSV services to oil majors such as PETRONAS Carigali, ExxonMobil and Sarawak Shell Bhd over 30 years. Presently, JM operates a fleet of 19 vessels comprising 2 Straight Supply Vessels (“SSV”) and 17 Anchor Handling Tug Supply Vessels (“AHTS”), with a fleetsize of 19 vessels. All of its OSVs are Malaysia-flagged and are relatively young, averaging 5 years in age. The OSV business has been the sole earnings contributor to the group as the Kajang Ring Road (KRR) has been on accounting loss due to existing high financing and amortization costs.
• However, KRR is expected to remain cashflow positive following the restructuring of its long term debts. In 1QFY07/15, KRR’s revenue jumped 26.7% y-y to RM26.3m) and losses is reduced to RM10m (vs 1QFY07/14 LBT RM11m), riding on SILK Highway’s connectivity with other highways along its alignment together with the availability of installed capacity as well as, continuing and increasing development and urbanization in the surrounding vicinity of Kajang SILK Highway.
• Disposal of KRR unsuccessful. In June 2014, SILK had proposed to dispose of the entire equity interest in its highway to Road Builder for RM395m cash to unlock its investment and further expand its O&G support services business as well as broaden its business portfolio in the O&G segment. However, the deal was terminated in Nov 2014.
• Likely to play catch-up. SILKHLD’s share prices nosedived 66% from 52-week high of RM1.24 (31 July) to a low of RM0.42 (2 Dec 14) before trending higher to end at RM0.555 on 13 Feb, in tandem with ongoing relief rally in oil prices. YTD, SILKHLD’s share prices remain a laggard against its peers with a mere 0.9% advance (vs peers’ average 17.5% gain).
• Hence, we believe current price weakness presents good buying opportunity as hourly, daily and weekly charts are flashing bottoming up signals. In terms of rebound, near term upside targets are RM0.58 (intraday high 9 Feb). A decisive breakout above RM0.58 will spur prices to RM0.61 (23.6% FR) and our long term target prices at RM0.65 (100-d SMA). Key supports are RM0.54 (20-d SMA) and RM0.525 (30-d SMA). Cut loss below RM0.51

Source: Hong Leong Investment Bank Research - 16 Feb 2015