Journey to Wealth
IJM Corporation - Acquiring a 25.08% stake in Scomi
News IJM Corp Bhd ('IJM') has proposed an investment of up to a 25.08% stake in Scomi Group Bhd ('SGB') for a total consideration of RM149.3m via (1) 10% shares valued at RM0.33 per share and (2) subscription of redeemable convertible secured bonds (SGB Bonds) of an aggregate nominal value of RM110.0m in cash.
IJM shares will be suspended for one hour from 9.00 a.m to 10.00 a.m today.
Comments This news came as a surprise to us as we had never anticipated that IJM will venture into the oil and gas industry. Based on its latest financials (1Q13), IJM's cash balance stood at RM1.8b and its operating cash flow generated c. RM223m. This will be enough to finance the acquisition of RM149m.
IJM will immediately pay RM39m in cash for the first tranche of the transaction, which will be for the 10% stake in SGB. The next tranche will be for the subscription of SGB bonds at RM110m. The SGB bond will have a tenure of up to 3 years bearing 0% coupon rate. Interestingly, there is a clause for SGB to redeem the bonds, which are that in the event that (1) SGB shares have been traded at not less than 50 sen for 90 consecutive days and (2) SGB has recorded net profits for the latest 2 quarters. We believe that the clause was mainly to ensure that SGB's business is financially viable in order for IJM to ring fence its return from the investment.
SGB's order book stands at RM1.3b and it is currently bidding for additional contracts (oil & gas and civil engineering works) worth about RM3b. Based on market talks, SGB is bidding for marginal field contracts which could potentially be worth about USD800m. With the assumption of a debt to equity ratio of 80:20 and a 30% local stake in the project, SGB will be able to finance the equity portion by using the proceeds of RM149m. As at 1H12, SGB' cash stood at RM250m with debts of RM1.1b.
For IJM, this will be a long term investment and we have not factored in any contributions from this investment in our forecast.
Outlook We see a hefty cash outflow and capital needed for IJM as it needs to execute its upcoming projects like the WCE highway and other potential projects under the ETP. Its gearing level is still manageable at 0.5x as at 1Q13 and we do not see any problem for it to finance these projects and its investments.
Forecast No changes in our FY13-14E forecasts.
Rating Downgrade to MARKET PERFORM
Due to the limited upside (+9%) and the execution risk ahead of the upcoming election, we reckon that the stock performance will be weaker.
Valuation We have trimmed down our TP to RM5.55 (RM5.65 previously) following our downward revision of IJMLand's valuation. Our TP is based on SoP valuation and pegged 16x PER FY13 to its construction earnings.
Risks Execution risk and prolonged finalisation of the concession agreement (WCE Expressway).
Source: Kenanga
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Discussions
Be the first to like this. Showing 14 of 14 comments
IJM buy Scomi shares will be a BURDEN for IJM.
No point to invest in such company with HUGE DEBTS & LOSS.
2012-09-25 21:25
The whole exercise to obtain 26% of scomi only cost 10% of IJM 's current cash hoard only. I think value investment on the part of IJM. Proven track record as a prudent investor on the part of IJM as alex lu observed!
2012-09-25 21:40
Not if their target's book order is in excess of 1bn at a miserable cost of 33 sens per share!
2012-09-25 21:46
Ah that's why Tan Sri sapu big lots at 0.35 n me q until my legs koja n still got nothing , ahyo , another inside trading and how can you call this investment loh , ha ha
2012-09-25 21:52
And thats not included the tenders won by scomien yet and their foray into O&G. The two Marginal Oil fields looks like already in hand & Qatar drilling job. Next year promises bigger things I guess. Those who threw IJM stock today, will regret!
2012-09-25 21:58
No no no... Instead those who bought scomi will regret.. After all, the proposal will call off eventualy...
2012-09-25 22:11
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4.9 / 5.0
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
afifi
Good .Propose...Dont Call George Soros or ah long...call Malaysian Bank for Credit..
2012-09-25 12:38