THE BUZZ  
 IJM has entered into an agreement with Scomi Group to take up a stake of up to 25.1% in the latter for a total consideration of RM149.3m.  


OUR TAKE  

Details on the proposal. IJM has agreed take up to a 25.1% stake in Scomi Group for a total investment of RM149.3m via the following:
 
i)  A  subscription  of  119.1m  new  shares  in  Scomi  Group  for  a  cash consideration of RM39.3m; and

ii)  A  subscription  of  redeemable  convertible  secured  bonds  of  an aggregate nominal value of RM110m in cash.

The  terms  of  the  bonds.  The  bonds  to  be  issued  will  have  a  three-year  with  zero coupons attached. Scomi has the option to redeem all or part of the outstanding bonds in cash at each anniversary of the issue date. The redemption price will be the nominal value of the bonds plus a 10% yield for each full year that the bonds remain outstanding. 
 
Entry  cost  at  RM0.355/share.  From  our  calculation, IJM's potential 25.1%  stake  in Scomi  works  out  to  the  cost  average  of  RM0.355  per  share,  taking  into  account  the potential bonds conversion at a stipulated price of RM0.365 per share.
 
Surprise, surprise. The announcement caught us by surprise as IJM previously had not revealed its intention to establish a foothold in the O&G business. Having said that, the valuation  pegged  for  its  initial  investment  of  RM39.3m  translates  into  a  FY12  PE  of 11.4x,  which  is  reasonable though with some risks involved given Scomi's ongoing restructuring, if we were to annualise Scomi's 1HFY12 net profit of RM19.5m.
 
Brief  summary  on  Scomi.  Scomi  Group  has  existing  business  presence  in  oilfield services and transport solutions through its 67.3% stake in Scomi Engineering as well as in  energy  logistics  via  its  42.8%-owned  associate in  Scomi Marine.  In  FY11,  the  group registered revenue of RM1.38bn while core earnings closed in the red with net losses of RM232.3m  due  to  one-off  expenses  of  RM244.8m,  which  were  impairment  losses charged  during  the  year  as  well  as  the  slower-than-expected  progress  in  its  ongoing monorail project in Mumbai. That being said, its 1HFY12 numbers showed a substantial improvement, registering revenue of RM850.1m as profitability returned to the black with core earnings of RM19.5m for the period.

Establishing  an  O&G  foothold.  As of 1HFY12, Scomi's oilfield services recorded a segmental profit of RM44.9m. On its future prospects, the group is believed to be the frontrunner for two risk-service contracts, to  be  awarded  by  Petronas  for  the  Tembikai  and  Cenang  marginal  fields  off  Peninsular  Malaysia.  Each  of these is reported to be worth USD200m-USD400m. This coincides with recent comments by Scomi's group Managing  Director  Shah  Hakim  Zain  which  mentioned  that  the  company  is  looking  to  tender  for  about USD1bn in O&G services contracts within the next year.

Monorail  presence  a  plus.  Scomi  has  also  carved  out  its  niche  in  the  provision  of  rolling  stocks  for  train systems. On the domestic front, the group is involved in the RM494m KL Monorail Fleet Expansion Project to refurbish  1,500  wagons  by  June  2013.  At  this  juncture,  the  bulk  of  its  works  are  centered  in  Brazil  as  the company  has  bagged  the  RM2.6bn  contract  on  a  17.6km  Monorail  Line  17  in  Sao  Paulo  as  well  as  the RM2.6bn  job  on  a  20km  monorail  project  in  Manaus.  Earlier,  the  group  has  proposed  setting  up  a  new manufacturing plant in Brazil with two local partners for the provision of rolling stock.

A  growing  Indian  presence.  Other  than  that,  Scomi  is  in  the  midst  of  growing  its  presence  in  India.  It  is currently involved in the RM18.4bn19.5km monorail project in Mumbai to provide 15 sets of four-car trains. Going  forward,  the  group  has  highlighted  its  intention  to  bid  for  more  jobs  in  India,  including  a  300km monorail system in Chennai and a proposed 60km job in Bangalore. 

IJM to be the second largest shareholder. Scomi's largest shareholders are Shah Hakim Zain and Dato' Kamaluddin  Abdullah  who  both  hold  a  combined  172.3m  shares  in  Scomi  through  Kaspadu  and  Onsteam Marine  SB.  Should  the  proposed  stake  acquisition  go  through,  IJM  would  emerge  as  the  second  largest shareholder in Scomi with 119.1m shares, or potentially up to 539.6m shares assuming the full conversion of its bonds. Next in line would be Tan Sri Abu Sahid Mohamed and Datuk Siew Mun Chuang at 104.2m and 66.8m shares respectively.   

An  insignificant  contribution  to  books.  Funding  should  not  be  an  issue  given  IJM's cash coffers of RM1.83bn as of June 2012. Accretion to earnings would be rather insignificant as well, as IJM's stake of a minimum 10% and a maximum 25% translates into RM3.9m and RM9.8m respectively for its share of profit on Scomi vis-''-vis its current earnings base of RM500m-RM600m. Hence, we make no adjustments to our forecasts for the time being.

Neutral to slight negative. Overall, while the acquisition price paid is fairly reasonable in our view, we  are largely neutral to slightly negative on this proposed stake acquisition in the light that Scomi's proposed corporate restructuring program is still ongoing. On top of that, MARC has recently downgraded Scomi's rating  over  a  RM200m  debt  due  to  delays  it  encountered  in  its  previously  proposed  asset  sale  in  Nigeria. Moreover, investors may perceive IJM's move largely as a bail-out  measure,  given  that  Scomi  has  an existing bond due for repayment later this month (previously postponed from Sept 2011) at a magnitude of
RM100m. That said, we make no changes to our call and recommendation for now, pending more affirmative findings from IJM's and Scomi's management. Maintain TRADING BUY for the time being, with our FV maintained at RM6.32.

Source: OSK