MAYBULK has decided to subscribe for POSH shares for a maximum aggregate value of USD70.0m, which is equivalent to RM231.7m to maintain their shareholdings in this associate company at the minimum of 20.0% after the potential dilution post-listing, which will dilute its holdings to 17.0% from 21.2% currently. The indicative value of IPO price with a range of USD1.3-1.5b suggested by the independent advisors appears to be at a premium to its peers on FY14 PER basis (16.2x-18.7x vs. peer average of 11.0x). Although the valuation looks expensive, report by independent advisors suggested otherwise with estimated forward PER of 6.5x-8.6x over FY15/FY16, thereby suggesting significant upside to its earnings starting only in FY15 due to delivery of several high specification vessels which we have not factored in yet. We choose to maintain our forecasts, pending more clarification on the financial information and earnings outlook of POSH in the IPO prospectus which is yet to be released. Our OUTPERFORM call is maintained with a TP of RM2.53 pegged to FY14 PBV of 1.3x

Proposed subscription of POSH IPO. On 21 February 2014, POSH, MAYBULK’s 21.2%-owned associate, received a conditional eligibility-to-list for the listing of and quotation for POSH shares on the SGX. Subsequent to the listing, MAYBULK’s shareholding in POSH will be diluted to 17.0% on the enlarged share capital. In view of that, the company has proposed to subscribe for POSH shares in the listing to achieve post-listing holdings of c.20.0% for an aggregate value not exceeding USD70.0m, which is equivalent to RM231.7m based on the exchange rate of USD1.00:RM3.31. The IPO price of POSH shares will be finalised upon completion of the cornerstone and book building.

Our take on POSH’s valuation. Based on the evaluation by advisors in the circular released on Bursa Malaysia, POSH is valued at the range of USD1.3b-1.5b, which appears to be at a premium to its peers with average forward PER of 11x (16.2x-18.7x on our FY14 earnings forecast for the company). In contrast, it is a different story when we look at its forward PER whereby the implied forward PER is at the range of 6.5x to 8.6x over FY15/FY16 based on the forecasted numbers by independent advisors for the circular report. We believe that the incremental earnings from vessel additions by POSH over the next two years (which we have yet to factor in our forecasts) have been factored into the fair value by the independent advisor.

Potential impact on MAYBULK. The subscription is going to be funded wholly by external borrowings and this would potentially increase the group’s gearing from 0.06x to 0.20x, which is still considered relatively healthy as its peers in the sector have gearing ratios in excess of 0.5x. We believe that the potential impact on the group’s earnings will be minimal assuming that they subscribe to the IPO to maintain their stake at 20.0%. To put that into perspective, post listing of POSH, our earnings forecast for FY14 and FY15 respectively are expected to be lower by 9.0% and 6.0%. On top of that, do note that our earnings forecasts are considered conservative given that we have not factored in potential earnings increment from the associate from vessels to be added in FY14 and FY15.

Subscription of IPO shares a positive move. Overall we are positive on the company’s decision to maintain their shareholdings in POSH at 20.0% premised on several justifications: (i) earnings dilution impact caused by the issuance of new shares in POSH post listing are expected to be partially mitigated, (ii) earnings outlook for POSH is expected to be more robust in the next few years given several deliveries of vessels expected in both FY14 and FY15, and (iii) OSV market is expected to remain buoyant in the coming years driven by increasing demand for infield support and maintenance for E & P infrastructures, especially in Brazil and Mexico. In addition, POSH is also expecting more vessel deliveries in both 2014 and 2015, which may drive the earnings significantly higher.

Maintain OURPERFORM call. We believe that the subscription to POSH IPO listing is positive for MAYBULK on a net basis as the outlook for the OSV market is positive in the coming years and POSH has a strong chance of securing a fair valuation for its listing, which will add more value to MAYBULK as a shareholder. For now, we maintain our numbers, for the time being, pending more details in the IPO prospectus which will be released in the near future, to make further assessments on its potential earnings for FY15 and FY16. We maintain our target price of RM2.53 pegged to 1.3x PBV on FY14 BVPS with an OUTPERFORM call. Further re-rating catalysts of the stock include: (i) stronger-than-expected recovery in the dry bulk segment and (ii) more earnings visibility from POSH’S due-to-be-delivered vessels in the next two years.

Source: Kenanga