PETRONAS has failed to take MISC private as its buyout offer fell 3.93% short on the stipulated acceptance level. Based on the number of shares the national oil corporation acquired, it would seem that second largest minority shareholder PNB had accepted the offer, suggesting that the smaller minorities were the hurdle. On anticipation of a selldown, we advise investors to accumulate MISC as its prospects remain bright. Upgrade to BUY, with MYR5.88 FV.

Buyout fails. Petronas has failed in its attempt to take MISC private as it has not met the required acceptance level to its revised buyout offer of MYR5.50 per share, compared with the earlier MYR5.30 per share offer.

-  Just 3.93% short. As at the deadline of 5pm on 19 April, only 23.4% of MISC’s minority shareholders had taken up Petronas’ buyout offer, lifting the national oil major’s stake in the company to 86.07%. This is just 3.93% short on fulfilling the 90% acceptance required for it to take MISC private.

-  Did PNB accept? It is uncertain whether Permodalan Nasional Bhd (PNB) – MISC’s second largest minority shareholder with a 6.4% stake -accepted the revised offer. After the Employees Provident Fund (EPF) announced its acceptance a week earlier, Petronas’ total shareholding had reached 79.8%. Assuming it had accepted the offer, Petronas’ total shareholding would have come up to 86.14% (see Figure 1 overleaf). Although there is a shortfall, this figure roughly tallies with Petronas’ actual shareholding of 86.07%. Hence, there is a high probability that PNB had accepted the offer.

-  Other smaller minorities may have blocked deal. We reckon that other smaller minorities may have refused to budge on the premise that the revised offer price was not attractive enough. Our SOP methodology values MISC at RM5.88 per share while the independent adviser’s valuation for the shipping conglomerate is RM5.69 to RM6.10 per share.

-  Selldown anticipated although not too massive. As the remaining shareholders that did not accept the offer would likely continue to hold on to MISC shares and since it takes 14 days from the revised closing date for Petronas to return the shares to shareholders whom have accepted the offer (totaling 23.4% of all MISC shares), any selldown would not be too severe, at least not to MYR4.45 - the price prior to the buoyout offer. Furthermore, we reckon that the independent adviser’s RM5.69-RM6.10 price range for MISC shares would cushion the impact of any major selldown.

-  Petronas won’t be making new offer for 6 months at least. Petronas has reaffirmed that it will not make another buyout offer. In accordance with the Malaysian Code on Take-Overs and Mergers 2010, if a takeover offer fails, the offerer will not be allowed to make takeover offer within six months of the date of the announcement of the takeover having failed. Beyond that, however, we do not discount the possibility of the national oil company making another buyout offer.

-  Listing of its LNG division in the pipeline? There is a possibility of a potential listing of MISC’s liquefied natural gas (LNG) division, which is a significant earnings contributor. Should the development of Petronas’ venture in Gladstone and Progress Energy kick off smoothly, we see MISC likely to raise capital for new LNG vessel acquisitions. Such a move, in our view, will further crystallize the valuations of the shipping conglomerate.

-  More scope for earnings upgrade seen. We see more scope for an earnings upgrade for MISC as our earnings estimates of USD386m for FY13 is still lower than the USD468m earnings it achieved last year, if we were to exclude the losses from its liner division. We see 2013 as a better year for the shipping group as earnings growth would be buoyed by its LNG, offshore, tank terminal and heavy engineering divisions, as well as narrower losses from its petroleum and chemical tanker divisions.

-  Upgrade to BUY. We upgrade MISC to BUY (from NEUTRAL). We also revert to our previous FV of MYR5.88 from the revised offer price of MYR5.50. Our FV is based on sum of parts as per Figure 2 below.

Source: RHB