We see clear value in ILB following the recent proposed disposal of its Shenzhen and Henan assets, which will result in ILB having a net cash per share of MYR2.19 versus current stock price of MYR1.81. This also means investors get ILB’s remaining business for free on top of the MYR2.19 net cash. Based on SOP, we derive a FV of MYR2.42, assuming 100% special dividend payout from the disposal gains.

- Exiting the China market. ILB’s 70%-owned subsidiary, IL HK, is proposing to dispose of two subsidiaries – ISH Logistics (Shenzhen II) (IL Shenzhen) and Integrated Logistics Henan (HK) (IL Henan) – for total proceeds of CNY988m (MYR519.3m). The main rationale is its plan to exit the China market, which has become an increasingly tougher business environment to operate in due to cost escalations. ILB’s total gain on disposal may amount to MYR177.9m (MYR1.01 per share). As at March, its net tangible asset (NTA) per share was worth MYR2.13. Given the net gain on disposal, its NTA will have risen to MYR3.14, assuming that no special cash dividends are distributed.

- Two main operating assets. Following the disposal of its two China operations, ILB will be left with two main operating assets, namely: i) its Dubai joint-venture (JV), which commenced operations in Oct 2012 (targeted to break even by 2014 and turn profitable by 2015), and ii) Wujiang Co in China, which operates two warehouses near Shanghai.

- MYR400m cash pile. Since ILB will no longer benefit from economies of scale, following the proposed disposal of IL Shenzhen and IL Henan in China, we think there is a high possibility of it disposing of Wujiang Co as well. Should this materialise, ILB may have a total cash pile of MYR400m, assuming Wujiang Co is disposed of at its NTA value.

- MYR2.42 FV, with potential upside. ILB’s value is not tied to earnings potential from its remaining assets. Instead, it is based on the disposal of its investments and the potentially huge cash pile to be received in due course. Assuming ILB pays out 100% of its net gain on the disposal of IL Shenzhen and IL Henan, based on our SOTP calculation, the company should worth MYR2.42 per share.

Key Highlights

Unlocking value
ILB told Bursa Malaysia on 28 June that its indirect 70%-owned subsidiary Integrated Logistics (HK) (IL HK), had agreed to dispose of its entire equity interest in IL Shenzhen and IL Henan to Winfair international Holdings for CNY988m (MYR519.3m). Following the proposed exercise, the company is expected to realise a net gain of MYR177.9m, which will translate into MYR1.01 per share. We believe the main reason behind ILB’s proposed disposal of these assets is the increasingly competitive business environment in China due to rising costs. Furthermore, a slowdown in China’s economic growth makes for the perfect time to exit the Chinese m

arket while simultaneously realising substantial gains.

Special dividends for investors?
The potential total cash proceeds of around MYR332m (or 70% of MYR519.3m, net of minorities’ portion) will put ILB in a better position to strategise its future expansion plans. Moreover, investors can expect special dividends should it decide to reward its shareholders with a portion of the MYR177.9m net gain. Assuming a 100% payout, investors will gain MYR1.01 per share immediately, translating into a dividend yield of 55.2%.

What then remains in the company?
After the completion of the proposed disposal, and assuming that the proceeds will not be dished out as dividends, ILB will be left with four main assets, namely: i) a huge cash pile, ii) Integrated Mits SB – a 50% JV with Mitsui (Japan) in Malaysia, iii) Integrated National Logistics Ltd – a 50% JV in Dubai, and iv) operations in China via its 70%-owned subsidiary – IL HK. The company plans to focus more on its Dubai JV post disposal. Should ILB make a complete exit from all operations in China, this will then mark another round of disposals, namely its two warehouses that are operated by Wujiang Co, a subsidiary owned by IL HK.

Middle Eastern hub on track for further growth
In 2007, ILB and the National Trading & Developing Establishment (NTDE) signed a 50:50 JV agreement to open and operate a logistics hub in Dubai – Integrated National Logistics (INL) – at a capital cost of about AED300m. However, the project was put on hold due to the financial crisis of 2008, but was revived in 2009 with the new warehouse starting operations in Oct 2012. ILB expects this project to break even by FY14F and turn profitable by FY15F. Currently, the warehouse utilisation rate stands at 30%-40%, and this is expected to ramp up aggressively moving forward. The company is confident of achieving its targets, as its JV partner is one of leading distribution and logistics providers for international consumer brands in the Gulf. NTDE is also an exclusive distributor of world-renowned food and beverage brands like Cadbury, Pokka and Häagen-Dazs. The state-of-art warehouse run by INL is equipped with the latest technologies to help maintain its position as the preferred logistics provider among fast-moving consumer goods (FMCG) companies in Dubai. The warehouse’s high tech features may allow INL to fetch superior margins once it hits its optimal occupancy rate.

18.0% effective strategic investment in China-based Hengyang Plc
ILB HK also owns a 25% stake in Hengyang (Not Rated, HYNG SP) – a chemical logistics provider along China’s Yangtze River, which is listed on the Singapore Catalist Board. We learnt that Macquarie Everbright – a Hong Kong fund – has invested USD44m in Hengyang, by subscribing to a 35% stake in a newco, which aims to become the leading integrated chemical logistics services provider along the Yangtze – with operations in: i) Jiangyin, ii) Jinjiang, iii) Wuhan, iv) Chongqing, and v) Yueyang. The newco’s target capacity of around 1m cu m by 2015 is 10 times bigger than when IL HK invested in the company back in 2007. As ILB will remain a strategic investment partner and is not directly involved in Hengyang’s management and operations, we do not expect further capex from the company.

One more asset in China
We gather that IL HK also owns a 65% equity interest in Wujiang Co, which has an NTA of CNY100m (MYR52.9m) and is located 45 minutes away from Shanghai. Phase 1 was completed four years ago, with a built-up area of 26,647 sq m and is currently fully occupied. Meanwhile, Phase 2 was completed in Dec 2012 and has a total built-up area of 18,700 sq m. Should ILB decide to exit the China market totally, we foresee the possible disposal of Wujiang Co. This is because the company will no longer possess any major assets in China, rendering it with zero economies of scale. Should such a disposal materialise, this could translate into some MYR24.1m in cash proceeds, assuming IL HK disposes of Wujiang Co at its NTA value.

MYR400m cash pile may sit on its balance sheet
Combining all the cash proceeds received from: i) the proposed disposal of IL Shenzhen and IL Henan, ii) the possible disposal of Wujiang Co, and iii) MYR29m in existing cash (net of minorities’ portion), ILB may have a huge cash pile of MYR400m sitting in its balance sheet. With such a huge cash pile, the company will be well-positioned to strategise its future growth plans. That said, we do not discount the possibility of ILB rewarding its shareholders with special dividends from the gains on disposal of assets, but, even so, its balance sheet will remain very solid.

Valuation
Moving forward, we expect ILB’s main earnings contributor to come from two entities: i) its 50%-owned Dubai operation, and ii) its strategic investment in Hengyang. We project that Wujiang Co’s earnings may remain under pressure, given the increasingly competitive Chinese market. Thus, we apply a 10-year DCF valuation for ILB’s Dubai operation with a WACC of 7.7% and a terminal growth rate of 2.0%. As Hengyang is a listed company, we impute ILB’s 18% effective interest of its market value into our valuation. We value Wujiang Co at its NTA value, as we think that ILB may dispose of this business to unlock the value. Moreover, Wujiang Co has very limited earnings growth.

Source: RHB