Surprise stake in Scomi

IJM announced that it is acquiring up to 25% stake in Scomi for RM149m comprising new shares and convertible bonds. We expect no immediate earnings impact as the initial 9% stake in new shares will place Scomi as a simple investment rather than associate. Scomi is said to be in the running for 2 marginal oil field projects by Petronas. It could also work together with IJM for some monorail jobs. TP lowered from RM5.84 to RM5.64 and maintain NEUTRAL pending details from today’s analyst briefing.

What’s in the news

 IJM announced that it has entered into a proposed investment of up to 25.08% stake in Scomi Group for RM149.3m. This will comprise of (i) 119.1m new shares in Scomi, representing 10% of its existing share capital for RM39.3m cash or RM0.33/ share and (ii) subscription of redeemable convertible secured bonds of a nominal value of RM110m in cash.

Our comments

 Scomi is primarily involved in oilfield services, transport solutions and energy logistics. For the 1H12 (FYE Dec) period, it posted earnings of RM19.5m. Due to an impending asset disposal, Scomi also recorded profit from discontinuing operations of RM9.9m.

 MARC recently downgraded Scomi’s RM500m MTNs from BBB+ to BB+ and placed it on a negative watch. It mentioned that this would impact RM200m of the debt issue that remains outstanding which is due on 28 Sept (this Friday). The downgrade was premised on delays in Scomi’s divestments in Scomi Nigeria Pte Ltd and Oiltools Africa Ltd which impacts its refinancing and repayment abilities.

 Management said that the rationale for its stake in Scomi is to gain an accelerated exposure to the O&G sector at an “attractive price”. It believes that with a strong and credible shareholder in place, Scomi will be in a better position to secure larger jobs.

 It also said that Scomi’s transport solutions business which mainly involves monorails would complement IJM’s construction outfit. Scomi is currently undertaking monorail projects in Sao Paulo and Manaus in Brazil and Bangalore in India.

 Based on Scomi’s 1HFY12 shareholder’s funds of RM601.m, IJM’s acquisition price translates to P/BV of 0.73x. While “buying below book” appears attractive, Scomi has RM306.2m in intangible assets. Hence on a P/NTA basis, this works out to be 1.48x.

Impact on estimates

 There should be no immediate earnings impact to IJM as its initial stake of 9% post new share issuance will be regarded as a simple investment rather than an associate stake.

 Nonetheless, we read IJM’s entrance into Scomi as a sign that bigger things could be brewing. This could be similar to 2007 when IJM bought a 20% stake in KEuro which eventually became the concessionaire for the RM7bn West Coast Expressway.

 Media reports previously mentioned that Scomi is the front runner for 2 risk service contracts (RSCs) by Petronas for the Tembikai and Cenang marginal fields off Peninsular Malaysia with values of USD200-400m (RM620-1200m) each.

 Both parties may be looking to bid for some sizable monorail projects abroad as well. Jointly, both would be able to provide a total-solutions monorail contractor.

Valuation and recommendation

 While we keep our earnings unchanged, our TP is cut from RM5.84 to RM5.64 as we mark to market IJM’s stake in its listed entities. This implies FY13-14 P/E of 15.4x and 13.5x compared to its 1-year forward mean of 14.9x.

 With share price down 7.1% yesterday, we acknowledge that value is emerging. However, pending details from today’s analyst briefing, we keep our NEUTRAL rating.