IPO: Gas Malaysia

Gas Malaysia Berhad (GMB) was established to sell, market and distribute natural gas and Liquefied Petroleum Gas (LPG). GMB is also responsible for the construction and operation of the Natural Gas Distribution System (NGDS), which is a system comprising 1,800km of gas pipelines and stations within Peninsular Malaysia owned by GMB. NGDS is connected to the Peninsular Gas Utilisation (PGU), which is the gas transmission pipeline across Peninsular Malaysia owned and operated by PGB.

GMB’s core business to sell, market and distribute natural gas to industrial, commercial and residential customers in Peninsular Malaysia via NGDS. In other words, GMB purchases natural gas from PGB and sells to GMB’s own customers at a profit margin. There are currently two players in Peninsular Malaysia’s natural gas distribution industry, comprising GMB and PGB. However, both serve different sets of customers, whereby GMB’s customer base consists of users that initially consume less than 2 MMScfd, whereas PGB supplies to PETRONAS customers consuming more than 2 MMScfd. Customers that initially consume less than 2MMScfd but subsequently increase their consumption exceeding 2MMScfd will remain as GMB’s customers.

Like a toll road?

Looking at it from a slightly different perspective, GMB’s business can be compared to that of PLUS i.e. a toll road operator. Basically, consider GMB’s pipeline infrastructure as a highway, while the “toll” is GMB’s absolute gross margins, i.e RM2.02-2.25, while the “cars” represent the volume of natural gas supplied to GMB’s customers. We believe this comparison is fair, as GMB does not bear the risk of volatile natural gas prices as it buys and sells natural gas at regulated prices. As such, further growth in GMB’s sales volume would further improve its economies of scale given that other costs are largely fixed administrative costs.

In February 2012, GMB signed a New Gas Supply Agreement (NGSA) with Petronas whereby effective from 1 January 2013, the maximum limit for GMB to supply to its customers individually will increase from 2 MMScfd to 5 MMScfd. The NGSA has a 10-year tenure with an option to extend for an additional 5 years. In addition, GMB also supplies LPG to consumers in Peninsular Malaysia.

Strong cash pile, 100% dividend payout for FY12. Management indicated that it will spend RM140-RM150m in FY12 for the expansion of GMB’s Natural Gas Distribution System and RM40m p.a. in both FY13 and FY14 for maintenance purposes. We think that it is possible for CAPEX to be funded internally, judging from the group’s huge cash pile of RM327m and retained earnings of RM360m as of Dec 2011. Besides, GMB is also committed to paying out 100% of its FY12 net earnings as dividends and it is targeting a minimum payout ratio of 75% from FY13 onwards.

Source: TA Securities, OSK Research, RHB Research Institute

OSK Strategy and Outlook (Dec 2011)

Essentially, with the uncertainties in Europe continuing amid a potential global slowdown in the economy, we will continue to see market volatility in the next few months. As such, we continue to advise investors to be patient and focus on Defensive counters, while looking out for opportunities to Trade. We continue to advocate Buying into Weakness when the KLCI falls towards the 1,300-pt level, focusing on Banks, O&G and Construction stocks while we advocate Selling into Strength on the same three sectors when the market rallies towards 1,500 pts.

Festive Cheer in December?

While we remain fairly defensive over the mid term, December may still be a bright spot amid the gloom. There is still a possibility of the traditional year-end rally and the just announced joint effort by various central banks, including the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, the Swiss National Bank and the Bank of Canada to provide liquidity may just convince markets that there will indeed be a coordinated global effort to tackle the sovereign debt woes.

These central banks will be reducing interest rates on dollar liquidity swaps by 50 basis points. While we doubt that this will be the magic pill for Europe and the world, there may just be enough optimism and hope left in December to see markets rise towards the year end. As such, we see a possibility that the KLCI may still rise to end the year in positive territory, close to our 1,533-pt year-end target, although ultimately economic woes in Europe should drag it down towards our 1,466-pt 2012 Fair Value.

Asian governments also getting into the act. The efforts by central banks is also being supported by Asian countries with the Chinese government cutting reserve ratios for its banks, while Thailand announced its first interest rate cut since August 2009. As such, there could also be a regional boost to support the global effort.

OSK Stock Picks for December 2011

Throwing in some cyclical names in December

Given our view that the KLCI may possibly rise in December with the coordinated efforts by central banks worldwide to put on a united front (at least till the end of 2011), we introduce more cyclical names into our Top Buy list, such as Maybank (replacing Axiata that has done very well) and Dialog (replacing the ever defensive KPJ Healthcare).

Source: OSK Research Report

4 Interesting Questions on Budget 2012

Well, well, well... The newly announced Budget 2012 seems to be a very holistic one, which covers almost everyone (even the opposition MPs). In the budget, a total of RM232.8 billions was allocated to implement all Government development plans, which include the projects and programs under various plans, focusing on the well-being of the rakyat. But, there are a few interesting questions that Finance Malaysia would like to highlight here.

1) Is it too optimistic?

As we all know, the external environment is becoming more challenging once again due to slowdown in US, Europe and Japan (if not double-dip recession). This would definitely impact Malaysia as manufacturing sector still playing a crucial role in our country's growth. While IMF is revising downward the global growth next year, our Government is projecting a 5 - 5.5% growth this year, and 5 - 6% for 2012. I think we should be very happy if Malaysia can grow more than 4.5% for 2011 and 2012.

2) Budget Deficit to come down?

Taking into account the estimated revenue and expenditure, the Federal Government deficit in 2012 is expected to improve to 4.7% of GDP compared with 5.4% in 2011. As we all know, Petronas is the main contributor to Government's revenue, which is heavily relies on crude oil prices. How much is the estimated price Government based on 2012? It does not stated. Of course, it should be lower than current year. Am I correct?

3) Construction sector to be one of the main growth engine?

By setting a 7% growth forecast for Construction sector next year, is it too optimistic (yet again)? Given the current state of delayed tendering process, land acquisition dispute and change of project owners (MRT project), I doubt the execution part of the beautifully layout projects. Do remember that Hong Kong and Singapore takes more than 5 years just for planning for their MRT projects. And, if we can kick-start so soon, sure Malaysia Boleh!!!

4) Is it really Rakyat-centric?

Just as rakyat coping with high living cost, especially in urban areas, there is some relieves after the Government's latest various incentives and rebates. Subsidies on some of the basic food items were continued. Concurrently, our MPs also have higher allowance. This seems like a win-win situation. However, would the Government forgot about another very important item - petrol? As promised earlier, our petrol prices are adjusted according to market price. Judging from the fallen crude oil prices lately, why Government still not yet lower petrol prices? I believe this is definitely a better and more effective way to help rakyat.

Oil & Gas: Why Malaysia is different? (21 Aug 2011)

With oil prices hovering around USD80-85 per barrel currently, what is the outlook for Malaysia oil & gas (O&G) industry? Dubbed as "Black Gold", crude oil is one of investors favorite asset classes, which is highly volatile. Here, we examined the implications of lower oil prices, current scenario of the industry, and sustainability of oil price going forward. Feel free to share this out via our Facebook page (www.facebook.com/financemalaysia).

What drags down oil prices?

As most of you already know, US and Europe is main culprit for the sliding oil prices. High debt issues still lingering the global economy since 2008 global financial crisis. As such, the potential slowdown in the global economy as per investors perception, droves oil prices lower to current level.

What is the implications?

Actually, the correction of oil prices is driven by sentiment of traders, whom thinking that the demand is going ton be weak soon. What would you do if you're a CEO of Shell? Cutting back on oil exploration spending, re-evaluating the feasibility of planned projects, or even delaying some of them. At worst, you already seen it during 2008 financial crisis, where KNM battling for survival when a few of its clients delaying projects.

Oil prices outlook?

We believe the price of crude oil will trend lower in tandem with easing demand as industrial activities slow down. OSK had revising downwards their oil price forecasts for FY11 and FY12 to USD85-95/barrel and USD80-90/barrel respectively. Immediate resistance at USD90/barrel, while support at USD70/barrel.

Why Malaysia is different?

Unlike other countries, local O&G players are more dependent on our big boss - Petronas. Why? Because, Petronas is the one who is feeding the local players by dishing out marginal oil fields contracts and higher capex committed for next 10 years. No matter how global oil prices trend, Petronas is the growth engine of local players.

Target Price by OSK Research dated 19 Aug 2011

Buy or Sell?

Based on our reasons given above, we should Buy those companies which have strong relationship with Petronas (higher chances of getting contracts) and Sell those companies with excessive foreign contracts. This assumption is correct if oil prices are trending lower. As such, I picks Kencana (strong relationship and earnings) and Dialog (sound business with recurring income).

Petronas Carigali will be the Largest IPO ever?

Petronas Caragali Sdn Bhd, the exploration unit of Petroliam Nasional Bhd (Petronas), may be listed on Bursa Malaysia next year and it is expected to attract a large number of foreign funds.

"The mother of all initial public offerings (IPO) next year will be Petronas Carigali. We need companies like this to make Bursa attractive," said MIDF Amanah Investment Bank Bhd senior vice president and head of research, Zulkifli Hamzah.

 

Petronas officials could not be reached for comment. Zulkifli said analysts have been told by Bursa officials of a possible IPO for Petronas Carigali.

OSK Research head Chris Eng said Petronas Carigali should be the largest IPO ever in Malaysia, with a potential market value of close to RM150 billion.

This would eclipse current leader Malayan Banking Bhd, with a market value of RM62 billion as at yesterday.

PETRONAS E&P Business Quick Facts

• Malaysia’s hydrocarbon reserves stand at 20.18 billion barrels of oil equivalent (boe) with an average production of 1.66 million boe per day.
• PETRONAS’ total hydrocarbon reserves stand at 27.02 billion boe with an average production of 1.80 million boe per day.
• International reserves in Africa, Southeast Asia, the Middle East and Central Asia stand at 6.84 billion boe, comprising nearly a quarter of PETRONAS’ total reserves
• PETRONAS achieved a Reserves Replacement Ratio of 1.1 times in Malaysia and 4.1 times internationally, comparable with the industry average.
• Malaysia's first deepwater field, Kikeh, employing the first Truss Spar floating production unit outside the Gulf of Mexico came onstream in August 2007. The project achieved world-class performance with only five years elapsing between discovery and production.

Source: Business Times, Petronas website

Related Posts:
New Listing: Petronas Chemicals Group
New Listing: Malaysia Marine and Heavy Engineering (MMHE)

KNM – Good & Bad

Recently, KNM is coming back to the limelight in Bursa Malaysia. After the 4 to 1 share consolidation exercise, KNM is inching up since securing a contract worth RM680 million in Uzbekistan. Then, KNM held a briefing with research outfits indicating that the company was on the road to recovery after a hiatus one-and-a half year.

Good facts:

• Order book had grown to RM2.4 billion
  
• Tender book grown to RM16 billion
  
• Better capacity utilization
  
• Re-surging of crude oil price which touches USD90 per barrel now
  
• Malaysia government's intention to spur oil & gas sector
  
• Listing of Petronas' subsidiaries enhancing the viability of local listed companies
  
• Impending projects roll-out by Petronas soon
  
• Planning to tap into nuclear industry in Africa

IR. LEE SWEE ENG
Executive Chairman / Chief Executive Officer

Bad facts:

• Foreseeable losses in its operations in Brazil, Canada and Indonesia
  
• High debt levels with RM1 billion borrowings, against net cash balance of RM300 million
  
• Future cash flows constraint would jeopardize the company credit rating
  

Would BUY Calls from ECM, OSK, HwangDBS, and RHB gave you some confidence?

New Incentives Plan for Oil and Gas‏

The government has endorsed a new plan of tax incentives proposed by Petronas which will be incorporated in the Petroleum Income Tax Act, Prime Minister said today.

“By lowering risks and increasing the rewards for investment, this initiative will potentially lead to additional petroleum-generated revenue of more than RM50 billion for Malaysia over the next 20 years” he said when announcing 9 new developments and Entry Point Projects of the Economic Transformation Program.

Najib said there would be a notional trade-off of about RM8 billion in the form of revenue foregone from investment tax allowances, reduced tax and the export duty waiver for marginal fields.

The 5 new incentives are:-

1. Investment tax allowance of capital expenditure.
2. Reducing tax rate from 38% to 25% for marginal oil field development
3. Accelerated capital allowance of up to 5 years from 10 years.
4. Qualifying exploration expenditure transfer between non-contiguous petroleum agreements with the same partnership or sole proprietor
5. Waiver of export duty on oil produced and exported from marginal field development

Source: Bernama

Finance Malaysia (FM):-

"This is definitely a good perks for the oil & gas sector. The main objective here is to encourage deep water exploration, which is capital intensive and requiring more technical know-how."

"MHB which was listed recently could be the main beneficiary, judging by its expertise and available resources and technical in this field."

"Following the listing of MHB and Petronas Chemical Group, any good news announced would definitely excite the market. FM believe this is just one of the good news prior to the next general election, reportedly early next year".

New Listing: Petronas Chemicals Group

After the successful listing of MMHE, Petronas is going ahead with the listing of another subsidiary - Petronas Chemicals Group Bhd (PCG). The IPO, which could raise as much as RM13.02bn (US$4.2bn), would be the largest in Southeast Asia, according to term sheet.

Below is the summary of the IPO:

• PCG is one of the leading integrated petrochemicals producers in Southeast Asia region, with 45% of revenue derived locally.
• Better profit margin in rising crude oil environment as prices of raw material was supplied by Petronas.
• The management has earmarked to 50% payout of its earnings, which translates to a dividend yield of about 4%.

Valuations...

At retail price of RM5.05, the historical price-earnings ratio (PER) works out to be about 16 times.

Upon listing...

• EPF and Kumplan Wang Persaraan will be cornerstone investors.
• To expand its business and synergistic-growth acquisitions for the next 5 years.
• To consolidate its petrochemicals activities to increase the efficiency and profitability of its operations.
• To expand its production capacity via plans to develop a Greenfield ammonia and urea production facility in Sabah

Top 5 KLCI stock?

With market cap of around RM40bn, PCG is set to be among top 5 stocks on KL market. Thus, register as a member of KLCI, right behind CIMB, Maybank, Sime Darby and Public Bank.

Conclusion:

Given the lukewarm respond to MMHE listing, PCG will set to repeat the spectacular debut listing. Undeniably, this is good BUY (if you can get it). However, I do not view this as an trading stocks given its mere 4% retail portion.

New Listing: Malaysia Marine and Heavy Engineering (MMHE)

MMHE is a wholly-owned subsidiary of MISC, which is 65% owned by Petronas. It has two main divisions namely engineering and construction (E&C), and marine conversion and marine repair. Its two fabrication yards were in Pasir Gudang (Johor) and Kiyanly (Turkmenistan).

Being one of the 7 licensed offshore fabricators in Malaysia, MMHE tops both in terms of annual tonnage capacity and market share, mainly because backed by Petronas. Other fabricators were Sime Darby, Kencana, Boustead Heavy Industries, Brooke Dockyard, Ramunia and Oilfab.

Meanwhile, its marine conversion business could expect more demand on its floating production system, driven by increased developments in deepwater oil and gas fields. In comparison, installation of fixed structures is not economical in water depths over 300m, thus, giving floating production an advantage.

Key investment points:

1. Almost guaranteed jobs from Petronas.
2. International opportunities and technical know-how enhanced by strategic tie-up.
3. Exposure to Caspian Sea's oil and gas projects with Turkmenistan yard.

Is MMHE a good investment?
Target price set by RHB and OSK is RM4.00 and RM4.54 respectively...