Malaysian O&G - RAPID delayed again (HwangDBS)

According to Reuters, PETRONAS will delay its RM60bn Refinery and Petrochemical Integrated
Development (RAPID) in Pengerang with commissioning expected in 2018 (vs 2016 initially). This is the
second time that PETRONAS pushed back the start-up of RAPID due to issues with the water supply as well as relocation of existing villages and graves in Pengerang.

The RAPID refinery is now scheduled to be ready for start-up in 4Q17 while the remaining plants within the
development will be commissioned in 2018. PETRONAS has so far roped in Italy’s Versalis, Japan’s Itochu,
Thailand’s PTT Global Chemical to participate in RAPID. Meanwhile, Taiwan’s Chinese Petroleum Corp was reported to have scrapped its investment plan in Pengerang, citing the radical change in the industrial
structure of naphtha cracking.

The delay is not totally unexpected given the complications of this massive project. However, it is likely to
have a negative impact on the local O&G players as the project was expected to create massive spill-over
effects with the various jobs to be awarded. Dialog (Hold, RM3.20 TP) is currently the existing player with
exposure to Pengerang by virtue of its deepwater independent terminal. The first phase is set to be
operational by 1Q14 but we believe that the second phase may be delayed as well as the tank capacity
was dedicated for the RAPID project.

Petronas Chemicals’ (Hold, RM6.15 TP) growth prospects could be affected as it is likely to play a
substantial role in the petrochemical projects. Meanwhile, other players such as MMHE (Hold, RM3.30 TP), SapuraKencana (Buy, RM4.85 TP), Pantech (Not rated) and Muhibbah (Buy, RM3.10 TP) may have to wait a little longer before PETRONAS starts to dish out contracts.

Daya Materials buys into Reach Energy (Jupiter)

Daya Materials Bhd, will pay RM8m for a stake in Reach Energy Bhd, a special purpose acquisition company (SPAC) headed by its director Shahul Hamid Mohd Ismail. Daya Materials will subscribe to 533,334 redeemable convertible preference shares in Reach Energy at RM4.50 each and acquire 12.4m shares in the shell company at 45 sen each. The subscription will enable Daya Materials to invest in Reach Energy - oil and gas exploration and production company once it completes it qualifying acquisition. Reach Energy has yet to obtain the Securities Commission’s (SC) approval for its listing. The shares subscription deal is conditional upon Reach Energy having obtained the relevant written approval of the SC for the proposed IPO.

Time to accumulate MAS, says Maybank Research (Star)

Malaysian Airline’s second quarter results, set to be released on July 31, are expected to still leave it in the red but should show strong improvements, said Maybank Research, as it upgrades the national carrier to Buy from Hold.

At 35 sen, its fair valuation remains unchanged, however, for the stock currently trading at around 31 sen.

Maybank Research said it was estimating core loss for the quarter at RM34.6mil against RM348.7mil for the corresponding quarter from the previous year. That would make for a year-on-year improvement of more than 78% and above 90% quarter-on-quarter.

“This strong improvement is due to higher load factors and a lower fuel price of US$124.4 per barrel. MAS should be profitable in the second of half of the year as it enters into its seasonally strong quarters of 3Q (strongest) and 4Q (second strongest) and benefits from lower operating cost from new aircraft induction,” it stated.

Operating statistics for the second quarter is remarkable, it added.

The airline’s passenger load factor surged by 6.6 percentage points from the previous year to 80.4%, while its cargo load factor increased by 1.5 percentage points to 72.8%. The overall load factor (passenger and cargo) was up by 4.9 percentage point to 77.9%.

“This is MAS’s best performance since inception,” the research house noted.

However, MAS’s second quarter yields are expected to decline by 4.5% year-on-year based on observation of other regional peers’ results and observation of published ticket fares. This is within expectation because MAS is embarking on a load-active, yield-passive strategy.

Now that the its loads target has been achieved, the national carrier should now focus on overturning its yield decline trend, commented Maybank Research, adding that it was time to accumulate the stock.

“The stock has plummeted by 23% since our Sell call at end of May. We think this is overdone as MAS’s current market capitalisation of RM5.1bil is roughly equal to its cash pile. We forecast MAS will be profitable in the second half and generate positive cash flow," it concluded.

Hiap Teck Venture - Outlook Brightens (OSK)

Fair Value : MYR 0.66 

We  are  lifting  our  forecasts  for  Hiap  Teck  Venture  (HTVB)’s FY13F-FY15F  earnings  by  9.5%,  12.0%,  and  10.1%  respectively  owing  to improved earnings visibility.   Phase 1a of Eastern Steel’s blast furnace is  scheduled  to  be  completed  by  end-2013  and  commence  trial operation  by  Jan  2014.  Meaningful  earnings  from  Eastern  Steel  should be  seen  in  FY15F.  Maintain  Trading  BUY,  with  MYR0.66  FV,  based  on 0.5x FY14F P/ BV. 

  Earnings  visibility  improves.  We  met  up  with  HTVB's  Management recently  and  believe  that  the  Group’s earnings  outlook  has  improved, although  the  steel  industry  remains  challenging  and  demand  for  its products has yet to pick up strongly.

  Solidifying  existing  business. HTVB’s current strategy is to solidify its existing  business  divisions  while waiting for the Eastern Steel’s blast furnace  plant  to contribute  in FY14-FY15.  The  utilisation  rate  of its pipe manufacturing plant increased from 36% in FY12 to 40% currently amid a  pick-up  in  demand,  with  the  division  reporting  positive  earnings. Meanwhile,  the  sales  volume  for  its  trading  division  has  also  improved although this was largely offset by depressed steel prices due to China’s steel  dumping.  HTVB’s  scaffolding  division  remains  stable  and contributed  positively  to  the  Group.  All  in  all,  sales  and  earnings improved y-o-y and we think HTVB would be able to close its FY13 (FYE July) with a decent growth y-o-y. 

  API pipes could be an upside surprise. HTVB is a licensed American Petroleum  Institute  (API)  pipe  producer.  However,  sales  did  not  meet expectations  as  the  Group  could  not  price  the  API  pipes  competitively due  to  high  production  costs.  Currently,  HTVB  has  stopped  producing and exporting  API  pipes, but  the US Government’s  recent anti-dumping duties  against  certain  pipe  makers  may  give  HTVB  an  opportunity  to revive  this segment.  Nonetheless,  HTVB  would  not  rush  into  expanding this segment and will resume production only when the price is right. 

Tan increases stake in Flonic (Star)

The granddaughter of the late Tan Sri Tan Yuet Foh, the founder of Tan Chong Motors Holdings Bhd, has emerged as a substantial shareholder in manufacturer of critical and precision cleaning systems Flonic Hi-Tech Bhd, suggesting that some exciting changes may be in store for the firm.

Tan Siew Ching, 43, had previously already held a small stake in the firm.

She had on July 15 bought 10 million shares at 10 sen each and another 7 million shares at 10.5 sen each a day later, increasing her stake in the firm to a substantial 6.72% , according to a filing with Bursa Malaysia.

Notably, Tan’s husband, Chua Wye Man, is the executive chairman of Flonic. He has a 1.86% stake in the company.

Chua, much like Tan, is also linked to the family of a high-profile automotive firm – namely the Cycle & Carriage Bintang group which is a dealer for the Mercedes Benz brand in Malaysia.

He was appointed a director of Flonic in June last year and re-designated to executive director and executive chairman later in the year.

Industry observers believe that Flonic could potentially see more high-profile shareholders coming on board with Tan’s stake increase paving the way.

Currently, the largest shareholders are one Ong Say Kiat with a 8.60% stake, followed by Novatige Sdn Bhd, which holds a 7.72% stake.

Tan is the third largest shareholder, according to Bloomberg data.

Recall in February, Tan emerged as a substantial shareholder in plastics manufacturer IRM Group Bhd. At last look, she has a 13.83% stake in the firm.

In January, Flonic proposed to buy a 30% stake in Jiwa Holdings Sdn Bhd, a group mainly involved in interior design and furnishing projects – for RM3.75mil to be settled in cash.

In its announcement to Bursa, it said the future earnings from the Jiwa Group were supported by a profit guarantee as well as the positive prospects of its (Jiwa’s) business comprising project management, interior fit out, manufacturing and trading in wood furniture. “As such, the demand for its services and products is expected to grow steadily in line with the growth of the interior design industry in Malaysia.”

JCY expects return to profitability by 2HFY13 (CIMB)

Hard disk drive component maker JCY International Bhd expects sales and earnings to pick up in the second half of the year to at least "break even" for the 2013 financial year. FY14 looks brighter for JCY to manufacture the new 5mm hybrid drives which will increase production by 20%. Although the group sees a return to profitability by 2HFY13 such gains may be offset by inventory and wage adjustments - the latter due to the implementation of the minimum wage policy in the country. (Financial Daily)

Perisai - Contract extension for Enterprise 3 (HwangDBS)

Perisai Petroleum; Buy; RM1.57
Price Target: RM1.80; PPT MK

Contract extension for Enterprise 3
Perisai announced that its derrick lay barge, Enterprise 3 has been awarded a contract extension with a
daily charter rate of US$60k by SapuraKencana Petroleum. The duration of the charter includes a fixed
term from 1 Jul 2013 to 15 Aug 2013 and thereafter on a daily charter basis subject to a notice period of
21 days to precede the end of the charter.

To recap, Enterprise 3 has been chartered out to SapuraKencana on a bareboat basis since 2008. It has
come to an expiry in Jun13 but SapuraKencana continues to engage the services of Enterprise 3. The daily
charter rate latest (DCR) of this contract extension is comparable to its earlier long-term contract’s US$63k.
We are optimistic that Enterprise 3 will remain utilised for the rest of the year which has been incorporated
into our earnings forecast.

We reiterate our Buy rating and RM1.80 TP based on 15x FY14 EPS. We continue to like Perisai for its
strong earnings visibility which is supported by long-term charters for its key assets. A key re-rating catalyst
would be Perisai securing a huge drilling contract to enhance earnings visibility. The appointment of KCA
DEUTAG as the rig contractor in Nov12 suggests that it may be on track to secure a drilling contract.

TH Heavy Engineering in focus on expectations of licence renewal (STAR)

Reuters reported earlier that THHE was understood to be looking to reactivate its oil and gas crane manufacturing licence and has been in talks Petroliam Nasional Bhd to facilitate this.

O&G Works Sdn Bhd, which is a wholly owned subsidiary of THHE, had an offshore and marine crane manufacturing licence from Petronas which was suspended when the company fell into the cash strapped Practice Note 17 category back in February 2010.

Reuters reported there had been talks between the two parties and that THHE should get the licence reactivated.

Ahmad Zaki - Lands MYR171.5m Campus Job (RHB)

We maintain our Buy call, forecasts and fair value of MYR1.47 following the award of a MYR171.5m campus building job.  On improved sentiment post the 13th general election, we believe the buying spree will eventually spill over to small-cap construction stocks from big-cap ones.  We also like Ahmad Zaki for its defensive non-construction businesses such as bunkering and plantation.

♦  First key job in FY13.  Ahmad Zaki has secured a MYR171.5m design and build contract for students accommodation complex at Universiti Teknologi Malaysia in Kuala Lumpur.  This is the very first key contract Ahmad Zaki has secured in FY13, boosting its outstanding construction orderbook by 10% to MYR2.2bn (see Figure 2) from RM2bn.  Assuming an EBIT margin of 5-7%, the contract will fetch RM8.6-12.0m EBIT over the contract period ending Jul 2016.  We are positive on the latest development.

♦  Forecasts.   Maintained as we have already assumed Ahmad Zaki to secure MYR500m worth of new contracts in FY13. ♦  A defensive side that is under-appreciated.  The company is beginning to see the fruit of its labour of having grown some defensive non-construction businesses, i.e. bunkering operation at Kemaman Supply Base, oil palm plantation in West Kalimantan, and the design, build, lease, maintain & transfer (DBLMT) of a teaching hospital for the International Islamic University Malaysia (IIUM) in Kuantan under the Private Finance Initiative (PFI) (see  Figure 1 for more details on these three businesses).  With their defensive, recurring and less cyclical incomes, these three businesses will materially boost the sustainability, visibility and resilience of Ahmad Zaki’s earnings. 

♦  Maintain BUY.  The fundamentals of the construction sector are strong backed by on-going and shovel-ready mega infrastructure, property and oil & gas projects.  We also like Ahmad Zaki for its defensive non-construction businesses such as bunkering and plantation.  Fair value is MYR1.47 based on “sum of parts”

Sumatec sets RM86m profit target (CIMB)

Sumatec Resources Bhd is already on the hunt for new oilfields in a bid to become a large independent oil and gas (O&G) firm by 2017, defined as having proved reserves of 200 million barrels of oil equivalent (boe). This means it has five years to scale up its current proved reserves of just 22 million boe by 10 times.

“We would need new assets on board by late-2015 to arrest the drop inour reserves. The fields could be in Kazakhstan or anywhere else that fits the portfolio, although it would make sense to acquire in Kazakhstan because we already have infrastructure here,” chief executive officer Chris Dalton

 The Shelly oilfields, which Sumatec has the rights to develop, do not have any existing gas processing facilities. Oil produced from its Rakushechnoye assets in Kazakhstan, a 354-sq-km concession area with some 332 million boe of 3P (proved, probable, possible) reserves, is currently transported by trucks and then shipped to Baku, Azerbajian.

 The PN17 firm, previously a downstream service provider, was given a new lease of life after tycoon Tan Sri Halim Saad injected his Kazakh O&G business into the ailing Sumatec. Sumatec had last year signed a joint investment agreement (JIA) with two companies owned by Halim to develop the Shelly oilfields under a concession with the state that lasts till 2015.

 With the passing of its regularisation plan by shareholders at an EGM a few weeks ago, Sumatec expects to be debt-free come the final quarter of this year, and profitable by end-2013. It is also hoping to exit its PN17 status by the second quarter of next year. It has to show two consecutive quarters of profit in the final quarter of 2013 and the first quarter of 2014 to make the application to the regulators. Halim will also emerge as one of Sumatec’s largest shareholders with a 25% stake following the restructuring. (StarBiz)

Pantech - Buy On Share Price Weakness (RHB)

Fair Value : MYR 1.43

Pantech (PGHB) told Bursa Malaysia yesterday that the US Government may impose anti-dumping measures on welded stainless steel pipes from Malaysia, Vietnam and Thailand. We believe the impact to PGHB’s bottom-line will be muted as its stainless steel pipe division is small. If the market reacts negatively to this piece of news, we advise investors to BUY PGHB shares on any price weakness, with our MYR1.43 FV unchanged as the company’s growth pace remains intact.

A precautionary step. PGHB is exercising good corporate governance by warning its investors of the potential of such a negative outcome although the decision on the impending measures has yet to be made.

Minimal impact. We advise investors to stay calm as we believe that such a negative announcement may only make a minimal impact. From the announcement, it would seem that the company expects such curbs to have a less than 3% impact on its FY14F revenue. Although PGHB exports 30% of its 1k tonnes of stainless steel pipes to the US monthly, the impact is muted as stainless steel pipes make up under 10% of PGHB’s net profit. To mitigate the anticipated negative impact, PGHB has begun on a plan to increase the production of higher-margin stainless steel fittings by three-fold by the second half of FY14F. Nonetheless, as our forecast has not incorporated any contribution from its stainless steel division, we believe that the anticipated anti-dumping measures should not undermine our earnings estimates for PGHB.

Outlook remains bright. We believe PGHB’s outlook is still bright as its trading and carbon steel fittings manufacturing divisions are still stable. Its UK unit, Nautic Steel, is poised for stronger growth in FY14F as more capacity would be installed once the company acquires a new factory to widen its product range and in turn boost its profitability.

BUY on weakness, MYR1.43 FV. Should the market react negatively to the company’s announcement, we would advise investors to accumulate PGHB shares on price weakness as the company’s outlook is still robust. We maintain our BUY call on PGHB, with our FV unchanged at MYR1.43, pegged to a 13x FY14F P/E.

Handal ties up with Australian O&G player

Handal Resources Bhd is partnering with an Australian-listed MEO Australia Ltd as it is eyeing the lucrative risk service contracts from Petronas. Handal explained the collaboration is set to tap into MEO’s available expertise and to enhance its business opportunities into the related O&G ventures. Edge