Puncak’s free O&G business

by **Cals** Fri 13 Jun 2014, 02:36

Business & Markets 2014

Written by Hong Leong Investment Bank Research

Thursday, 12 June 2014 10:13

Puncak Niaga Holdings Bhd
(June 11, RM3.31)
Not rated: Puncak Niaga announced that it and Kumpulan Darul Ehsan Bhd (KDEB) had reached an agreement on the proposed acquisition of 100% equity in Puncak Niaga Sdn Bhd (PNSB) and 70% equity in Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) for a net cash consideration of RM1,555.3 million. The proposed takeover shall include the takeover of all assets and corresponding liabilities of PNSB in relation to its concession business only. The deal is subject to due diligence and legal documentation to be signed between the parties.

The RM1.56 billion net offer is the equity value for Puncak’s shareholders as all assets and liabilities of PNSB will be assumed by KDEB. This is above current market capitalisation of RM1.3 billion. Puncak also owns 100% of GOM Resources which provides offshore transport and installation services with over 20 years’ experience. The current share price has implied zero value to its oil and gas (O&G) business which made an average of RM60 million to RM80 million profit after tax (PAT) per annum.

GOM Resources was awarded a transport and installation (T&I) Package B contract by Petroliam Nasional Bhd (Petronas) with an estimated value of RM1.8 billion for a duration of three years (with an option to extend for another year). The weakness for the O&G quarterly result is mainly due to the delay of commencement of the Petronas T&I job to April this year with higher start-up costs which were also experienced by other service providers.

We expect to see full contribution in financial year 2015 (FY15). With assumption of a net margin of 10%, we expect it to generate RM60 million in PAT per annum. By pegging at 12 times price-earnings ratio (PER) — conservative compared with peers at 14 times target PER, the O&G business should at least fetch value at RM720 million.

Puncak set up an exploration and production (E&P) division in 2012 to look for opportunities for marginal and brownfields. Given the huge war chest of more than RM1.5 billion after the resolution of the water deal, we do not rule out any possibility that Puncak will use part of the proceeds to invest in the O&G division which will provide upside to our sum-of-parts (SOP) valuation.

After the completion of takeover of PNSB and Syabas, Puncak expects to receive RM1.56 billion cash. By using an SOP valuation, we arrive at a fair value of RM4.87 which provides a 56% of potential upside from the current share price after taking into account the cash proceeds of RM1.56 billion from the disposal of water business, O&G business with a valuation of RM720 million, enlarged share base from conversion of warrants and sukuk and holding company cash. We also do not rule out any possibilities of potential special dividend after the completion of the takeover deal. — Hong Leong Investment Bank Research, June 11

[You must be registered and logged in to see this image.]

[size]

This article first appeared in The Edge Financial Daily, on June 12, 2014.[/size]