Better liquidity from share sale

BUMI ARMADA BHD

By Maybank IB Research

Buy (maintain)

Target price: RM4.88

WE maintain our “buy” recommendation on Bumi Armada with a target price of RM4.88. Usaha Tegas did not pare down its stake in Bumi Armada last Friday.

Instead, the secondary share sale via a book building exercise came from four other individual shareholders. We do not know the reason for the sell-down by the respective parties but liquidity should improve from this transaction.

We remain positive on Bumi Armada's operating prospects. Our target price is based on sum-of-parts valuations.

The 293 million Bumi Armada shares sold represented 10% of its share base and were sold via a book building exercise last Friday from four individuals, whose shares were held under three companies: Wijaya Sinar and Karisma Mesra which collectively sold 284 million shares, and 9 million Ombak Damai shares.

According to Bursa Malaysia's past announcements on Bumi Armada's substantial shareholders' interests, the shareholder who transacted the 284 million block of shares is Farah Suhanah Ahmad Sarji.

The owners of the smaller 9 million block of shares are Datuk Abdul Farish Abd Rashid, Datuk Ahmad Fuad Md Ali and Datuk Seri Mahamad Fathil Mahmood.

The transaction last Friday did not relate to the Usaha Tegas block which is held under Objektif Bersatu Sdn Bhd. Objektif Bersatu remains the largest shareholder of Bumi Armada with a 42.4% stake.

After last Friday's transaction, we estimate that the four individuals still hold a combined 17.5% stake.

Although we do not know why the four individuals reduced their stakes in the company, we think that the sale last Friday may improve the stock's trading liquidity. This is dependent on who the 10% block was eventually sold to.

On a positive note, Bumi Armada's free float shares prior to last Friday's transaction was 30.1%, and this could rise to 40.1% post the share sale. While this sale has resulted in weakness in the share price last Friday, we do not think it is a sign of operating weakness.

We think that the fundamental aspects of its businesses are still intact.

DIALOG GROUP BHD

By Hwang-DBS Vickers Research

Buy (maintain)

Target price: RM2.95

Last Thursday, the first phase of the Pengerang deepwater terminal project was officiated by the Johor Mentri Besar Datuk Abdul Ghani Othman. The 150-acre reclamation is completed, with some land treatment work going on.

Construction for the project is set to start by June, and is on track for completion in December 2013. Construction of the tank terminal should start by mid-year as reclamation work is completed, but it is pending land treatment for certain areas. We understand that Dialog's long-term customers will absorb 80% of the 1.3 million cu m capacity of the project.

According to the management, the 1.3 million cu m storage capacity under the first phase can support up to five refineries.

Pengerang's sheltered harbour with 24m water depth makes it an ideal choice for a petrochemical hub, emulating the success of Rotterdam port. The terminal when commissioned by 2016 will support Petronas' RM60bil refinery and petrochemical integrated development (Rapid) project.

The management has earmarked 75 acres in Pengerang for fabrication, which is likely to capture the strong services demand for Rapid, leveraging on Dialog's integrated technical services, and also to provide oil and gas technical services to the up and coming petrochemical industry at Pengerang.

We are optimistic of Dialog's long-term prospects, as its tank terminal capacity will almost triple to 2.8 million cu m within three years.

The RM5bil Pengerang project, which is stretched over seven years is a major transformation for Dialog, and will drive earnings going forward. The recent share price weakness offers a good entry opportunity for keen investors.

Dialog's contractor for reclamation works is Japan-listed Penta-Ocean Construction Co Ltd, a renowned Japanese contractor that specialises in marine works and land reclamation. Some of its major contracts that had been completed include land reclamation at Jurong Island (Singapore), Marina Bay (Singapore), Singapore Changi Airport (Singapore) and Suez Canal (Egypt).

We understand reclamation works had been picking up pace since commencement in Oct 11 and the engineers are satisfied with the progress. We learnt that the first phase will mainly cater to import and export operations.

The management is very optimistic of long-term prospects for the Pengerang terminal because of the fact that it is a natural port, its close proximity to the international shipping lane and the ready market with established trading hubs in Singapore and Petronas' Rapid project.

AXIATA GROUP BHD

By OSK Research

Buy (maintain)

Target price: RM5.80

Axiata Group Bhd's 19.7% associate Idea Cellular in India reported a stronger 7% quarter-on-quarter increase in revenue for the fourth quarter ending Dec 31, 2011 (4QFY11) to 53.7 billion rupees from 50.3 billion rupees in the previous quarter.

This came on the back of higher minutes of usage and a jump in subscriber addition, while earnings before interest, tax, depreciation and amortisation (EBITDA) came in flat quarter-on-quarter.

Overall, financial year ending Dec 31, 2011 (FY12) earnings fell 20% due to higher 3G-related interest and amortisation expenses. The telecommunication's headline earnings grew 19% quarter-on-quarter as a result of the 21% quarter-on-quarter decline in interest expense.

As expected, regulatory issues hogged discussions. The company said it has 2.6 million active 3G subscribers as at end-March with an incremental average revenue per user of 91 rupees.

However, 3G revenue contribution is still insignificant as 3G users account for less than 3% of its total base. Idea's stable average revenue per minute of 0.42 rupees reflects the relatively stable competition in the market over the past few quarters. Its voice revenue expanded and estimated 6% quarter-on-quarter while non-voice revenue grew 11.1% quarter-on-quarter, making up 14.3% of service revenue versus 13.7% a quarter ago. When annualised, Idea's core earnings were in line with our projection.

On April 23, the Telecom Regulatory of India (TRAI) proposed a pan-Indian base price of 36.2 billion rupees (US$675mil) for each MHz of the new 1800 2G licences to be issued as part of the re-farming of the earlier cancelled licences. With the assumption that Idea bids for 5MHz of the spectrum that it lost in the nine operational circles, it would have to fork out 46 billion rupees (US$900mil).

TRAI's proposals have received widespread criticisms from mobile operators, which have protested in writing. In a strongly worded statement, the GSM Association said such a move is actually harmful to the development of the mobile sector as well as undermines any accompanying socioeconomic benefits. We view the proposals as regressive, with the potential to trigger a further outflow of foreign investments, coming on the heels of the controversial cancellation of the 2G licences in February. We expect TRAI to review its proposals in due course.

The Supreme Court of India has ruled that operators, which had their licences cancelled can still operate until Sept 7. This is in contrast with the previous ruling, which required the cessation of mobile operations by June for the affected circles.

While the negative newsflow from India creates negative sentiment on the stock, investors should be aware that Idea contributes less than 10% of Axiata's core earnings.

Excluding Idea's sum-of-parts, our fair value on Axiata drops to RM5.45. This is still above the current share price, implying that the market may have priced in greater regulatory risks for the group. We are keeping a “buy” recommendation for the stock pending the release of its 1QFY12 results next month.

We advise the more risk adverse investors to switch out to TM our other top pick for exposure to Malaysia telecommunications.

PERDANA PETROLEUM BHD

By CIMB Research

Trading buy (maintain)

Target price: RM0.85

We view favourably Perdana Petroleum Bhd's proposed sale of its 26.9% stake in its associate Petra Energy as Perdana lost control of the latter in the financial year ending Dec 31, 2009 (FY09).

The stake is valued at RM67mil, which could help Perdana trim its debt and return to the black. Therefore, we continue to rate Perdana a “trading buy” as we expect the sale of the stake to be a short-term catalyst for the stock.

Perdana is currently undertaking a restricted tender process for the proposed divestment of its entire 26.9% stake, which accounts for 57.7 million shares in Petra Energy. To obtain maximum value for the stake, the restricted tender is open to selected pre-qualified parties.

The announcement did not come to us as a surprise. The divestment is long overdue as Perdana lost control of Petra in FY09. The biggest shareholder in Petra is Shorefield Resources, which holds a 27.3% stake. Sarawak-based businessman Datuk Bustari Yusof owns Shorefield.

For the financial year ending Dec 31, 2011 (FY11), Petra turned in a 36% growth in net profit to RM3.5mil.

Last Friday, Petra closed at RM1.16, valuing Perdana's stake at RM67mil. However, as at Dec 31, 2011, Petra's net tangible asset (NTA) stood at RM1.52 per share, which suggests that Perdana's stake could fetch a higher price. Perdana's cost matches the NTA.

As at end-December 2011, Perdana's net gearing stood at 0.4 times. Assuming the sale of the 26.9% stake at Petra's last closing price of RM1.16, net gearing would fall to 0.3 times. However, should the stake be divested at Petra's NTA per share of RM1.52, Perdana's net gearing would drop to 0.25 time.

Investors should stay invested as proceeds from the divestment could help Perdana reduce its borrowings and return to profitability.

Although marine support remains the weakest segment in the oil and gas sector but the signs are pointing to further recovery this year. Perdana posted a core net loss of RM27mil in FY11, which is a big improvement on FY10's RM61mil loss