PP 7767/09/2010(025354)

26 July 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Upda te

26 July 2010
MARKET DATELINE

MISC Share Price

Fair Value
:
:
RM8.77
RM8.07
Divulging More Details On MMHE’s Listing Recom : Underperform
(Maintained)

Table 1 : Investment Statistics (MISC; Code: 3816) Bloomberg: MISF MK

Net Net
FYE Turnover Profit# EPS# Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Mar (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2010 13,775.1 703.3 18.2 (51.8) 48.1 - (111.3) 1.7 2.9 0.2 4.0
2011f 14,474.2 1,473.4 33.0 81.2 26.6 37.0 203.1 1.7 6.3 0.3 4.0
2012f 15,118.8 1,638.5 36.7 11.2 23.9 48.0 70.2 1.7 6.9 0.3 4.0
2013f 15,749.8 1,959.9 43.9 19.6 20.0 48.0 40.0 1.6 8.2 0.3 4.0
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC #Excluding EI * Consensus Based On IBES
E i

♦ 1.6bn share base for MMHE. Upon listing, Malaysia Marine & Heavy
Issued Capital (m shares) 4,463.8
Engineering (MMHE) will have a share base of 1.6bn shares, of which MISC
Market Cap (RMm) 39,147.5
will retain 1.19bn shares or 74.5%. The initial public offering (IPO) will Daily Trading Vol (m shs) 0.6
entail a public issue of 262m new MMHE shares and an offer for sale by 52wk Price Range (RM) 7.80-9.00
MISC of 146m vendor shares. Major Shareholders: (%)
♦ A big letdown to MISC’s minority shareholders. Given that only 24m Petronas 62.7
MMHE shares will be offered to MISC’s minority shareholders, the exercise EPF 11.0
PNB 8.4
appears to have turned out to be a big letdown to MISC’s minority
shareholders. The offer made to MISC’s minority shareholders will be FYE Mar FY11 FY12 FY13
effected via a “restricted ballot”. EPS Revision (%) - - -
♦ We value MMHE at RM4.8bn. We value MMHE in its entirety at RM4.8bn Var to Cons (%) -11 -24 -9
based on our FY03/12 net profit forecast of RM300.5m and a 1-year forward
PE Band Chart
target PER of 16x. This translates to an issue price of about RM3 per share.
Based on our assumed issue price of RM3 per share, MISC will raise a total
of RM1.2bn from the exercise. Ceteris paribus, MISC’s net debt and gearing PER = 29x
will decline from RM4.9bn and 0.21x as at 31 Mar 2010 to RM3.7bn and PER = 22x
PER = 15x
0.16x after the exercise.
♦ We are neutral on the exercise. All in, we are neutral on the exercise.
To begin with, we do not believe the listing of MMHE is a pure commercial
decision. This is because based on the current high valuations for MISC,
the market effectively has already accorded a fair valuation to MMHE as a Relative Performance To FBM KLCI
100% privately owned unit of MISC with a 1-year forward PER of in excess
of 16x.
FBM KLCI
♦ Forecasts. Maintained pending the completion of the exercise, expected
by 4Q2010.
♦ Risks to our view. The risks include: (1) An earlier-than-expected MISC
recovery in the shipping sector; and (2) Lower-than-expected bunker cost.
♦ Maintain Underperform. The performance of MISC’s petroleum, chemical
and container shipping segments will continue to be weighed down by the
subdued freight rates and volumes over the next 1-2 years. This eclipses
MISC’s investment case based on the steady income stream from its LNG
division and high growth at its offshore & engineering businesses. Not
Joshua CY Ng
helping either, is the big letdown to MISC’s minority shareholders from the (603) 92802151
much anticipated listing of MMHE with only a faction of the new MMHE joshuang@rhb.com.my
shares being offered to them based on a “restricted ballot” basis. Indicative
fair value is RM8.07 based on “sum of parts”.

Please read important disclosures at the end of this report.

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 26 July 2010

Divulging More Details On MMHE’s Listing

♦ Pricing not disclosed, still. MISC has divulged more details with regards to the proposed listing of its wholly-
owned oil & gas heavy engineering division, Malaysia Marine & Heavy Engineering (MMHE), but fallen short of
providing any indication on pricing and valuations. Upon listing, MMHE will have a share base of 1.6bn shares, of
which MISC will retain 1.19bn shares or 74.5%. The initial public offering (IPO) will entail a public issue of 262m
new MMHE shares and an offer for sale by MISC of 146m vendor shares (see Table 2 for allocation).

Table 2: IPO Allocation

Offering No. of shares % of Investor(s) No. of shares % of
(m) share base (m) share base
Public Issue 262.0 16.4 Bumi institutions/MITI-approved investors 184.0 11.5
MISC minority shareholders (via restricted ballot) 24.0 1.5
Malaysian public (Bumi) 16.0 1.0
Malaysian (non-Bumi) 16.0 1.0
Directors & employees of MISC/MMHE 22.0 1.4
Sub-total 262.0 16.4 262.0 16.4

Offer for sale 146.0 9.1 Institutional investors 146.0 9.1

Total 408.0 25.5 408.0 25.5
Source: MISC

♦ A big letdown to MISC’s minority shareholders. Given that only 24m MMHE shares will be offered to MISC’s
minority shareholders (translating to prima facie 5.4 MMHE shares for every 1,000 MISC shares held), the
exercise appears to have turned out to be a big letdown to MISC’s minority shareholders. Also, given the small
allocation, the offer made to MISC’s minority shareholders will be effected via a “restricted ballot” (not defined in
the announcement, but we suspect MISC’s minority shareholders will be given “coloured” application forms, to be
submitted with bank drafts, and balloted among other “coloured-form” applications). Assuming an MISC’s
minority shareholder is unsuccessful in the “restricted ballot” for MMHE shares, he or she will effectively end up
with only a 74.5% stake of this prize asset indirectly via MISC, vis-à-vis 100% previously.

♦ We value MMHE at RM4.8bn. We value MMHE in its entirety at RM4.8bn based on our FY03/12 net profit
forecast (adjusted for interest savings from public issue proceeds) of RM300.5m (see Table 3) and a 1-year
forward target PER of 16x, at the upper end of our benchmark 1-year forward target PER band for the oil & gas
sector to reflect MMHE’s strong fundamentals and ultimate controlling shareholder, i.e. Petronas. This translates
to an issue price of about RM3 per share (FY03/12 EPS of 18.8sen x 16). Based on our assumed issue price of
RM3 per share, MISC will raise a total of RM1.2bn from the exercise, of which RM438m (offer for sale) will go
directly into MISC’s coffers while RM786m (public issue) into MMHE’s coffers. As MISC will continue to
consolidate MMHE’s accounts after the exercise (as MISC still owns more than 50% of MMHE), ceteris paribus,
MISC’s net debt and gearing will decline from RM4.9bn and 0.21x as at 31 Mar 2010 to RM3.7bn and 0.16x.
MMHE will utilise the public issue proceeds to finance/part finance: (1) Its RM2.7bn yard optimisation programme
in Pasir Gudang, Johor, covering 2006-2014 (of which RM548m had already been spent up until 30 Jun 2010);
Acquisition of equipment in Turkmenistan; and (3) The listing expenses.

Table 3: MMHE’s Financial Performance

FY Mar (RMm) 2008 2009 2010 2011F* 2012F*
Turnover 1,741.9 4,021.1 6,147.0 4,019.9** 4,209.0**
PBT 235.9 349.0 377.2 361.8 400.7@
Net profit 194.6 282.2 284.1 271.3 300.5@
EPS (sen)^ 12.2 17.6 17.8 17.0 18.8@
*RHBRI’s forecasts **Numbers appear in MISC’s P&L, after inter-co elimination
^Pro-forma, based on enlarged share base of 1.6bn shares @Adjusted for interest savings from public issue proceeds
Source: MISC, RHBRI

♦ 1.9% EPS dilution, 9.1sen/share gains. Based on our assumed issue price of RM3 per share, we estimate
that MISC will book in RM405m one-off gains from the offer for sale of 146m MMHE shares, translating to 9.1sen
per MISC share (based on MISC’s original investment cost of RM303.8m in MMHE). Excluding the one-off gains,
the exercise will dilute MISC’s FY03/12 EPS by 1.9% (see Table 4).

♦ We are neutral on the exercise. All in, we are neutral on the exercise. To begin with, we do not believe the
listing of MMHE is a pure commercial decision. This is because based on the current high valuations for MISC, the
market effectively has already accorded a fair valuation to MMHE as a 100% privately owned unit of MISC with a
1-year forward PER of in excess of 16x.

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Table 4: Impact On FY03/12 EPS

FY03/12 (RMm) Before After
Net Profit 1,638.5 1,638.5
Interest savings* 0.0 45.9
MMHE's MI 0.0 -76.6
Adjusted Net Profit 1,638.5 1,607.8
Share Capital (m shares) 4,463.8 4,463.8
EPS (sen) 36.7 36.0
Chg (%) - -1.9
*Av interest cost and tax rate of 5% and 25%

♦ Forecasts. Maintained pending the completion of the exercise, expected by 4Q2010.

♦ Risks to our view. The risks include: (1) An earlier-than-expected recovery in the shipping sector; and (2)
Lower-than-expected bunker cost.

♦ Maintain Underperform. The performance of MISC’s petroleum, chemical and container shipping segments will
continue to be weighed down by the subdued freight rates and volumes over the next 1-2 years on the back of
the double-whammy of overcapacity and slow demand on the back of a mild recovery in the global economy.
This eclipses MISC’s investment case based on the steady income stream from its LNG division and high growth
at its offshore & engineering businesses. Not helping either, is the big letdown to MISC’s minority shareholders
from the much anticipated listing of MMHE with only a faction of the new MMHE shares being offered to them
based on a “restricted ballot” basis. Indicative fair value is RM8.07 based on “sum of parts” (see Table 5).

Table 5: Sum-Of-Parts Valuation For MISC

RMm RM/share Basis
LNG 16,467.2 3.69 DCF, WACC of 6.47%
Petroleum 7,989.1 1.79 1.5x book value
Chemical 2,583.4 0.58 1.5x book value
Liner 1,789.6 0.40 1.5x book value
Oil & Gas 12,109.0 2.71 16x 1-year forward earnings
40,938.3 9.17
Net debt (4,922.6) -1.10 As at 31 Mar 10
Fair value 36,015.7 8.07

Table 6: Earnings Forecasts Table 7: Forecast Assumptions

FYE Mar (RMm) FY10a FY11F FY12F FY13F FYE Mar FY11F FY12F FY13F

Turnover 13,775.1 14,474.2 15,118.8 15,749.8 LNG fleet (units) 29 29 29

Turnover growth (%) (12.7) 5.1 4.5 4.2 Petroleum tanker fleet (units) 67 75 78

EBITDA 2,512.6 3,304.5 3,592.4 4,019.4

EBITDA margin (%) 18.2 22.8 23.8 25.5

Depreciation (1,246.0) (1,270.9) (1,296.3) (1,322.3)

Net Interest (366.9) (353.5) (430.6) (486.4)
Associates 33.4 35.0 35.0 35.0
EI (21.2) 0.0 0.0 0.0

Pretax Profit 911.9 1,715.1 1,900.5 2,245.7

Tax (89.7) (72.4) (75.8) (81.0)
PAT 822.2 1,642.7 1,824.7 2,164.7
Minorities (140.2) (169.3) (186.2) (204.9)
Net Profit 682.0 1,473.4 1,638.5 1,959.9
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

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Industry/Sector Ratings

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Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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