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Sunday, November 27, 2011

Analysts back SapCrest, Kencana merger

GREAT PARTNERS: This merger will also be a complementary and synergistic fit for the two businesses as SapCrest is Malaysia’s leading transport and installation provider while Kencana has demonstrated one of the best delivery records in offshore fabrication works, says AmResearch.

KUCHING: The merger of SapuraCrest Petroleum Bhd (SapCrest) and Kencana Petroleum Bhd (Kencana) is seen as a welcome move by analysts as this will create a full-fledged integrated oil and gas service provider – making it one of the big caps listed on Bursa Malaysia.

To recap, SapCrest and Kencana were offered on July 11, 2011 by Integral Key Sdn Bhd (a Mayban Ventures special purpose vehicle) to merge into one entity for a total consideration of RM11.85 billion.

The merger would need at least 75 per cent approval from shareholders in the annual general meeting, followed by approvals from creditors and authorities and the order of the High Court for the capital reduction. The exercise is aimed to complete in the first quarter of 2012.

The research arm of Kenanga Investment Bank Bhd (Kenanga Research) believed that attaining the 75 per cent shareholder approval was not critical as its current top three majority shareholders are holding about 72 per cent of stake.

Of the total of RM11.85 billion, RM5.98 billion would be for Kencana and RM5.87 billion for SapCrest, and RM10.01 billion of this would be satisfied by shares.

The remaining RM1.84 billion would be settled by cash, implying 18.5 times calendar year 2012 (CY12) price earnings ratio (PER).

The offer price for SapCrest is RM4.60 (RM3.91 will be paid in the new company’s shares and RM0.69 in cash payment) and Kencana is RM3.00 (RM2.51 in the new company’s share and RM0.49 in cash payment). The new entity’s share’s issue price would be RM2.00.

Upon completion of the merger exercise, the new company would be the largest integrated oil and gas service provider, with market cap of RM10 billion at a 15.5 times PER for CY12.

Assuming a fair valuation of 20 times, Kenanga saw an upside of approximately 29 per cent from its issue price of RM2.00 per share.

Net profit of the enlarged entity for CY12 could reach RM645 million, potentially making it the most profitable non-Petronas oil and gas company in Malaysia.

An integrated committee would be set up after both companies’ boards had accepted the offer. The crucial part of this exercise was who would take the lead in the enlarged company.

Kenanga Research believed that based on the new shareholder structure, SapCrest would be in the ‘driver’s seat’ of the new company. This was because SapCrest’s president Datuk Shahrill Shamsudin would own about 20 per cent stake in the new company while Kencana’s Datuk Mokhzani Mahathir would have about 16 per cent in the new company eventually.

While the cash distribution of RM1.8 billion could translate to an estimated combined net gearing of 0.3 times for the merged entities, AmResearch Sdn Bhd (AmResearch) remained positive about this development as it would create an oil and gas player with a substantial market capitalisation.

It would also be a complementary and synergistic fit for the two businesses as SapCrest is Malaysia’s leading transport and installation provider while Kencana had demonstrated one of the best delivery records in offshore fabrication works.

AmResearch also opined that it would lead to enhanced capabilities in securing larger sized packages from Petronas and multi-national oil and gas companies given the enlarged group’s integrated suite of services and stronger balance sheet.

The offer price of RM3.00 per share valued Kencana at CY12 19.3 times PER while RM4.60 offer price valued SapCrest at CY12 17.5 times PER.

On cash payment, shareholders of Kencana would get more in terms of percentage, which is 16.2 per cent as compared with SapCrest’s 14.9 per cent, prompting AmResearch to opine that the offer for Kencana seemed more attractive than that of SapCrest’s.

However, Kenanga Research maintained that this was not an entirely bad deal for SapCrest shareholders as they would able to ride on the attractive valuations of the new company.

The research house explained, “Furthermore, we believe the synergy effect is potentially great, as both companies can complement each other. As such, we reckon that SapCrest shareholders should accept such an offer.”

Kenanga Research saw 29 per cent upside for the new company should it be valued at 20 times CY12 PER, which it deemed as ‘not excessive.’

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