Monday, January 30

More mergers and acquisitions in Malaysia

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Much excitement in the O&G division

As with other commodities, traditional sources of en­ergy such as oil and gas (O&G) require exploration and development activities which can become a costly and timely affair before any significant discovery is made.

This is why many O&G play­ers continue looking towards acquisitions as an alternative to complement their own expan­sion activities, much like what is seen via the potential merger between SapuraCrest Petroleum Bhd (SapuraCrest) and Kencana Petroleum Bhd (Kencana).

This merger, if it follows through, is touted to be the big­gest merger of the year with a potential market capitalisation worth RM11.85 billion.

“We view the merger positively and see good synergies between the two companies,” noted ECM Libra Capital Sdn Bhd head of research, Bernard Ching.

“There is plenty of synergy between the two companies and we believe the merged entity will be in a better position to compete regionally, perhaps even globally.

“The O&G industry in Malaysia really does lack a company which is able to provide a full range of support services and therefore take on major turnkey projects regionally and globally.”

Ching affirmed his belief that that the merged SapuraCrest-Kencana entity would have the necessary skill set to fill this void and be ahead of the pack.

“Kencana, with its fabrication stronghold, and SapuraCrest, with its installation of pipelines and facilities business, are suit­able for each other.

“In a nutshell, it can be de­scribed as Kencana building the offshore structures that SapuraCrest is able to install, making both businesses comple­mentary.”

The business model that the fully-fledged entity will take on, he noted, was similar to that of global companies like J.Ray McDermott Inc, Saipem America Inc and Technip USA Inc.

“The only area where there might be duplication is in the offshore support vessel (OSV) business which both companies have. This also involves hook-up and commissioning (HCM) services.

“We have known cases for both SapuraCrest and Kencana vying for the same jobs.”

Nevertheless, the head analyst noted that OSV and HCM services made up only a small part of both companies’ businesses.

Looking forward, AmResearch Sdn Bhd’s O&G analyst Alex Goh believed that the sector would continue to see more mergers and acquisitions, with the Economic Transformation Programme pushing to create an oil field serv­ices hub in the country and the consolidation of local operators into regional champions.

“Potential candidates for merg­ers are the smaller O&G operators such as Perdana Petroleum Bhd (formerly known as Petra Per­dana Bhd), Dayang Enterprise Holdings Bhd, Petra Energy Bhd, Alam Maritim Resources Bhd, Uzma, Tanjung Offshore, Ramunia Holdings and Coastal Contracts Bhd.”

For Malaysian O&G service pro­viders, Goh remained convinced that domestic capital expenditure spending will accelerate with Pet­ronas’ RM300 billion programme over the next five years, which includes the development of 27 marginal fields, enhanced oil re­covery and further development of deepwater projects.

Plantation players: Setting sights on new pastures

There has not been any M&As in the plantation sector since 2006 when the country’s three biggest planta­tion firms merged to form the world’s largest listed oil palm plantation player then.

Through a special purpose vehicle named Synergy Drive Sdn Bhd (Synergy Drive), the merger of Sime Darby Bhd (Sime Darby), Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd to formulate this company would absorb all assets and liabilities of nine listed companies.

Being an exercise led by Per­modalan Nasional Bhd (PNB), the move five years ago was seen as an initiative to create a global company on Bursa Malaysia and, at the same time promote opera­tional and scale benefits.

Carballido from OBG told BizHive Weekly that Sarawak’s palm oil industry has not seen major acquisitions since Kim Loong Resources Bhd purchased a 60 per cent stake in Sarawak’s Tetangga Akrab Pelita for RM25 million in 2009.

Despite not seeing much M&As in the sector since then, Gan from HwangDBS IM believed the time was once again ripe for M&A activities.

“There has been an increasing global demand for more land banks in Malaysia and Indo­nesia. Due to competition and cost sensitivity, the smaller or less-competitive companies will either merge with another, be bought over, or be edged out of the market,” he explained.

“Moreover, the sector offers very attractive yields to investors as plantation output generally have big profit margins.”

Supporting this was Carbal­lido, who said that appetite for M&As could be growing based on current CPO prices.

“The key for Sarawak is the potential for M&As in the plan­tations sector. High CPO prices in 1Q and 2Q likely dampened enthusiasm for acquisitions of plantation companies by making any target expensive.

“Now, with CPO prices hover­ing around RM3,000 per tonne, appetite for M&As might grow.” One story to watch, he said, would be the proposal by Sime Darby to sell off some of its businesses in the future.

It was still unclear to whether Sime Darby’s divestment plans would include any of its planta­tion holdings, which made up the firm’s core competency.

On an opposite note, James Ratnam, head analyst at TA Secu­rities Bhd said given the increase in land supply in neighbouring countries, plantation compa­nies appeared to be opting for greenfield development instead of acquiring brownfield planta­tion assets.

“Land bank is a key factor. In addition, those with large down­stream operation would want to expand upstream to ensure sup­ply security.

“There are other factors as well but in plantation companies per­spective, the key issue to consider is whether brownfield acquisi­tion, at current market prices would be able to give the desired return compared with investing in greenfield development.”

On a more positive note, Ratnam did not discount the possibility of M&As between Malaysian planters and foreign companies.

“This is quite possible, given that most plantation companies are cash rich due to the current high CPO price. Having said that, apart from the biofuel sector, we have not seen any substantial investment in collaboration with foreign partners so far.”

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