Please give me more time

TheEdge: National carrier MISC Bhd is seeking more time to complete its due diligence on fabricator Ramunia Holdings Bhd. Officials of MISC had told analysts at a briefing on their latest set of results that they were seeking more time and was looking at end-2008 to complete the due diligence. Analysts said that no reason was given. When announcing the proposed takeover of Ramunia in January this year, MISC had stated that it hoped to conclude the reverse takeover of the company by the fourth quarter of 2008. The national carrier was supposed to complete the due diligence by end-May. Under the proposed exercise, MISC via its wholly owned unit MSE Holdings Sdn Bhd would inject Malaysia Marine and Heavy Engineering Sdn Bhd (MMHE) in return for shares and irredeemable convertible preference shares (ICPS) in a deal valued at RM3.2 billion. MMHE in turn is a wholly owned unit of MSE Holdings. The second part of the deal involves a renounceable offer for sale of 82 million shares in Ramunia upon completion of the proposed reverse takeover to entitled shareholders at RM1 a share. Upon conclusion of the deal, MISC would emerge as a 72% shareholder in Ramunia. , which would give MISC’s parent Petroliam Nasional Bhd (Petronas) indirect control of Ramunia. Petronas has 62.4% in MISC, which would give it an indirect 47.8% of Ramunia. Ramunia’s jewel in the crown is its 170-acre fabrication yard in Teluk Ramunia, Johor, which can be expanded by an additional 90 acres. MISC’s MMHE, meanwhile, has an existing fabrication yard space of about 80 acres. With damp charter rates, MISC’s mainstay in shipping is likely to remain unexciting in the near term, and much of its outlook is hinged on the fabrication and heavy engineering business. For the 12 months ended March 2008, MISC posted a net profit of RM2.5 billion from a revenue of RM13 billion. Net profits dipped by about 13.8% despite revenue gaining by 15.7% from the corresponding period a year ago. Moving forward, heavy engineering and fabrication is likely to play a more important role for MISC as Petronas has aggressive oil exploration works planned. The state-controlled oil major is likely to award some RM10 billion worth of fabrication jobs this year. Ramunia being the only fabricator with available yard space stands to benefit from this Petronas spending.

MyTake: The delay by MISC to finalise the due diligent does not augur well to its group of companies and Ramunia itself. According to Kenanga "the management wants a more thorough review on Ramunia's current projects". Does this means that MISC may revised the RTO proposal or scrap it completely after reviewing Ramunia's current project? Both parties were very confident earlier to get the due diligent out by May 30.Why such a sudden change of heart after going through with all the public announcements regarding the deal? Could it be due to Ramunia's previous records of not able to deliver projects on a timely basis, cost over run issues and poor pricing strategy? If so, one of the main reason for the delay could be due to MISC wanting to find out a clearer picture regarding the Indian job B-193 obtained from Oil and Natural Gas Corporation (ONOG) worth about USD685m in January 08 and the loan financing problems Ramunia is facing for this project. This project was speculated to be tendered at a very low price which was lower than its nearest competitors by at least 30%. Will there be any losses from this job although Ramunia's MD says it expects a gross profit margin of 10%? Furthermore, it seems that Ramunia is waiting for another job to be offered B-22 which was supposed to re-rewarded again by May 30 after Ramunia fought in the Indian Court to get the winner annuled due to technical issues. Are there more issues MISC has with regards to Ramunia which we do not know, egs major shareholders issues, existing project related problems etc? Even if the due diligent is completed and accepted in Dec 08, the actual RTO would probably be effected by June 09. Meanwhile, the unfinished deal may caused Ramunia not to get the funding required for its Indian job and Ramunia's deadline to complete the 3 years job is fast running out.. Estimated valuation on both sides will need to be reworked again. I believe ultimately, MISC will take Ramunia with wide open arms as it is in line with Petronas's interest to develop world class oil and gas companies within its Group but MISC is right to get the due diligent done with care, complete and accurate. In the meantime, the delay will create a short term weakness and overhang for Ramunia.

* Ramunia is one of the 7 approved Petronas local fabricators. The others are Kencana, Oilfab, Brooke Dockyard, Malaysian Marine Engineering, Sime Engineering and PSC Shipyard.

* On Petronas royalty (for future references) - Petronas paid RM26.83b in oil royalties to the Federal Government and three states(Terengganu, Sabah and Sarawak) from financial year 2004 to 2007. Breakdown: Federal Government RM13.4b, Terengganu RM7.3b, Sabah RM1.2b and Sarawak RM4.8b. Calculation of royalties based on a set contract formula of 5% or half of the royalties paid to the Federal Government. Malaysia is expected to be a net energy importer of oil and gas by 2014. Crude oil and oil condensates were expected to last for 22 years, while gas reserves would last 39 years.

* On WiMax(Go Here for previous posting), looks like GPacket via Packet 1 will launch Malaysia's first WiMax by end June. The business development division says that the launch of WiMax will go on schedule with the certification from WiMax Forum to be obtained latter, similar to what is happening in South Korea. Will GPacket's WiMax benefit from being the first mover advantage? The share price seems to be saying yes. The price hit RM2.10 in March and is now RM2.74.