Ramunia Heart MISC

The Edge: MISC Bhd launched a reverse takeover (RTO) for Ramunia Bhd in a proposed deal valued at RM3.2 billion, where MISC would inject its heavy engineering business in exchange for new Ramunia shares. Ramunia told Bursa on Jan 21 that it had received an offer letter dated Jan 18 from MISC’s unit MSE Holdings Sdn Bhd offering to dispose of its entire stake in Malaysia Marine and Heavy Engineering Sdn Bhd to Ramunia. The total consideration of RM3.2 billion would be satisfied by the issuance of new shares of 50 sen each and new irredeemable convertible preference shares of Ramunia. Ramunia said MISC’s offer would lapse by Jan 21 or at such other time which might be extended by MISC.

Comment: Smart move. Saves on listing cost with Malaysia Marine & Heavy Engineering. MMH was supposed to be a hidden gem to be unlocked by MISC via a listing. In one fell swoop, MISC ends up with the facilities under Ramunia, major controlling stake in Ramunia, savings on listing cost for MMH, and a huge kicker in Ramunia's post-deal share price.

The main beneficiary will still be Ramunia shares and not MISC (too big, too heavy). MMH is expected to rake a net profit of RM213m in FY2008. That's 15x 2008 earnings, good for MISC rather than Ramunia. In terms of fabrication yard space, MMH has 80 acres, Ramunia 180 acres and Sime Engineering 45 acres. Sime Darby had thought Ramunia's asking price to be too high last year. I think MISC's got better brains at the top because absolute price will always be expensive for a good asset. However, if you are willing to think outside the box, its a great win-win situation. With the deal, Ramunia will have an unassailable 260 acres of fabrication space. This will put Ramunia in the driver's seat to get a huge slice of the RM10bn fabrication jobs to be doled out in 2008. The government strategy is to build 65 new platforms over the next 5 years. This deal will also help Ramunia in terms of meeting demand for offshore fabrication equipment.

Ramunia will also get MMH's outstanding orderbook of more than RM3.3bn. Though we do not know the details (we can still do a guesstimate), but assuming MISC gets the new shares @RM1.00 = 3.2bn new shares. Add that to Ramunia's existing 557m shares = 3.757bn shares. Ramunia is expected to make RM53m net profit in 2008, add MMH's RM213m = RM266m.

Owing to the synergy and enhanced business model with the RTO, I would be comfortable to ascribe an 20x PER for 2008 valuation = 5320 / 3757 = Target price RM1.42.

The merged entity is basically a Petronas controlled company, and there will be positive management changes. Naturally the company will be able to "compete" better in tenders. Its like a moth into a butterfly, hopefully with a longer life.

p/s please note that there had been a revision in target px, got the prior Ramunia's net profit figure wrongly