Rumblings In Ramunia

The Edge: Ramunia has now turned to foreign banks to finance its US$685 million (RM2.2 billion) B-193 oil field project in India, after being shunned by local banks amid the reverse takeover (RTO) of the company by MISC Bhd. Ramunia managing director and chief executive officer Dr Daniel Chung-Sung Ahn said it was now talking to UOB Bank and Deutsche Bank, both in Singapore, and Kuwait Finance House (Malaysia) Bhd (KFHMB). These three banks were “very positive” on the B-193 project, Ahn said, adding that Ramunia hoped the banks would take the lead in syndicating the loan among several banks. “We’re working on it. It’s not a big problem. It’s just that, all of a sudden, there’s such a big project and most of the local banks are not accustomed to such a big amount. That’s why we’re looking at other foreign banks making syndicated loans,” he told The Edge yesterday.

According to Ahn, local banks previously approached by Ramunia refused to finance the company in the B-193 project, as they were concerned that the RTO may not go through. He said some local banks were worried that MISC and its parent company Petroliam Nasional Bhd might not endorse the B-193 project after Ramunia became a subsidiary of MISC following the RTO exercise.

However, industry observers questioned if Ramunia’s balance sheet is strong enough to warrant the local banks’ confidence in providing financing.

Ramunia won the B-193 job in late January from India’s oil and gas (O&G) conglomerate Oil & Natural Gas Corporation Ltd (ONGC). The B-193 cluster field is located off the shore of Mumbai.

Ahn said some upfront payments were needed for engineering and procurement. In addition, Ramunia has to submit a 10% performance guarantee amounting to US$68.5 million to ONGC soon. After taking into account ONGC’s future progressive payments, he said the company would still need bank borrowings of US$350 million to US$400 million to carry out the project during the 29-month tenure. On the costing side, Ahn said fabrication and procurement would account for 50% of the total cost, while transportation and installation would take up 30%, project management and engineering 10% and sub-contracting 10%. He said steel, as part of the fabrication and procurement cost, formed less than 5% or below US$30 million of its total cost and as such, any increase in steel prices would not have a significant impact on its margin.

“Even if there’s a 20% increase in steel prices, the impact is there but it’s not that great. We’ve already ordered raw materials required for the first stage of the project (lasting until May 2009),” he said, adding that engineering works for the B-193 project had started in February. He added that the B-193 project had a gross margin of 10%. Asked if Ramunia would be able to deliver on time, Ahn said his vast experience in leading more than 20 O&G projects worth over US$5 billion in India during his time with Hyundai Heavy Industries Co Ltd (HHI) would ensure smooth completion of the B-193 project.

“I know the Indian market, typically EPCIC (engineering, procurement, construction, installation and commissioning) project. When I was in Hyundai, we never delayed any project. We are accustomed to delivering on time. I try to do the same thing in Ramunia,” he said. Ahn joined the board of Ramunia as director on July 18, 2005 and was subsequently appointed managing director on May 28, 2007. He has brought with him about 20 experienced staff from HHI and Samsung Heavy Industries Co Ltd to boost Ramunia’s growth.

Meanwhile, on the RTO exercise undertaken by MISC, Ahn said the due diligence had been extended to mid-April.MISC made a RM3.2 billion bid on Jan 20 to take over Ramunia via the injection of its Malaysia Marine and Heavy Engineering Sdn Bhd (MMHE). Ramunia agreed to pay for MMHE by issuing 1.4 billion new shares at RM1 each and 3.6 billion new irredeemable convertible preference shares at 50 sen each. The second part of the exercise involves MISC making a renounceable offer for sale of 82 million Ramunia shares at RM1 each to Ramunia’s minority shareholders. The offer for sale would see MISC holding 68% of Ramunia instead of 72%. Ahn said the RTO would benefit both Ramunia and MMHE, as both parties could work hand-in-hand in securing more projects, especially deep-water structures.

Ramunia’s current 69ha yard in Teluk Ramunia, Johor, has a utilisation rate of only 20%. With the commencement of fabrication job for the B-193 project, he said the figure would grow to 80%, adding that it would further rise to 90% with MMHE in the picture.

Comments:

a) MISC's bid came in at about the same time the project was secured. Hence it was likely that MISC would be aware that Ramunia had tendered for the project. It is very unlikely that MISC would walk away from Ramunia based on the Indian project. Hence MISC should go through with the RTO and would certainly vouch for the project.

b) Local banks walked away from funding the project because on its own, Ramunia's balance sheet would not be sufficiently strong enough to take on such a project. Foreign banks could be more open, but a lot would ride on MISC proceeding with its RTO. The fact that MISC has extended the due diligence is not a comfort factor. More sweating behind closed doors.

c) What's wrong with the Indian project? Isn't winning the project a good thing? Well, maybe yes, maybe no.

Following article appeared in IndianPetro.com
"
The consortium of Ramunia Fabricators Sdn Bhd and Ramunia International Services Ltd has emerged as the L-1 bidder under ONGC`s tender for construction of facilities under its B-193 field development project. Notably, the Malaysian consortium`s quotation of US$683.827 million (Rs 2,710.01 crore) is around 1.54% lower than ONGC`s revised cost estimate of US$694.5 million for this project. However, there appears to be a wide variation with regard to the rates quoted by the L-2 and L-3 bidders under this tender as compared to Ramunia`s bid. The second-ranked bidder, Larsen & Toubro Ltd, had quoted a rate of US$982.046 million (Rs 3,891.85 crore) for this project, while L-3 bidder Punj Lloyd Ltd had demanded a fee of a whopping US$1.33 billion (Rs 5,281.25 crore) to take up the project. This indicates that the L-1 bid was 43.61% lower than the L-2 bid and almost a 100% lower than the L-3 bid."

Its no comfort for banks when they see the next closest bid at US$982mn and the next bid came in at US$1.33bn. Did Ramunia bid too low? Considering the work involve a lot of steel components - its a highly competitive bid. Plus, Ramunia expects a 10% margin only, not a lot of room for mistakes and cost over-runs. Even the awardeee company ONGC's cost estimate was very close to Ramunia's bid - very little margin. Even if Ramunia priced its bid correctly, its a very thin margin contract however you cut it.

d) Ramunia's share price would come under a lot of pressure at least until MISC OKs the RTO. The due diligence now is extended till mid-April, sellers will dominate till then. Unless some foreign banks is willing to bet on Ramunia, and MISC to say yes, prior to mid-April - Ramunia is in a spot of bother.

e) The question investors have to ask is without MISC's RTO where would Ramunia share price go to?

7206	RAMUNIA	1.330	1.370	1.320	1.330	0.00	5,109
7206PA	RAMUNIA-PA	1.150	1.130	1.110	1.130	-0.020	92
7206WA	RAMUNIA-WA	0.980	1.000	0.970	0.990	+0.010	1,445

Ramunia's share price is holding very well, an indication that many have been buying being positive on the RTO. This news could destabilise the price and shake down a lot of weak holders. The extended date for due diligence is not good in light of the lack of funding secured till now. If MISC says no after the due diligence, can expect Ramunia to go all the way back down to 80-90 sen. Brace for some volatility. If the share price move closer to RM1.00, it could be worth a punt as the downside would be limited then compared to the upside on MISC saying YES.

p/s photo: Sharifah Amani