The exuberant run in Ramunia Holdings Bhd’s shares came to a grinding halt last Friday with the company’s stock slipping five sen to close at 58 sen. This is in stark contrast to the astronomical gains the oil and gas (O&G) fabricator had made a week earlier when Sime Darby Bhd was rumoured to be eyeing it.

Judging by the dip, Datuk Azizul Rahman Abd Samad, the chairman and largest shareholder in Ramunia with 33.1%, has plenty to do to convince other shareholders about the deal with Sime Darby.

“Sime Darby is a big name, they are known the world over and for us to have a 20% stake in their engineering unit is a big thing. We (Ramunia) are buying into a big brand name. We will also have a clean balance sheet. This could work well for us,” he says.
Sime Darby, via its wholly-owned unit Sime Darby Engineering Sdn Bhd, is buying the assets of Ramunia for RM232 million, of which RM46.2 million is in cash and the remaining RM185.8 million in new shares that will translate to 20% of Sime Darby Engineering.

Sime Darby will also take over Ramunia’s net debts, which stood at RM322 million as at end-January this year.

After the Ramunia board’s recent approval of the deal, TA Securities highlighted that Sime Darby will now conduct a due diligence exercise, something which Ramunia failed previously when it was a takeover target of national carrier MISC Bhd.

The MISC deal valued Ramunia at about RM1 per share and involved MISC injecting its unit, Malaysia Marine and Heavy Engineering Sdn Bhd, in a deal valued at RM3.2 billion. Ramunia was also to issue RM1.4 billion worth of shares at an issue price of RM1, and RM1.8 billion worth of 3.7%, seven-year irreedeemable convertible preference shares of 50 sen each at par value.

Azizul, however, says that at that point in time, oil was trading at US$100 per barrel. In July last year, oil hit a record US$147. Now, it is below US$60.

“That (MISC’s) was the valuation in 2007. So, there has to be some change now… and the oil and gas theme is over. There is not as much going for the O&G sector these days,” says Azizul.

The jewel in Ramunia’s crown is its 170-acre fabrication yard in Teluk Ramunia, Johor. Sime Darby, meanwhile, has a 120-acre yard in Pasir Gudang, also in Johor.

What the analysts say
Nevertheless, most analysts view the deal negatively for Ramunia. In a research report on Ramunia released last week, CIMB said, “We are slightly surprised that Ramunia has accepted Sime Darby’s offer as the RM232 million (or 41 sen per share) price tag stands at a 34.5% discount to Ramunia’s market cap of RM354.2m based on its last close of 63 sen (the close last Monday).”
AmResearch says, “Assuming conversion of Ramunia’s RM50 million irredeemable convertible preference shares which will boost its share base by 18% to 662.6 million, the offer works out to 35 sen per share. We estimate Ramunia is acquiring the 20% stake in Sime Darby Engineering for an extremely high price earnings ratio of 36 times vis-a-vis the O&G industry’s nine times currently.” AmResearch has a “sell” call on Ramunia, with its fair value still under review.

AmResearch adds that based on Ramunia’s net debt of RM322 million as at end-January this year, the offer for Ramunia’s business translates to an enterprise value of RM3 million per acre for Ramunia’s fabrication yard. This, it seems, is low in contrast to other yards such as that of Kencana Petroleum Bhd’s, which has an enterprise value of RM11.5 million per acre. Based on the offer price for Sime Darby Engineering’s shares, its Pasir Gudang yard is valued at RM9.3 million per acre.
Azizul retorts, “We could do the deal at 2007 prices, but after that, it will all be downhill… we have to be realistic, prices of oil have come down.”

Will Lembaga Tabung Haji go along?
Maybank Investment Bank meanwhile says Ramunia’s minorities could have little say in this deal, as only a simple majority of 51% will be needed to push the deal through.

After Azizul, the second largest shareholder is pilgrim fund Lembaga Tabung Haji (LTH), which has about 29.7%. There are no other substantial shareholders.

Initial indications are that LTH may not be agreeable to the deal. Sources say LTH’s holding cost for Ramunia shares is in the region of RM1 apiece.

The fund emerged as a substantial shareholder in early November 2007, three months after the deal with MISC was announced, with 5.1% or 16.5 million shares. LTH upped its shareholding aggressively after mid-December 2008 and raised its interest to 29.7%.

The average share price during the period when LTH was accumulating Ramunia was about RM1.41. Multiplying it by the number of shares LTH holds (166.4 million shares), its investment is estimated at about RM234.6 million.

At last Friday’s close of 58 sen, Ramunia’s market capitalisation is RM326.1 million, which means LTH’s stake is about RM96.85 million.

It is also known that Ramunia was on the brink of falling into the Practice Note 17 (PN 17) category for companies with negative shareholders funds, which would not have gone down well for the top brass at LTH.

For 1QFY2009, Ramunia posted a net loss of RM5.5 million on the back of RM89 million in revenue. For FY2008, Ramunia suffered a net loss of RM279.8 million from RM360.8 million in sales.

However, at the seemingly low price of 41 sen per share which Sime Darby is offering, it would be hard to justify perceptions that LTH is being bailed out.

Opportunities in the offing?
Azizul says that once the Sime Darby Engineering deal is concluded, Ramunia’s balance sheet will be clean and it will have RM46.2 million cash to acquire new assets.

“It’s a tough time to get banks to loan you money, so it’s hard to buy assets and strengthen your position. With this deal, we should have little difficulty in obtaining funds as our balance sheet will be clean,” says Azizul.

He adds that with the 20% stake in Sime Darby Engineering, Ramunia stands to gain from the yearly profits of Sime Darby Engineering.

Sime Darby Engineering has an order book of about RM2 billion and according to AmResearch, it posted a pre-tax profit of RM17 million on revenue of RM1.3 billion for 1HFY6/2009.

Annualised, Ramunia would thus make about RM6.8 million in pre-tax profits from Sime Darby Engineering.

As at end-January this year, Ramunia had fixed deposits of RM32.8 million, cash and bank balances of RM6 million and trade receivables of RM78.7 million. But Sime Darby will be acquiring the assets and liabilities, which will leave Ramunia with RM46.2 million in cash and a 20% stake in Sime Darby Engineering.

With the global downturn, assets such as yards and fabrication machinery are up for sale, leaving Ramunia in a good position to snap up assets.

However, the company will only be in a position to think of picking up assets at a much later date. At the present, Azizul will have to convince LTH to accept Sime Darby’s offer.

This article appeared in the Corporate page, The Edge Malaysia, Issue 754, May 11-17, 2009.