KUALA LUMPUR (Nov 15): The proposed merger between Bumi Armada Bhd (KL:ARMADA) and MISC Bhd’s (KL:MISC) offshore businesses is expected to result in MISC holding a 68% majority stake in the new entity, with a combined valuation of RM14.6 billion, according to CIMB Securities.

CIMB’s estimate is based on MISC's offshore business valuation of RM10 billion at the equity level, compared to Bumi Armada’s valuation of RM4.6 billion, the research firm stated in its note on MISC on Friday.

“We view the immediate focus post transaction will be on integration and extracting synergies from the merger. Should this merger materialise, it could generate operational synergies for the combined entity,” it said. “The new entity would be well positioned to strengthen its presence in European regions such as the UK North Sea. Furthermore, it would expand opportunities in other promising markets, including Brazil and Angola”.

While specifics on the shareholding structure of the new entity remain undisclosed, analysts are largely neutral on the deal, highlighting several downside risks.

These include the complex integration of business models, systems and processes, higher merger-related costs, potential regulatory hurdles that could delay or disrupt the memorandum of understanding (MOU), and external challenges such as market uncertainty and geopolitical tensions.

“At this juncture, the possibility of a termination is still in the decks, although we opine that, given the longer period to continue discussions, both parties would find ways to mitigate the risks, while ensuring that stakeholders will continue to reap the benefits from MISC’s dividend play,” MIDF Investment Bank wrote in a separate note.

On Thursday, MISC and Bumi Armada announced the signing of a nine-month, non-binding MOU to jointly explore a potential share-based merger of MISC’s offshore business with Bumi Armada. Under the proposed merger, MISC would transfer its offshore business to a new entity in exchange for shares in that entity through a share swap arrangement.

For MISC, the merger will only involve its offshore business that owns, leases, operates and maintains offshore, floating, production, storage and offloading (FPSO) terminals. MISC mainly ships liquefied natural gas (LNG) as well as operates a fleet of petroleum tankers. MISC was previously considering a stake in Bumi Armada, The Edge reported in July.

Shares of MISC Bhd declined on Friday after the group’s latest earnings, for the period ended Sept 30, 2024, fell short of analyst expectations, mainly due to weaker-than-expected performance in the gas and asset solutions division, affected by soft LNG spot rates.

The stock dropped by as much as 27 sen, or 3.4%, reaching RM7.68 during morning trade. The counter was trading at RM7.65 at the time of writing, giving MISC a market valuation of RM34.15 billion, with around 262,300 shares traded.

Kenanga Research noted that MISC's core net profit for the nine months ended Sept 30, 2024 (9MFY2024) — adjusted for non-recurring items such as a RM26.5 million unrealised forex gain, a RM44.1 million gain on other investments, and a RM66.7 million impairment loss on trade receivables —was only 69% of its full-year forecast and 64% of consensus estimates.

Amid MISC’s earnings miss, Kenanga Research reduced its earnings forecast and target price (TP) for MISC by 4%, cautioning that MISC’s gas and asset solutions division faces a challenging earnings outlook in the near to medium term amid continued pressures in the LNG market. “We cut our FY2023-2024 earnings forecasts by 4% each, reduce our TP by 4% to RM7.78 (from RM8.11) but maintain our ‘market perform’ call”.

Hong Leong Investment Bank likewise revised its earnings forecasts for MISC downward by 10%, 5.6%, and 5.4% for FY2024, FY2025, and FY2026, respectively, after factoring in a lower construction margin for the offshore segment and a reduced charter rate assumption for the petroleum division.

“Post-adjustments, we maintain a ‘hold’ call on MISC with lower sum-of-parts-derived TP of RM7.99 as we view that its risk to reward profile is balanced at this juncture. With expected yield of over 4% for FY24f-26f, we reckon the stock may not be an attractive divvy name for the time being,” it added.

MISC’s net profit for the third quarter ended Sept 30, 2024, dropped 21% to RM338.9 million from RM430.4 million in 3QFY2023, as revenue fell 12% to RM2.96 billion from RM3.37 billion.

Its 9MFY2024 net profit rose 9.6% to RM1.64 billion from RM1.49 billion in 9MFY2023, although revenue dipped slightly to RM9.93 billion from RM9.99 billion previously.

Overall, MISC has eight “buy” calls, seven “hold” calls, and no “sell” calls, with a 12-month target price of RM8.89, according to Bloomberg data.