Friday 29 Mar 2024
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WHILE investors have responded positively to the approval of the detailed environmental impact assessment (DEIA) study for Benalec Holdings Bhd’s reclamation works for the Tanjung Piai Integrated Petroleum & Petrochemical Hub project, the group still has to prove itself by securing offtakers for its land sales.

“This is positive for the company, having waited so long [for the approval]. It gives legitimacy to the Tanjung Piai project, and now they (Benalec) can approach clients that it’s the real deal. Without the approval, clients may not want to commit, even to pricing, as there isn’t any certainty,” says a fund manager.

“They’ve got a good deal, the onus is now on them to prove it to secure the clients,” he adds, noting that obtaining approval for the study was the hardest obstacle.

The project is expected to provide Benalec (fundamental: 1.65; valuation: 1.2) with earnings visibility for the next 10 to 15 years.

To recap, Benalec announced last week that the report — submitted jointly by its 70%-owned subsidiary Spektrum Kukuh Sdn Bhd and State Secretary, Johor Inc — was officially approved on Jan 23. The approval is valid for two years from the date of the Department of Environment’s letter of approval.

The study was submitted last October following objections from residents who were concerned that the project would damage the forest and fishing grounds in the area.

According to its announcement to Bursa Malaysia, Benalec will commence work on Phase 1 of the project in February, which will include the construction of an oil terminal, a jetty and a bridge linking the island to the mainland, and dredging.

The 1,410.33ha (3,485 acres) Tanjung Piai project comprises a man-made island to be sited off the southwestern coast of Johor.

This is the second major approval for land reclamation works in Johor after Country Garden Pacific View Sdn Bhd’s 1,368ha Forest City development just two weeks ago.

An offtake agreement, which is usually negotiated prior to the construction of a facility, seeks to secure a market or purchaser for the future output of the facility, thus making it easier to obtain financing to construct the facility.

In terms of funding, Kenanga Research believes that Benalec will fund Phase 1 — estimated at 1,000 acres — through the group’s recent issuance of RM200 million in convertible bonds last September.

“Based on a reclamation cost of RM30 per sq ft (10% higher than Malacca’s average reclamation cost), for every 100 acres of land reclamation in Tanjung Piai, the group needs to fork out RM130.7 million. Hence, we believe that Benalec will be actively looking for potential offtaker(s) for the initial 100 acres that are soon to be reclaimed to sustain its cash flow,” says Kenanga Research analyst Iqbal Zainal in a Jan 28 report.

As at Sept 30, 2014, Benalec had net cash of RM47.78 million, after deducting borrowings of RM14.87 million.

With 173 acres of land worth RM312 million for sale, and the RM203.9 million coastal reclamation contract from Oriental Boon Siew (M) Sdn Bhd in May last year, Benalec said it will have a stable revenue stream of about RM515 million for FY2015 to FY2017.

Analysts see Benalec inking the 1,000-acre land sales with 1MY Strategic Terminal Oil — the binding term sheet which has been extended four times since March 2013 to June 11, 2015 — as sizeable and a rerating catalyst for the stock.

Kenanga Research estimates that the group could fetch a total revenue of RM2.2 billion, with a selling price of RM50 psf, over four to five years.

Based on the group’s historical net margin of 30% from its land sales, this could translate into RM660 million in net profit over five years, or RM132 million per year.

Meanwhile, CIMB Research estimates that Benalec could gain RM566 million in net profit over five years, based on a RM52 psf average reclamation cost and a RM65 psf selling price, hence a RM13 psf surplus value.

Based on these estimates, Benalec could surpass even its highest net profit of RM96.1 million for FY2011.

For the first quarter ended Sept 30, 2014, Benalec reported a net profit of RM14.17 million, compared with a net loss of RM4.66 million in the previous quarter. Its revenue also more than tripled to RM47.93 million from RM14.1 million, most of which were from land disposals.

The fund manager opines that the demand for Tanjung Piai is there, and it’s just a matter of pricing. He adds that the project could garner a little more premium compared with Asia Petroleum Hub’s man-made island due to its close proximity to Jurong.

“However, with 1MY Strategic Terminal Oil, as 1,000 acres is a big chunk, the pricing might be lower. Also, at that point of discussion (back in 2013), the price point could be higher as costs were higher … Now, both parties might need to renegotiate,” he says.

Meanwhile, another analyst says Benalec need not rush to obtain offtakers at one go, as the project spans 10 to 15 years. It all depends on whether Benalec is willing to compromise its pricing.

AmResearch, which maintains its “buy” call on Benalec with a fair value of RM1.25, believes that the real litmus test for Benalec starts now.

“Undeniably, Tanjung Piai’s deepwater depth and close proximity to the Jurong Petrochemical Hub put it in a prime position to tap into spillover demand for oil storage from the various multinational corporations that are currently operating in Singapore,” analyst Mak Hoy Ken says in a Jan 28 report.

Kenanga Research maintains its “outperform” call with a target price of 83 sen, implying a price-earnings ratio of 10.3 times FY2015 earnings per share.

Affin Hwang Capital, while maintaining its target price of 74 sen, has downgraded its call from “buy” to “hold”, citing the rebound in Benalec’s share price from a low of 53 sen.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.

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