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1 TA Securities A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: I P O Wednasday, 5 January, 2011 FBMKLCI: 1, Sector: Construction Benalec Holdings Berhad A Niche Player With A Competitive Edge FV: RM1.16 Main Market Subscribe THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* TA Research Team Coverage ext:1612 kevink@ta.com.my Background Benalec s business could be traced back to 1960 where its founder Leaw Eng Chang focused on earthworks and general contracting. Today, the group has evolved to become an integrated one stop marine construction solutions provider. Marine construction services include land reclamation, dredging and beach nourishment, pre bore and marine piling, construction of marine structures, bridges, jetties, ports and other offshore and ancillary structures. The group also provides ship chartering services for transportation of sand, bulk materials and cargo, construction materials and other heavy materials. To top it all off the group undertakes its own shipbuilding activities. Thus far, this segment is in existence for the groups internal use only. Figure 1: Business Activities Share Information Stock Code na Listing Main Market Enlarged Share Capital (mn) 730 Market Cap RM Par Value 0.25 Issue Price (RM) 1.00 Oversubscription rate na Estimated free float 31.5 Tentative Listing Dates Event Opening of the IPO Closing Balloting of Applications Allotment of Shares Listing Tentative Date 28 Dec 10 6 Jan Jan Jan Jan 11 Ratio & Analysis NTA per share (post IPO) (sen) 30.5 Price to NTA (x) 2.88 Proforma ROE (%) 28.4 Proforma ROA (%) 12.7 Proforma Net Gearing (x) 0.44 Proforma Current Ratio (x) 1.3 Utilisation of Proceeds RMmn % Acquisition of Oceanlec Vessels Working Capital Estimated Listing Expenses TOTAL IPO Structure The IPO will consist of a public issue of 100mn ordinary shares in the following manner: i) 36.5mn made available for application by the Malaysian public, ii) 36.5mn shares for application by eligible directors, employees and business associates of Benalec, iii) 27mn shares for private placement to selected investors, An offer for sale of 130mn will be made in the following manner: i) 73mn shares for Bumiputera investors approved by Ministry of International Trade and Industry (MITI) ii) 57mn for private placement to selected investors Page 1 of 8

2 Industry Overview 05/01/11 Figure 2: The Marine Industry Construction Value Chain Source: Frost and Sullivan/TA Securities Dredging in the marine construction industry is part of the midstream activities and the main function is for capital, maintenance and remedial dredging of navigational waterways by the removal of siltation and deepening of channels, and supporting downstream activities such as land reclamation, shore and beach protection works and in the preparation for construction of coastal structures. Land reclamation is a complex engineering activity which requires extensive knowledge and study in hydrology, geotechnical and structural engineering. The technology involved and materials used largely depend on the environmental and geological factors at the site. The cost for land reclamation projects are high because of the large amount of raw materials required, the use of expensive and sophisticated heavy machineries, labour involved, time to complete and most importantly in the feasibility studies and engineering design involved which are unique to each site. Figure 3: Marine Construction Projects Awarded in Malaysia ( ) Source: Frost and Sullivan/TA Securities Total Project Value Page 2 of 8

3 Since 2006 the industry has grown by a resounding 68%. The market peak in 2009 was largely due to 9 th Malaysia Plan whereby allocations towards capital projects were being utilized. Three major projects which contributed towards the year's outstanding performance were the reclamation project for the expansion of the Lapangan Terbang Kuala Terengganu (26.2%), the Sungai Pahang major dredging and rehabilitation project (25.6%), and the Melaka reclamation projects (12.6%). To add to this there were a number of project activities taking place around the Iskandar economic region such as the Nusajaya waterfront development and upgrading of ports, harbour and navigational waterways along the Straits of Tebrau. Figure 4: Major Marine Construction Projects in Malaysia ( ) Source: Frost and Sullivan/TA Securities Factors that determine demand: Population congestion due to land scarcity Increase in waterfront development because of economic prosperity Expansion to existing ports and harbour due to increasing international trade Environmental protection from flood, erosion and climate change Expansion of oil and gas terminals due to the increase in exploration and high international demand for fuel Supply conditions and dependencies: Dredgers equipment Diesel/Fuel Price Sand suppliers Labour supply Reliance and vulnerability to imports Industry outlook in Malaysia In Malaysia, there are three main states that are most active in marine construction namely Melaka, Penang and Johor. Penang and Melaka are active in dredging and land reclamation activities due to the scarcity of land. Johor on the other hand is developing the Iskandar region. The Sarawak Corridor of Renewable Energy (SCORE) and the Sabah Development Corridor (SDC) are the latest developing projects. Industry players and competition The international scene is dominated by companies in Belgium and Netherlands. In South East Asia however, the industry is dominated by many small to medium sized domestic players operating within national boundaries. For larger scale projects, competition is confined to key international players or local joint ventures with international players. Page 3 of 8

4 In Malaysia there are approximately 15 competitors who are active in marine construction, specifically dredging and land reclamation projects: Benalec Clamshell Dredging Sdn Bhd HRA Teguh Sdn Bhd Hock Seng Lee Berhad (HSL) Inai Kiara Sdn Bhd Loh & Loh Corporation Bhd Malaysia Maritime & Dredging Corporation Malaysian Resources Corporation Bhd NDC Dredging and Construction Bhd See Song & Sons Sdn Bhd See Yong & Son Construction Sdn Bhd Tidalmarine Dredging Sdn Bhd Wajar Mutiara Sdn Bhd Source: Frost and Sullivan Out of the 15 companies listed above, there are only 5 active marine engineering players in Malaysia. Benalec Holdings ranks second in terms of market share at 18%. Figure 5: Market Share Hock Seng Lee Bhd, 9% Malaysian Maritime & Dredging Sdn Bhd, 8% See Song & Sons Sdn Bhd, 7% Benalec, 18% MRCB, 16% Other, 17% Inai Kiara Sdn Bhd, 25% Frost and Sullivan estimates the market size for the marine construction industry in Malaysia for is worth approximately RM2.87bn based on the value of projects awarded. Benalec s market share based on project value secured between 2006 and 2009 is estimated to be approximately 17.6% of this cumulative market size. Future Plans/ Earnings Driver Figure 6: Future Plans Page 4 of 8

5 Focus on large scale marine construction in Malaysia The group has targeted several land reclamation projects in Selangor, Penang, Johor and Melaka which would require the deployment of a large fleet of vessels. Such larger scale projects are more profitable and commands higher margins. To achieve this, the group intends to acquire new vessels and equipment to its fleet technical ability, operating efficiency and productivity. Geographical expansion To bid for more large marine construction contracts in other states such as Johor, Selangor and Penang. Benalec also intends to further expand our marine transportation segment to increase its profitability by pursuing large marine transportation contracts for transportation of construction materials from Vietnam and I or Myanmar to Singapore and also transportation of construction materials within the Middle East region. In 2008, its sister company, Oceanlec, secured a contract to supply and deliver construction materials to the Singapore government. The group already has one foot into this geographical expansion strategy. Increase shipbuilding, ship repair and ship maintenance facilities In order to diversify into oil & gas offshore transportation, Benalac will also build Offshore Supply Vessels (OSV) such as AHTS. With these vessels it would be able to provide long term AHTS charter services to the key players in the Oil & Gas sector. Explore possible acquisitions, investments, strategic alliances andlor joint ventures to expand its businesses Strategic alliances and I or joint ventures with parties that are synergistic to our businesses and that would complement our current and future businesses and create access to new markets. We are positive on the overall growth prospects of the group. Simultaneously, we are slightly skeptical on the group expanding into the oil & gas sector as the competition could squeeze its already strong margin. The market for constructing offshore supply vessels consist of players specialising in the area for several years. (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK) Page 5 of 8

6 Investment SWOT Analysis Strengths Integrated one stop marine construction solutions provider Competitive cost structure and effective business model Good reputation and competent project management skills Large and comprehensive range of vessels and equipment High barriers of entry to the industry Weaknesses Project based business which can prevent consistent cash flow Fluctuating market prices and disposal of land portion the group from time to time obtains part of the land reclamation as payment. In a market downturn, the group could be stuck with the land instead of disposing it and converting it into cash. Delay in completion of projects and cost overruns Outlook Future projects in the pipeline particularly in Penang, Melaka, Iskandar, Port Klang, and SCORE 10 th Malaysia Plan has allocated a substantial amount of funding in support of the industry Opportunities in Asia Pacific with future projects estimated at over RM170bn Threats Supply of diesel, sand and rocks price fluctuations. Diesel constitutes 21.5% of operating cost. Foreign exchange fluctuations 11% of FY10 revenue recognised in USD Regulatory and political considerations Dependence on key management personnel Dependence on supply of foreign workers Financial Highlights Currently the group has an order book of RM855.7mn which could run through till The said amount excludes the value of completed works in respect of ongoing projects. In our estimates we assume a RM600mn and RM780mn tender book win for FY11 and FY12 respectively. Figure 7: Revenue by Segment 100% 80% 60% 100% 96% 89% 40% 20% 0% 0% 4% FY08 FY09 FY10 11% Marine Construction Vessel Chartering and marine transportation Page 6 of 8

7 FY10 revenue fell by 3.6% largely due to the industry shrinking in 2009 in tandem with the global economic crisis. With its RM855.7mn order book we expect FY11 top line to increase by 63%. FY10 net profit grew by a resounding 237.5% due to higher margin projects and the disposal of land. We expect FY11 net profit to grow by approximately 19%. Management has guided that margins should remain the same in this approximate region in FY11 and FY12. In our assumptions we have built in land sales as part of the group s net profit thus enabling margins to be retained. Figure 8: Revenue vs. Net Profit RMmn Revenue Net Profit E 2012E Figure 9: Construction PBT Margins (%) Gamuda IJM Naim WCT HSL Benalec FY07 FY08 FY09 Figure 10: Potential Order Book 1. Melaka 2. Penang 3. Selangor 4. Johor Malaysia Total Contrat Value (RMmn) Expected Date of Contract to be Awarded 5, years Singapore Contract Value (SGNbn) 1. Jurong Town Council Singapore (JTC) 1 5 bn 2. Housing and Development Board (HDB) 1 5 bn 3. Maritime and Port Authority of Singapore (MPA) 1 5 bn 1 2 years Page 7 of 8

8 Valuation We benchmark Benalec against its closest peer namely Hock Seng Lee Bhd (HSL). Approximately 90% of Benalec s revenue was contributed by the marine construction division and we estimate that approximately 50% of HSL s revenue is derived from the similar division. Hence, we attach a similar CY11 PER of 10.5x to HSL. The valuation reflects Benalac s stronger profit margin. We thus value Benalec at RM1.16. We recommend investors to subscribe to the issue. Earnings Summary FYE 31 June (RMmn) E 2012E Revenue Cost of Sales (53.4) (91.8) (59.8) (99.0) (154.4) Gross Profit Taxation (3.4) (6.6) (10.2) (23.1) (36.3) Net Profit Net EPS (sen) Fully Diluted EPS (sen) GDPS nm nm nm Dividend Yield (%) nm nm nm PER (x) PBT Margin (%) Net Profit Margin (%) ROE (%) (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK) Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 8 of 8