PP10551/10/2010(025682) 29 July 2010 Jason Yap +60 (3) 9207 7698 Jason.yap@my.oskgroup.com IPO Note SIG Gases Berhad MALAYSIA EQUITY Investment Research Daily News An Established Industrial Gas Producer NOT RATED Target IPO Price Enlarged Share Capital / Par Value 150m shares/rm0.50 Indicative Listing Date 09 August 2010 Listing Sought Main Board RM0.62 RM0.58 Major Shareholders (post- IPO) Phoenix 35.0% Peh Lam Hoh & 11.9% Sing Swee Bee Enterprise P/L IPO Details Shares (m) Public Issue - Malaysian public 7.5 - Eligible directors, employees and/or 9.0 business associates - Selected investors via placement 17.7 - Bumiputera investors via placement 15.0 Total 49.2 Offer for sale 3.0 Utilisation of Proceeds RMm Purchase of land and 14.7 building new facilities Purchase of plant, 6.4 machinery and equipment Repayment of term loan 4.2 Estimated listing expenses 3.2 Total 28.5 SIG Gases Bhd, which has been in the industrial gas business for more than 10 years, is ranked no 3 in Malaysia. Although the company is focused on Peninsular Malaysia, it has more than 1,000 customers from industries such as ship building, metal fabrication, oil and gas and many others. Our target price for the company is RM0.62, based on a PER of 10x FY10 EPS. We believe the IPO price of RM0.58 is fair. An established player. SIG Gases Bhd started its industrial gas business in 1996 through its first plant in Senai, Johor. Today, the company has emerged into a one-stop industrial gas solution provider by manufacturing, refilling and distributing various industrial gases to over 1,000 customers despite having a presence mainly in Peninsular Malaysia. Ranked No 3 in the industry. We gather that SIG is ranked 3 rd in the industry, after MOX- LINDE Group, being the biggest player with operations in both the peninsula and Sabah and Sarawak for the local market, followed by Air Products Malaysia SB. The other 2 notable competitors are B.I.G Industrial Gas SB, which is the largest supplier of industrial gases in Sarawak, and Eastern Oxygen Industries SB, which also operates in the Sarawak market. We gather that the other smaller players have a different geographical presence from SIG. Strategic locations in Peninsular Malaysia. SIG has facilities located in Senai (Johor), Nilai (Negri Sembilan), Puchong (Selangor), Kuantan (Pahang), Bukit Minyak (Penang), and Krubong (Melaka). It distributes gas directly and through intermediaries such as dealers and industrial gas refillers to its customers in various industries such as ship building, metal fabrication, oil and gas and many others. This extensive network enables SIG to promptly deliver gases to its customers, and cost-effectively too. It also enables the group to cater to the growing demand of industrial gas nationwide. IPO price is fair. Based on our FY10 EPS forecast of 6.2 sen, we believe the IPO price of RM0.58 is reasonable, being at the PE band of 9-10x. Our target price for the company is RM0.62, based on a PER of 10x FY10 EPS, representing a discount to its listed peers like The Air Products and Chemical Inc, which are trading at an estimated PER of 13x-15x for FY10-11 consensus estimates.. FYE Dec (RMm) FY06 FY07 FY08 FY09 FY10f Revenue 40.5 49.0 55.4 54.6 60.0 Net Profit 3.6 5.8 8.4 7.1 9.3 % chg y-o-y - 61.2 44.5-15.7 30.3 Consensus - EPS (sen) 2.4 3.9 5.6 4.7 6.2 DPS (sen) 0.0 0.0 0.0 0.0 0.6 Dividend yield (%) - - - - 1.1 ROE (%) 11.4 15.6 17.8 13.6 10.8 ROA (%) 5.7 8.9 10.9 7.9 7.6 PER (x) 24.0 14.9 10.3 12.2 9.4 BV/share (RM) 0.21 0.25 0.32 0.35 0.57 P/BV (x) 2.7 2.3 1.8 1.7 1.0 EV/ EBITDA (x) 11.3 8.4 8.0 8.0 6.1 OSK Research See important disclosures at the end of this report 1
IPO DETAILS SIG Gases Berhad (SIG) is seeking a listing with an enlarged share capital of 150m shares of RM0.50 each on the Main Market of Bursa Malaysia Securities. Based on the IPO price of RM0.58 per share, SIG will have a market capitalization of RM87m. It expects to raise gross proceeds of RM28.5m from the Public Issue, of which around 52% will be used to purchase land and building new facilities in Sarawak, Kuantan (Pahang), and Krubong (Malacca) and the rest would be used to purchase plant, machinery and equipment, repay term loans, and listing expenses. Figure 1: Share capital No. of Shares Share Capital (RM) Authorised share captial 400,000,000 200,000,000 Exisiting issued and fully paid-up share capital 100,800,000 50,400,000 Public issue shares to be issued 49,200,000 24,600,000 Enlarged issued and paid-up share capital upon listing 150,000,000 75,000,000 Existing shares to be offered pursuant to the offer for sales 3,000,000 1,500,000 Source: OSK, Prospectus Figure 2: Important dates Events Issue of Prospectus/opening date of the IPO Closing date of the IPO Balloting of applications Allotment of IPO shares Listing date Tentative Date 22-Jul-10 29-Jul-10 2-Aug-10 3-Aug-10 9-Aug-10 Source: OSK, Prospectus OSK Research See important disclosures at the end of this report 2
COMPANY AND MANAGEMENT BACKGROUND Company background. SIG s involvement in the industrial gas industry started in 1996 with the production of acetylene and carbon dioxide, and refilling of various industrial gases at its first plant in Senai, Johor. In 1999, it expanded its business by establishing a distribution depot in Kuantan to serve customers in the east coast of Peninsular Malaysia. With the construction of an air separation unit (ASU) in Senai in 2003, SIG began producing its own liquid oxygen and liquid nitrogen. In 2009, its second industrial gas manufacturing plant located in Nilai started operation and began production of acetylene and fuming gas. Currently, the company comprises three wholly-owned companies - Southern Industrial Gas Sdn Bhd is the manufacturer, refiller and distributor of all kind of industrial gases, while the two other companies are currently dormant. However, the two companies were incorporated to undertake the group s additional activities. Southern Oxygen Sdn Bhd will undertake on-site plant and supply of liquid oxygen, liquid nitrogen and liquid argon while Southern Carbon Dioxide Sdn Bhd will operate a carbon dioxide recovery plant and supply liquid carbon dioxide. Figure 3: Group structure SIG Gases Berhad 100% 100% 100% Southern Industrial Gas Sdn Bhd Southern Oxygen Sdn Bhd Southern Carbon Dioxide Sdn Bhd Source: OSK, Prospectus Figure 4: SIG milestones Year Milestones 1996 Incorporation of Southern Industrial Gas Sdn Bhd 1997 Commenced factory in Senai, Johor, to produce acetylene and carbon dioxide, and refill various industrial gases 1999 A distribution depot was established in Kuantan, Pahang 2001 Set up plant in Juru, Penang, to refill oxygen and carbon dioxide Set up plant in Puchong, Selangor, to refill oxygen, nitrogen, argon, carbon dioxide and gas mixtures 2003 Commissioned Air Separation Unit (ASU) in Senai to produce liquid gas oxygen and liquid nitrogen Set up plant in Krubong, Melaka, to refill oxygen 2004 Obtained ISO 9001:2000 in quality management to industrial gases production 2008 Juru plant relocated in Bukit Minyak, Penang, with expanded facilties to refill oxygen, nitrogen and carbon dioxide 2009 Commenced Group's 2nd production plant in Nilai Nigeria Sembilan, to produce acetylene and fuming gas OSK Research See important disclosures at the end of this report 3
Figure 5: Industrial gas industry Management background. The group was found by a Singaporean named Peh Lam Hoh, who is currently the Executive Chairman of SIG and also a promoter and substantial shareholder. He has more than 30 years of experience in the industrial gases industry. Peh is also shareholder and director of several private companies engaged in importing, exporting, and/or distributing industrial gases and related products, and/or providing services related to industrial gases. Another key person is Lau Cheng Ming, the Executive Director, who also has had long experience in industrial gases. He served as a Director of Bintulu Industrial Gas Sdn Bhd in 1982 and as an Executive Director of B.I.G Industries Bhd in 1995. In addition, SIG s senior management has an average of 10 years relevant experience. OSK Research See important disclosures at the end of this report 4
PRINCIPAL ACTIVITIES One-stop industrial gas solutions. SIG is principally involved in manufacturing, refilling and distribution of industrial gases. Currently, it produces industrial gases namely oxygen, nitrogen, acetylene, gas mixtures, fuming gas, liquid oxygen and liquid nitrogen. It also purchases liquid argon and liquid carbon dioxide from third-party producers and vapourises and compresses them into cylinders for its customers. It is also engaged in distributing refrigerants and specialty gases such as ethylene, propylene, purified hydrogen. Besides its principal business activities, SIG also provides supporting services, including the provision of cylinder and delivery services. It also supplies other products and services that complement its business in order to provide a wider range of products and services to its customers. SIG currently ranks among the top 5 industrial gas producers in Malaysia and is an exclusive member of the FMM Malaysian Industrial Gas Manufacturers Association. Figure 6: SIG s business activities Source: OSK, Prospectus Where is SIG? SIG operates a network of gas refilling facilities distributed throughout Peninsular Malaysia. Its gas refilling facilities are positioned at the strategic locations close to major industrial centers. SIG is located in Senai (Johor), Nilai (Negeri Sembilan), Puchong (Selangor), Kuantan (Pahang), Bukit Minyak (Penang), and Krubong (Melaka). Its extensive network of gas refilling facilities enables SIG to promptly deliver gases to its customers more cost effectively. It also enables the group to cater to the growing demand of industrial gases nationwide. Figure 7: Location of SIG s operational facilities Source: OSK, Prospectus OSK Research See important disclosures at the end of this report 5
SIG s 6 operation facilities. SIG possesses two production-cum-refilling facilities located in Senai (Johor) and Nilai (Negeri Sembilan). It also has four refilling plants in Puchong (Selangor), Kuantan (Pahang), Bukit Minyak (Penang), and Krubong (Melaka). As shown in Figure 8, at SIG s headquarters in Senai there are two production plants. One is an ASU plant for liquid oxygen and liquid nitrogen with annual production capacity of 20,160 tonnes, and another is the production plant for dissolved acetylene with annual production capacity of 864,000 m 3. Besides that, there is a refilling plant for oxygen, nitrogen, argon, carbon dioxide and gas mixture. Another production plant is located in Nilai to manufacture acetylene and fuming gas. In Nilai, there is also a refilling plant for carbon dioxide. In addition, four other refilling plants are located in different states, including Pahang, Penang, Selangor and Melaka. Figure 8: SIG s operational facilities Location Senai, Johor Nilai, Negeria Sembilan Location Kuantan, Pahang Bukit Minyak, Penang Puchong, Selangor Krubong, Melaka Annual production capacity Air Separation Unit (ASU) Plant (Liquid oxygen & liquid nitrogen) Total: 20,160 tonnes Acetylene Plant Total: 864,000 cubic metres Acetylene Plant Total: 1,296,000 cubic metres Fuming Gas Plant Total: 360,720 kg Refills Oxygen Oxygen, nitrogen, carbon dioxide Oxygen, nitrogen, argon, carbon dioxide, and gas mixture Oxygen, carbon dioxide Source: OSK, Company Figure 9: SIG s branch in Puchong Figure 10: SIG s branch in Kuantan Source : OSK, Company Figure 11: SIG s branch in Penang Source : OSK, Company Figure 12: SIG s branch in Melaka Source : OSK, Company Source : OSK, Company OSK Research See important disclosures at the end of this report 6
Established player in the entire value chain of industrial gases. SIG operates in the entire value chain of industrial gases starting from manufacturing, refilling and distribution. Both direct and indirect channels are used to distribute the industrial gases to its customers. With direct distribution, SIG sells its industrial gases directly to large end users while its indirect distribution are made through intermediaries such as dealers, industrial gas refillers, and other operations in the industrial gas industry. To emphasize, dealers sell to end-users without further processing, while refillers buy gases in bulk liquid or gaseous form and refill them into cylinders for resale to dealers and end-users. SIG, through its indirect distribution, also supplies industrial gases to other operators in the industrial gas sector. Figure 13: SIG distribution channel Industrial gases manufacturing Direct Distribution End Users Distribution and cylinder rental Dealers Sourced from third party Refilling Indirect Distribution Industrial gas refillers Other operators in the industrial gas Source: OSK, Prospectus Serving a wide range of users. SIG manufactures and supplies industrial gases that are ultimately used in a wide range of applications in the ship building industry, metal fabrication industry, oil and gas industry, iron and steel industry, chemical industry, machinery and equipment industry, industrial gas industry, building and construction industry, and healthcare industry. Currently, the group has a client base of more than 1,000 clients, among which the top 5 customers account for less than 25% of the total group revenue for FY09. Those customers are Sime Darby Engineering Sdn Bhd, Malaysia Marine & Heavy Engineering Sdn Bhd, Kengas Industrial Supplies Sdn Bhd, Aerogas Industrial Supply Sdn Bhd and Oriental Oxygen Sdn Bhd, with the average length of relationship being 9 years. With this diversified cliental base (despite 98% of the revenue being from Malaysia) and long term relationship with its key customers, this would ensure earnings sustainability for the group. Figure 14: Industrial users Oxygen used to remove impurities and to increase combustion temperature in furnaces Orgon as shielding gas in metal welding Argon as shielding gas in metal welding Acetylene and oxygen used in combustion to produce a very hot flame to cut weld metals Oxygen, carbon dioxide used as raw material to manufacture other chemicals Nitrogen as feedstock to produce ammonia Acetylene as raw material for conversion into acrylic acid product Oxygen to improve viscosity of oil and gas flow Nitrogen used to create inert atmosphere to protect oil and gas from coming in contact with oxygen and liquid Oxygen used in surgery, inhalation therapy Nitrogen as freezing agent for biology substances Fuming gs as steriliser for medical equipments OSK Research See important disclosures at the end of this report 7
The principal markets. SIG s principal market is Malaysia, which accounted for 98% of total revenue for FY09, while its overseas markets (Singapore and Indonesia) accounted for only around 2% of revenue. The FY09 revenue from the local market came from 5 states, namely Johor, Selangor, Pahang, Penang, and Melaka. Among the 5 states, Johor and Selangor are the largest markets, making up 37% and 31% of total revenue for FY09 respectively. Figure 15: FY09 revenue contribution by state Melaka 9% Others* 2% Penang 9% Senai 37% Kuantan 12% Puchong 31% *Singapore and Indonesia Manufacturing - the biggest source of revenue. The group s core revenue comes from the manufacturing, refilling and distribution of industrial gases. As shown in Figure 16, more than a half of its total group revenue was generated from manufacturing, which has maintained its share of contribution at 54% for the past few years. Refilling and distribution contributed respectively 24% and 12% of total revenue for FY09. Besides its main revenue streams, about 10% of group revenue is derived from other business activities including the provision of cylinder and delivery services, and the supply of other products and services. Figure 16: FY09 revenue contribution by business activity Distsribution 12% Cylinder & Delivery 8% Others 2% Manufacturing 54% Refilling 24% OSK Research See important disclosures at the end of this report 8
SIG s market positioning. Most of the industrial gas currently used in Malaysia is produced locally. Nitrogen occupies the biggest market in 2009 based on sales value of domestic production, followed by oxygen with 27% of sales value, argon, acetylene and carbon dioxide. Based on local production, SIG group commands 2% share of the market for nitrogen, 13% for oxygen and 27% for acetylene. In 2009, SIG ranked fifth based on total revenue among industrial gas producers in Malaysia that operate ASUs and produce atmospheric gases such as nitrogen and oxygen. It also ranks fifth among producers of acetylene in Malaysia based on total revenue. Figure 17: FY09 sales value of domestic production Carbon dioxide 2% Argon 9% Acetylene 6% Oxygen 27% Nitrogen 56% OSK Research See important disclosures at the end of this report 9
ANALYSIS ON COMPETITORS The third largest player. We understand from its IPO briefing that SIG is ranked 3 rd in the industry, with MOX-LINDE Group being the biggest market player operating in the peninsula and Sabah and Sarawak, followed by Air Products Malaysia SB, which we gather from secondary research also operates in Peninsular Malaysia. The other 2 notable competitors are B.I.G Industrial Gas SB, which is the largest supplier of industrial gases in Sarawak, and Eastern Oxygen Industries SB, which operates in the Sarawak market. The latter 2 competitors do not directly compete with SIG since both are in different geographical areas. Malaysian Oxygen (MOX) Group. MOX group manufactures and distributes industrial, special and medical gases, and provides a range of related services including installation of gas equipment and pipelines and associated engineering services. It also supplies packaged chemicals, and welding and consumable products. In 2007, the group was integrated with The Linde Group, a renowned gaseous and engineering global company headquartered in Munich, Germany. MOX-Linde group is today the number 1 gas company in Malaysia. With its more than 60 plants and sites and 17 gases and gear nationwide, the company serves a variety of industries such as automotive, environment, laboratories, medical, oil/gas and petrochemicals, pharmaceuticals, safety and industrial hygiene, as well as utilities. Figure 18: Location of MOX plants in Malaysia Air Products Malaysia Sdn Bhd. Air Products Malaysia Sdn Bhd is a wholly owned company of Air Product and Chemicals Inc., which is a leading supplier of industrial gases and related equipment and services, and selected chemicals, and operates in over 40 countries throughout the US and in Canada, Puerto Rico, South America, Europe and China. The company provides a wide range of gases such as atmospheric gas, process and specialty gas, performance materials and chemical intermediates to customers in the technology, energy, healthcare and industrial markets. The gases are supplied as cylinder gas through its nationwide network of sales centres and as bulk gas trucked to the customers site or by using on-site gas generation systems. Figure 19: Location of Air Products s plants in Malaysia OSK Research See important disclosures at the end of this report 10
B.I.G Industrial Gas Sdn Bhd. B.I.G is the largest supplier of industrial gases in Sarawak with a 60% market share. It supplied liquid oxygen, liquid nitrogen, acetylene, carbon dioxide, argon, nitrous oxide, helium, hydrogen, entonox, specialty gases and gases mixtures, and medical gases. It also trades in building materials, welding or cutting equipment, and consumables. The company has been operating in East Malaysia for more than 22 years and owns three production plants and two refilling facilities in Kuching, Bintulu, Sibu, Miri and Labuan. It is a wholly owned company of B.I.G Industries Bhd, which was listed on the KLSE Second Board in 1995. Figure 20: B.I.G s operational facilities Figure 21: Location of B.I.G s plants in Malaysia Eastern Oxygen Industries Sdn Bhd. Eastern Oxygen Industries is the manufacturer and supplier of industrial, medical and specialty gases, welding/cutting equipment and consumables in East Malaysia. This Sarawak-based company serves customers from the fabrication, medical, oil and gas, food, electronics and shipbuilding industries in major towns in Sarawak. It has an air separation unit in Kuching and Miri to produce liquid oxygen and liquid nitrogen, an acetylene production plant in Kuching, a carbon dioxide production plant in Kuching, a liquid nitrogen generator plant in Sama Jaya, and an oxygen compressing station in Kuching, Sibu and Miri. OSK Research See important disclosures at the end of this report 11
Figure 22: Locations of Eastern Oxygen Industries plants in Malaysia OSK Research See important disclosures at the end of this report 12
FINANCIALS Steady growth. The group s revenue has jumped from around RM27m in 2004 to our forecast of about RM60m in 2010 with consistent revenue growth at a 6-year CAGR of about 14.1%. Also, note that despite the global economic downturn in 2009, it has managed to sustain its revenue year on year, down only by a marginal 1.4%. Besides its good reputation in the industry, we believe this was also attributed to the strength of the Malaysian economy. The group s gross profit has been on the uptrend in line with revenue growth. Figure 23: Group revenue and gross margin 80 41% 70 60 34.8% 36.4% 34.9% 37.7% 36.3% 36.5% 35.3% 60.0 55.4 31% 54.6 Revenue (RM'm) 50 40 30 27.2 34.0 40.5 49.0 21% Gross Margin 20 11% 10 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10f 1% Source: OSK, Prospectus Lucrative margins. In line with topline growth, the group has been registering an average EBITDA margin of about 23% since 2007. Nevertheless, due to the economic slowdown in 2009, the group recorded a fall in net profit of 15% y-o-y compared with a net profit of RM7.1m in 2009, against the net profit of RM8.4m reported in 2008. Net profit margin has consistently grown from 2006 to 2008, but dropped from 15.2% in 2008 to 13% in 2009 due to under-provision of deferred tax in 2008 amounting to RM1.3m. Going forward, we expects margin improvement inline with the recovery of the global economy. Figure 24: EBITDA margin and net margin 30% 27.3% 25% 22.6% 23.0% 22.5% 24.8% 23.2% 24.3% 20% 15% 15.2% 15.4% 10% 8.3% 10.8% 8.9% 11.9% 13.0% 5% 0% FY04 FY05 FY06 FY07 FY08 FY09 FY10f EBITDA margin Net margin Source: OSK, Prospectus OSK Research See important disclosures at the end of this report 13
INVESTMENT HIGHLIGHTS Good reputation and established track record. SIG has an established reputation and track record, having been involved in the industrial gas industry since 1997. When it was first established, it was initially engaged in producing acetylene and refilling industrial gas cylinders. It has also been producing liquid oxygen and liquid nitrogen since 2003. Its reputation and proven track record gives new customers the assurance that it is a reliable supplier of industrial gases. Also, since its top 5 customers have been with the company for about 9 years, this is an indication that they are happy with its products and services. In-house industrial gas production. Having its own in-house gas production facilities gives the group more flexibility in terms of pricing as it is less dependent on industrial gases purchased from third parties. Also, this is key in ensuring cost competitiveness, high product quality and good customer service in order to retain existing customers and attract new ones to sustain and grow the business. SIG s main manufacturing facility is in Senai, where it operates an ASU to produce liquid oxygen and liquid nitrogen. It also operates an acetylene production plant at the same facility. Its capability to produce industrial gases in-house gives SIG sufficient control over the quality of the industrial gases that it produces. A to Z industrial gas provider. SIG manufactures, refills and distributes all kinds of industrial gas such as oxygen, nitrogen, carbon dioxide, dissolved acetylene, gas mixtures, special gases, fuming gas, refrigerant products, and gas-related services equipment and services. This allows the company to meet its customers needs and serve a diverse customer base, including shipbuilding, metal fabrication, iron and steel, chemical, healthcare and others. Expansion plans targeted at SCORE. SIG will utilize RM14.7m of the gross proceeds raised to purchase land in Sarawak, Krubong (Melaka), and Kuantan (Pahang). It plans to build a new industrial gas production plant and refilling plant in Sarawak, establish a new gas refilling plant in Krubong, and build a new gas refilling plant in Kuantan. This production-cum-refilling plant in Sarawak will serve the East Malaysia market and also capitalize on the Sarawak Corridor of Renewable Energy (SCORE) since more than half of SCORE s 10 priority industries include users of industrial gases such as aluminum and steel, oil and gas, marine engineering, and palm oil industries. The expansion plan would enable SIG to widen its distribution network, serve a wider range of customers needs, and therefore improve its financial outlook. OSK Research See important disclosures at the end of this report 14
RISKS TO OUR VIEW AND VALUATIONS RISK TO OUR VIEW Lack of long-term contracts. Currently, SIG has minimal formal long-term contracts with its existing customers. Instead, it relies on a long-standing business relationship with them to ensure the continuity of its business. While having formal long-term contract is good for the company, we think the lack of such contracts may be due to stiff competition. Lack of presence overseas. SIG is currently centered on Peninsular Malaysia, from which 98% of its sales is derived from this market while the balance 2% are from oversea markets like Singapore and Indonesia. Although this may not pose a risk in the short term, we believe the company would need to prepare itself for a global reach in case demand from the Peninsular Malaysia market reaches saturation or slows down. Nevertheless, we gather from the IPO briefing that management is looking into this to reduce its reliance on one geographical market. Threat from new entrants. Although SIG is among the top 5 industrial gas producers in Malaysia, it still does not have a monopolistic market, which will always subject the company to the threat of new entrants, especially when new players acquire the relevant technology in manufacturing and refilling of the industrial gases. Threat of competition from existing rivals. Since the industry is seeing more players moving towards becoming one-stop services solution providers to better facilitate the needs of their customers as well as progress or improve going forward, this may ultimately lead to cannibalization of business from one another. This we see as posing a risk to SIG in the future. Potential rise in electricity and petrol prices. Electricity is one of the main inputs used by SIG in the production of industrial gases. It is primarily used to operate ASUs to produce liquid nitrogen and liquid oxygen. This cost is expected to account for 10%-15% of its total cost. Petrol cost, on the other hand, makes up about 5%-10% of total costs. Hence, any cost increase may have negative impact on SIG s bottomline. VALUATIONS IPO price fair. Based on our EPS forecast of 6.2 sen for FY10, we believe the IPO price of RM0.58 is reasonable, which should be within the 9-10x PE band. In terms of peer comparison, of the 4 competitors, only 2 companies - Air Products and Chemical Inc (listed on the US stock exchange) and B.I.G Industries Bhd, are listed. Air Products and Chemical Inc is trading at an estimated PER of 13x-15x at FY10-11 consensus estimates. As for B.I.G Industries, there are no consensus estimates. Hence, using Air Products and Chemical Inc as a guide, we believe it would be reasonable for SIG to trade at a discount to its bigger peer. Hence our target price for SIG is RM0.62, based on a PE of 10x FY10 EPS. OSK Research See important disclosures at the end of this report 15
EARNINGS SUMMARY FYE Dec (RMm) FY06 FY07 FY08 FY09 FY10f Turnover 40.5 49.0 55.4 54.6 60.0 EBITDA 9.1 12.1 12.8 13.3 16.4 PBT 5.1 8.2 9.0 9.4 12.2 Net Profit 3.6 5.8 8.4 7.1 9.3 EPS (sen) 2.4 3.9 5.6 4.7 6.2 DPS (sen) - - - - 0.6 Margin EBITDA (%) 22.5 24.8 23.2 24.3 27.3 PBT (%) 12.6 16.8 16.2 17.2 20.3 Net Profit (%) 8.9 11.9 15.2 13.0 15.4 ROE (%) 11.4 15.6 17.8 13.6 10.8 ROA (%) 5.7 8.9 10.9 7.9 7.6 Balance Sheet Fixed Assets 46.4 48.4 58.9 69.2 93.0 Current Assets 17.1 17.2 18.3 21.3 28.2 Total Assets 63.5 65.5 77.2 90.5 121.2 Current Liabilities 22.8 17.0 18.1 20.4 21.0 Net Current Assets 40.6 48.5 59.1 70.0 100.1 LT Liabilities 8.8 11.2 11.7 17.8 14.1 Shareholders Funds 31.8 37.4 47.3 52.2 86.1 Net Gearing (%) 50.0 41.0 33.5 35.9 16.1 OSK Research See important disclosures at the end of this report 16
SK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investor or Accredited Investor, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd ( DMG ). All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published and printed by :- OSK RESEARCH SDN. BHD. (206591-V) (A wholly-owned subsidiary of OSK Investment Bank Berhad) Chris Eng Kuala Lumpur Hong Kong Singapore Jakarta Shanghai Malaysia Research Office OSK Research Sdn. Bhd. 6 th Floor, Plaza OSK Jalan Ampang 50450 Kuala Lumpur Malaysia Tel : +(60) 3 9207 7688 Fax : +(60) 3 2175 3202 Hong Kong Office OSK Securities Hong Kong Ltd. 12 th Floor, World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) 2525 1118 Fax : +(852) 2810 0908 Singapore Office DMG & Partners Securities Pte. Ltd. 20 Raffles Place #22-01 Ocean Towers Singapore 048620 Tel : +(65) 6533 1818 Fax : +(65) 6532 6211 Jakarta Office PT OSK Nusadana Securities Indonesia Plaza Lippo, 14 th Floor, Jln. Jend. Sudirman Kav 25, Jakarta 12920 Indonesia Tel : +(6221) 520 4599 Fax : +(6221) 520 4598 Shanghai Office OSK (China) Investment Advisory Co. Ltd. Room 6506, Plaza 66 No.1266, West Nan Jing Road 200040 Shanghai China Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633 OSK Research See important disclosures at the end of this report 17