Alam Maritim… dated Jan 2013

It owns a young fleet of 44 OSVs with the average of 4.5 years is riding the wave of contracts in the O&G sector.

The latest contracts are expected to boost the company’s utilization rate to above 80%. The rising demand coupled with limited supply has jacked up charter rates which augurs well for vessel operators like Alam Maritim.

It has secured a RM576mil contract from Petronas Carigali Sdn Bhd to provide six marine vessels. The RM576mil included an extension option, if exercised. The contract, which has taken effect from Jan 1, 2013 to Dec 31, 2017 is for a firm period of five years. The contract was expected to positively contribute to the group's earnings and net assets for the financial years ending Dec 31, 2013 and beyond.

Its balance sheet as at Sept 30 2012 showed that Alam Maritim had borrowings of rm561 million and a cash pile of rm111 million.

To sustain its share price momentum (Jan 2013), it needs to clinch contracts for its offshore installation and construction and subsea business divisions. If it ails to do so, the company’s earnings growth will be jeopardised because of the OIC division may sink into losses of no new contract is secured in the near future.
The risk remains with its OIC and subsea businesses.

The existing contract will expire in April 2013 and if the company lands no new contracts after that, it will incur losses of rm3 million to rm4 million a month as it still has pay divers and all. The losses will offset the bullishness of its OSV division.

Towards the end of 1QFY2013, we may see profit taking if the company does not secure any contract for its OIC and subsea businesses as earnings growth is not going to be great then.

However it is beefing up its orderbook for OIC

Outside Malaysia, Alam Maritim has been invited to submit bids for Middle Eastern and African jobs.

Airasia… dated Jan 2013

Shareholders could receive a special dividend, even though the low cost carrier has placed a firm order for 100 new aircraft.

It purchased 24 planes in 2012 but it still had free cash flow of over rm300 million them – thanks to the listing of its two associates in Thailand and Indonesia. After their IPOs. The associates will now (Jan 2013) buy their own planes and carry the assets in their own books and not in Airasia’s, unlike in the past.

While the special dividend still needs to be approved, it is likely to pay out a larger portion of its net profit.

The biggest beneficiaries of the dividend payput would be its largest shareholder – Tune Air Sdn Bhd (which has a 25.49% stake), Wellington Management Co (11.31%) and the EPF with 7.61%.

The budget carrier’s move to pay a generous dividend is a departure from the norm in the lowest carrier segment, where companies normally keep their cash expansion. However the group has been making steady profits and this is in a good position to reward its shareholders.

As at Sept 30, 2012 it had net gearing ratio of slightly over one based on its total borrowings of rm7.81 billion, shareholders’ funds of rm5.5 billion and cash of rm2.2 billion.

What may comfort investors is that by 2017, most of Airasia’s orders would be fully paid for, giving it the option to sell or even lease out its fleet of older aircraft.

Tenaga… dated Jan 2013

Its prospects

Escalating fuel costs, which has haunted Tenaga could be a thing of the past following the structural changes in the energy sector.

The price of coal, a commodity which Tenaga purchases at spot price has been fallen below US$100 per tonne. It has been hovering between US$90 and US$95 during Dec 2012 – Jan 2013.

The softer prices will benefit Tenaga as the commodity accounts for about 36% of its total fuel cost. Coal is the second largest source of fuel for Tenaga after gas. Considering that coal is purchased at market prices, a lower price means a better bottom line for Tenaga.

Weak coal prices would give Tenaga’s earnings for current fiscal year a big boost. It is estimated that for every US$1 drop in coal prices, this translates into a cost saving of US$21 million for Tenaga.

Sentiment for Tenaga has improved amid optimism that the risk to the group’s earnings has declined given the reforms in the energy sector. This includes decreasing capacity payments for two first generation IPPs whose power purcahse agreements have been renewed with adjustments on the payments to Tenaga.

It is now (Jan 2013) just a question of timing for fuel cost pass through mechanism to be put in place.
The power capacity payment is expected to save Tenaga about rm500 million to rm600 million a year out of the rm1.4 billion that is paid to the first generation IPPs.

It is understood that the amount saved will be pooled to form a stabilization fund to compensate Tenaga if it is unable to pass on the fuel cost increments to the end consumers.
As the fund snowballs over time, it will help to cushion any adverse impact brought on by a spike in fuel costs. This, to some extent, has reduced concerns that the utility giant’s earnings would always be hard hit by higher fuel costs due to the failure to pass on additional costs to the consumer as it had always done so in the past.

The ongoing sector reform is positive for Tenaga over the longer term with more competitive pricing of power supply from the IPPs. But right now (Jan 2013), it needs the tariff hike to address rising gas costs, in line with the government’s plan to gradually reduce the fuel subsidy.

It is well known that there is a lack of political will to put in place a fuel cost pass through mechanism for Malaysia’s electricity tariff. However the ruling government would have a stronger impetus after the GE when it comes to cutting subsidies to narrow Malaysia’s budget deficit.

By the second half of 2013 expect an acceleration of initiatives to improve Tenaga’s operations. This could lead to higher electricity tariffs and better economic returns for Tenaga.

Nevertheless, the less optimistic believe it is too early to be overly optimistic about Tenaga’s prospects. They say the government still has not shown any firm indication of whether there will be a revival of the gas subsidy rationalization plan. Under the plan, Malaysia’s gas price has to be increased very six months, something that has not been happening.

There is no certainty on gas prices. Very soon, Tenaga will have to import at market prices and it is still not known if the price can be passed on to consumers.

The only concern is Tenaga’s vulnerability to government regulation as the company has virtually no control over its pricing structure or costs.

Passing on the increases in the fuel cost has long been a challenge for Tenaga. Will the scenario be any different after the GE.

Shareholder percentage of Lion Group

Lion Industries

William Cheng
Ø      20.14% stake in Parkson Holdings
Ø      40.61% stake in Lion Industries
Ø      28.67% stake in Lion Diversified

Lion Diversified
Ø      49.2% stake in Lion Corp

Lion Industries
Ø      14.5% in Lion Corp
Ø      72% stake in Lion Forest
Ø      24.55% stake in Parkson Holdings
Ø      20.85% stake in Lion Diversified

What’s NEXT! … dated Jan 2013

The proposed corporate restructuring at the Lion group of companies, aimed at reducing debts and streamlining the conglomerate’s diversified business interests, is a preclude to a separate reorganization ahead of the group’s planned partial divestment of its beleaguered steel business.

This is the first phase and the next move will be to put the entire steel business into a SPV to make way for a strategic investor.

But how quickly Lion pushes ahead with its corporate restructuring will depend on how tightly the government decides to regulate the import of steel products under a new plan to protect local players. Until the steel blueprint this will be a a holding pattern. Unless the group is accorded enough protection against cheap steel imports, potential suitors for its steel business will stay in the sidelines.

In early Jan 2013, Lion Corp’s flagship listed entity received the go ahead from its lenders to dispose of its entitre 25.34% stake in Lion Industries Bhd to group chairman Tan Sri William Cheng and Dynamic Horizon Holdings Ltd.

That in turn will give the Cheng family a tighter grip on the group’s yet to be completed blast furnace project. Estimated to cost rouglhy rm3.2 billion, the blast furnace is being touted as central to the revival of the Lion group’s Megasteel Sdn Bhd. Proponents of the blast furnace in Banting say it will radically cut operating costs and help improvev the quality of Megasteel’s products.

Work on the blast furnace has been disrupted by funding problems and is only 18% completed. Cheng has been courting potential investor to help revive his steel business but talks that began two years ago were derailed by the uncertainty in the domestic steel sector.

As Malaysia’s only integrated flat steel producer, Megasteel has been given protection in the form of tariffs and import restrictions on the product. But the company has been swamped by losses which it blames on the so called illegal import of flat steel.

Megasteel will continue to enjoy government protection for up to 24 months if its able to get back into a positive cash flow position by mid 2013.


Cheng appears to be betting that this target can be achieved. He and parties related to him are proposing to acquire the shares in Lion Ind.

Lion industries registered a net assets per share of rm4.40 for 2012. But its operations have been loss making since 2009.

Astro

Its Prospects … dated Dec 2012

It still has huge room for growth given the low existing pay TV household penetration rate of 50%, a potential uptick in ARPU as subscribers migrate to the HD platform, its superior content and high entry barriers to the pay TV industry due to significant economies of scale.

Currently (Dec 2012) 1.8 million households have already migrated over to the HD platform (55% of Astro’s pay TV subscriber base) and management intends to swap out most of its legacy standard definition set top boxes by end FY2014.

It is believed that most of its customers will subscribe to High Definition (HD) contents when the company migrates all its customers to the new HD platform. As at October 31, 2012, Astro has over 3.2 million subscribers, of which about 1.77 million (or 55 per cent of subscribers) are currently (Dec 2012) watching their TV contents via the Astro B.yond set-top boxes. Of the 1.77 million customers, about two-thirds subscribe to HD contents.

HD channel is one of its key differentiators against what is available out there, whether it's privacy or other content providers.

Having most of its customers to subscribe to HD contents is one of the key for Astro's growth over the next few years from Dec 2012.
Astro’s partnership with Maxis and TimeDotCom to provide IPTV services to the masses could provide a new avenue of growth, with the bundling of voice, broadband and IPTV services to offer new products to consumers.

It will be catalyzed by a convergence of media platforms and successful execution of its new IPTV product.

After all, Astro’s dominance today (Dec 2012) grew on the back of monopoly – which ends in 2017 – of satellite technology which is old compared with HSBB-powered TV.

Competition will be stronger as Astro will be challenged by TM’s triple play service on HSBB network. Astro is looking to launch its triple play service with MAXIS by end of Jan 2013 and on TM’s fiber network by April 2012.

Astro enjoys a monopoly on the pay TV industry with a market share of more than 95% and TM;s Hypp TV being its only. However, ABN Media Corp, a newcomer in the pay TV is looking to challenge the incumbent with grand and ambitious plans in mind.

Regardless of how ABN ups the ante against Astro, industry observers do not foresee the latter faltering and surrendering market share given its strong brand and resilient ecosystem which the company took many years to establish and nurture.

Some observers opined that AStro still faces the threat of new players, high content costs and regulatory risks.

It is open to sharing its contents with its rivals - as long as it makes business sense to the company and the company is constantly in talks with parties on such arrangements. Under the new content-sharing rules, all TV stations without broadcasting rights to certain major sports events would be able to share the contents obtained from rights holder on reasonable commer-cial terms.

Its revenue rose 11.5% to RM3.133bil from RM2.811bil mainly due to the increase in subscription and advertising revenue of RM269.4mil and RM52.2mil respectively.

On the outlook, Astro TV expected subscriber net additions, ARPU and adex to continue to contribute to its revenue growth.

The conversion of residential subscribers to Astro B.yond set-top boxes is progressing according to plan and is expected to complete by the next financial year. This will continue to drive higher take-up of value added services such as high definition, recording services and Video-On-Demand, which are the primary drivers of ARPU growth.

However, this is expected to impact the group EBITDA and net profit for the remainder of this financial year. The group continues to have good visibility in respect of content costs which are in line with its expectation.

It reported net profit of RM118.08mil in the third quarter ended Oct 30, 2012 from RM103.52mil a year ago, boosted by unrealised foreign exchange (forex) gains.

There was an unrealised forex gain of RM30.6mil versus an unrealised forex loss of RM47.4mil a year ago, which was offset by a decline in earnings before interest, tax, depreciation and amortisation (EBITDA) of RM14.3mil and higher depreciation of RM45.6mil.

Revenue rose 8.3% to RM1.078bil from RM995.31mil a year ago. Earnings per share were 5.20 sen. It declared an interim dividend of 1.5 sen per share.

The higher revenue was mainly due to the increase in subscription revenue of RM74.5mil. The increase in subscription revenue is attributed to both an increase in ARPU for Pay-TV residential subscribers of RM4.90 (from RM87.40 to RM92.30) and an increase in number of Pay-TV residential subscribers from 3,013,500 to 3,213,100.

However, group earnings before interest, tax, depreciation and amorisation fell by RM14.3ilm from a year ago mainly due to higher installation, marketing and distribution costs. These were in relation to customer acquisition as well as higher B.yond boxes swap out, higher content costs, staff related costs and impairment of receivables.

As for its cashflow, cash and cash equivalents increased to RM927.4mil from a year ago mainly from proceeds from the shares issuance, net of issuance costs of RM1.387bil. However, this was offset by lower operating cash flows of RM69mil and payment of dividend of RM366.0mil.

For the nine-month period ended Oct 30, 2012, the earnings fell 29% to RM334.84mil from RM472.04mil.

The decrease in net profit is mainly due to higher depreciation of RM113.2mil, decrease in EBITDA of RM46.6mil, and increase in finance costs of RM70.1mil, which is partly offset by increase in finance income of RM33.6mil and lower taxation of RM57.7mil.