May 18, 2011

Kencana Petroleum Buy AME - Positive by Maybank

A strategic acquisition. We are upbeat on Kencana’s purchase of AME, on financial and operational aspects. Valuations are decent, in our view, and the deal, secured with profit guarantees (RM40m p.a. for FY11-12) is mildly EPS accretive (+1 sen to EPS). The acquisition will provide Kencana a foothold into the subsea markets and ownership of 4 vessels. This ‘all-share transaction’ will turn vendors of AME into the
2nd  largest shareholder of the Group with a 7.6% stake. Our forecasts and target price are under review pending further details. Buy. 

Acquires AME via issuance of 149.3m new share @ RM2.68/ shr. Kencana has proposed to acquire the entire stakes in Allied Marine & Equipment Sdn Bhd (AME) for RM400m. The conditional sale and purchase agreement will be paid to AME’s vendors – Worldclass Inspiration Sdn Bhd (WCI) and Allied Assets Holdings Sdn Bhd (AAH) via issuance of 149.3m new Kencana shares at an issue price of RM2.68 per share. The deal is expected to be completed by 3Q 2011. 

Deal embedded with ‘profit guarantees’. For this deal, the vendors have provided Kencana  a  profit guarantee (ex-exceptionals/ currency gain) of not less than RM40m p.a. for FY11-12 (FYE Sep). Any shortfall will be offset by: (i) pledged shares agreed under the Stakeholding Securities or (ii) any other form of payment acceptable to both parties.
An earnings accretive pact. We are positive on this acquisition, financially and operationally. Based on the acquisition price and projected income, Kencana will acquire AME at prospective PER of 10x, below its PE multiples of 19-21x for FY12-13, based on existing estimates. The deal allows Kencana to set a foothold in the underwater services projects and expand its operations horizontally. Asset-wise,
Kencana will own 4 DP Class II vessels for diving and ROV support.

Potential impact: +1 sen to EPS. The issuance of new shares (149m) will lift Kencana’s share base to 1,986.7m (+8.1%) while AME’s profit guarantee will raise its core net profit to RM270.5m (+14.0%; 10-month impact) in FY12 and RM313.3m (+14.6%; 12-month impact) in FY13. Putting things into perspective, the net impact is an additional 0.9 sen each to EPS: +13.8 sen for FY12 and +15.8 sen for FY13.