CORPORATE EXERCISES AND WHAT INVESTORS...
Transcript of CORPORATE EXERCISES AND WHAT INVESTORS...
CORPORATE EXERCISES AND WHAT INVESTORS SHOULD LOOK
FORJOINT PRESENTATION BY MSWG AND ASIA EQUITY RESEARCH
1 APRIL 2016
This presentation illustrates corporate exercises of three listed companies, involving Mandatory / Voluntary
General Offers and some key messages that we could gather from such exercises namely:-
(i) Broad understanding of the types of privatization approaches for listed companies – Mandatory General
Offer (MGO) and Conditional Voluntary General Offer (VGO)
(ii) Traded Share Price and Intrinsic Value – Circumstances when traded share price may not fully reflect
its intrinsic value
(iii) Broad overview of equity valuation techniques and key points investors should for on the valuation
methods being used in ascribing fair value.
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COMMON TYPES OF PRIVATISATION METHODS FOR LISTED COMPANIES
(i) MANDATORY GENERAL OFFER (UNCONDITIONAL)
UPON TRIGGERING THE CODE OF TAKEOVER AND MERGERS, WHEN OFFEROR SHAREHOLDING REACHES 33%
OR MORE.
(ii) CONDITIONAL GENERAL OFFER
A CONDITIONAL VOLUNTARY OFFER TO ACQUIRE SHARES NOT OWNED BY THE OFFEROR. TYPICALLY, OFFER
BECOMES UNCONDITIONAL WHEN ACCEPTANCE RESULTS IN OFFEROR SHAREHOLDING, EQUAL OR EXCEEDS 90%
OF TOTAL ISSUED SHARES OF LISTED COMPANIES.
Why 90% is chosen ?
BURSA SAHAM LISTING REQUIREMENTS – IN A TAKEOVER AND MERGERS, WHEN ACCEPTANCES LEVEL ACHIEVES
90% OR MORE, ( PARAGRAPH 16.07 ) A LISTED COMPANY CAN BE VOLUNTARILY PRIVATISED
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POINTS Explanation
Prices MAY NOT trade at its fair price in normal trading
circumstances
Bernas – Concession related business and possess classified
information or other information not released to the market.
Market participants may not be fully aware of true value,
until corporate exercise undertaken.
SRC – Not under research coverage
What are the privatization methods available ? Mandatory ( Unconditional ) = Bernas, possibly SRC
and Conditional General Offer = MISC
How to uncover signals prior to corporate exercise if no
announcements are made yet by company
Studying the recent / past annual reports especially the
chairman and managing director’s statements or any other
“signals” from other published information
Valuation concepts We should not look into P/E and P/B alone and make
conclusions. Rather a study of other financial indicators and
qualitative aspects to determine the health of a company.
Rights of shareholders in a MGO Vote for / against depending on investors’ evaluation
Substantial information could be gathered from a
detailed study of annual reports for a period of say 5
years
Illustration by using SRC
SOME LESSONS LEARNT FROM PAST CORPORATE EXERCISES – TO BE ILLUSTRATED
4
Bernas means Padiberas Nasional Berhad, a completed case and now Bernas has been delisted.
SRC means Shell Refining Company (Federation of Malaya)Berhad, a recent exercise that may trigger
a Mandatory General Offer if propose transaction is proceeded.
MISC means MISC Berhad, a case whereby shareholders acceptances level of 90% as stipulated, was not achieved by offeror. Continue to be listed, today.
Privatisation Methods Companies
1 MGO Bernas, Possibly SRC
2 Conditional Takeover Offer MISC
Cases to be discussed
CASE 1 - BERNAS
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HOW WAS THE TAKEOVER CODE TRIGGERED? When Parties Acting in Concert (PAC) owns 72.57%
share in Bernas. This triggers a Mandatory General Offer by PAC to acquire shares that it does not
own at RM3.70 per share
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Case 1 – Bernas
An Overview of MGO
and Exit Offer under
paragraph 16.06 of
Bursa Saham LR
1. Accepted by 75% or more shareholders (in value ) who attend meeting
2. Not rejected by 10% or more shareholders (in value) who attend meeting
Asia Equity Research www.aer.global
PROPOSED DELISTING / VOLUNTARY WITHDRAWAL - ILLUSTRATION ONLY AND DOES NOT CONSTITUTE ANY FORM OF ADVICE
PARAGRAPH 16.06 BURSA SAHAM LISTING REQUIREMENTS
COMPULSORY
ACQUISITION
SHAREHOLDERS HOLD
UNLISTED SHARES
NOT APPROVED BY
SHAREHOLDERS
CONTINUE TO BE LISTED
APPROVED BY
SHAREHOLDERS
A VOLUNTARY TAKE-OVER OFFER WILL BE
EXTENDED TOGETHER WITH THE PROPOSED
DELISTING
COMPANY SHALL BE DELISTED
ACCEPTING
SHAREHOLDERS
NON-ACCEPTING
SHAREHOLDERS
RECEIVED TAKE OVER
PRICE
ACCEPTANCE EQUAL
TO 90% OR MORE
OFFER SHARES
ACCEPTANCE LESS THAN
90% OF OFFER SHARES
CASE 1 – BERNAS
KEY MESSAGES
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CASES KEY MESSAGES
BERNAS Valuation point Concession related business. Share price was low until privatisation offer takes place. Possible reason: concession agreements are private documents, and not much information could be gathered unless disseminated to the public in past corporate exercises.
Valuation methodology most appropriate – Free Cash Flow. Subjective but governed by valuation standards
In a span of one year, 3 offfers were made to complete the privatisation process.
Concept of Fair and Resonableness
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CASE 1 – BERNAS
KEY MESSAGES
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VALUATION POINTS:-
1. For equity valuation of concession, most appropriate valuation approach is Free Cash Flow.
However, in most instances, this method requires inputs on business model, certain details of
concession arrangements (which are sometimes classified information) and hence traded
share price may not be reflect the intrinsic value of a company.
2. This is seen in Bernas, when the offered price by the offerors was higher than the average
price. i.e. the offered price was RM 3.70 whilst the average price was RM 3.25 and 68%
of the time, the price was between RM 2.95 to 3.56
3. Also, in most instances valuation requires some professional input and it is essential that the
reader appreciates what and how the main inputs affects the share price ascribed.
CASE 2 - MISC
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HOW WAS THE TAKEOVER CODE TRIGGERED? When Petroliam Nasional Berhad (PETRONAS) makes an offer to
all the remaining shareholders of MISC to acquire at a cash price of RM5.30 per share for each MISC share that it
does not own with a condition that acceptance by PETRONAS is conditional that it shall result in an ownership of
90% or more in MISC. This is a Conditional General Offer of which acceptance by offeror is subject to condition
stipulated by offeror is met.
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ASIA EQUITY RESEARCH www.aer.global
90% or more of the issued
capital of listed company but
less than 90% of offer
shares
Paragraph 16.07 - Bursa = Listed issuer can apply for withdrawal if offeror owns 90% or more shares
in a listed company and offeror expressed intention not to be listed
Dissenting shareholders can
invoke Section 223 of the
CMSA to compel offeror to
acquire at OFFER PRICE or
such other terms that are
agreed between Offeror and
dissenting shareholder
ACCEPTING CONDITION MET IF OFFEROR
RECEIVES ACCEPTANCE OF 90% OR MORE OF
ISSUED SHARE CAPITAL
More than 90% of the offer shares
Offeror can invoke compulsory
acquisition under Section 222 of the
CMSA on dissenting shareholder
ACCEPTING CONDITION
NOT MET ( LESS THAN
90% ) OF ISSUED SHARE
COMPANY CONTINUE TO BE LISTED
HOLDERS CONTINUE TO HOLD COMPANY'S
SHARES
OFFER - UNCONDITIONAL
CONDITIONAL GENERAL OFFER - FOR ILLUSTRATION PURPOSE ONLY. THIS DOES NOT CONSTITUTE ANY FORM OF ADVICE
Case 2 – MISC
An Overview of
Conditional Take-Over
Offer
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CASE 2 – MISC ( IN HINDSIGHT… OFFER WAS NOT SUCCESSFUL….
IAC ADVISED AS NOT FAIR BUT REASONABLE)
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CASE 2 – MISC
RELATIVE VALUATION ANALYSIS (RVA) – CURRENT MISC RVA
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MESSAGE
1. RVA has to be interpreted together with other financial analysis to gather meaningful results
2. Generally, there is a relationship between P/B multiple and ROE %. This matter is explored further in case of SRC
Market Cap (RM) Price, RM P/E Div Yield
MISC BHD 39.8 8.92 16.1 1.1 8.7% 2.8%
National Shipping Company of Saudi Arabia (Bahri) 17.4B 8.8 1.7 21.3% 2.5%
Qatar Gas Transport Company (Nakilat) 13.9B 12.6 2.8 23.9% 5.6%
Source: Bloomberg 17 March 2016
Analyzed by: ASIA EQUITY RESEARCH www.aer.global
MESSAGE
1. Though MISC BHD, P/E appears to be higher than the Comparable Companies sampled, its Price to Book is the lowest. Also noted is that it registers the lowest ROE %.
2. Generally, in an efficient market, there is a positive relationship between P/B and ROE %. A higher ROE% signifies future growth potential and hence a higher P/B is
ascribed. The opposite is also true.
3. Relative valuation metrics has to be studied together with other financial parameters.
COMPARABLE COMPANIES
P/B ROE
CASE 3 - SRC
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HOW WAS THE TAKEOVER CODE TRIGGERED? On 1 February 2016, Shell Overseas Holdings Limited (SOHL)
the major shareholder of Shell had entered into a conditional SPA with Malaysian Hengyuan International Limited
(MHIL) for the disposal of 51% issued share capital of SRC for a total cash consideration of USD 66.30 million at
a price of RM1.80 per share, by making reference to the unaudited net assets of SRC at 30 September 2015 of
RM1.93 per share. This propose transaction shall oblige MHIL to extend a MGO to all remaining shares in SRC not
held by MHIL.
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FY1999 TO FY2007 =
PROFITABLE EVERY YEAR
EXCEPT BREAKEVEN IN
FY2000
FY 2008 TO FY 2015 =
EXHIBIT VOLATILE
PERFORMANCE RESULTS
FY 2008, FY, 2011, FY2012,
FY2013 and FY2014 =
LOSSES
FY2015 = CONSIDERABLE
IMPROVED RESULTS
CONTINUE ON
Revenue,
RM billions
Gross Profit
/ (Loss), RM
millions
Gross
Margin,
%
Net Profit
/ (Loss)
After
Tax, RM
Million
Net
Margin,
%
FY 1999 3.2 94 3.0% 74 2.3%
FY 2000 5.2 219 4.2% 112 2.2%
FY 2001 4.6 54 1.2% (0) 0.0%
FY 2002 4.5 204 4.6% 153 3.4%
FY 2003 5.5 287 5.2% 182 3.3%
FY 2004 7.5 790 10.5% 670 8.9%
FY 2005 9.7 743 7.7% 522 5.4%
FY 2006 10.9 407 3.7% 258 2.4%
FY 2007 11.4 807 7.1% 593 5.2%
FY 2008 13.1 (343) -2.6% (330) -2.5%
FY 2009 8.9 417 4.7% 290 3.2%
FY 2010 10.4 154 1.5% 106 1.0%
FY 2011 11.2 (98) -0.9% (126) -1.1%
FY 2012 15.1 (132) -0.9% (95) -0.6%
FY 2013 14.7 177 1.2% (156) -1.1%
FY 2014 14.3 (308) -2.2% (1,189) -8.3%
FY 2015 9.1 815 9.0% 352 3.9%
Average 3.3% 1.6%
Analysed by: Asia Equity Research www.aer.global
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CASE 3 – SRC
RELATIVE VALUATION ANALYSIS (RVA) ON SRC
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MESSAGE
1. Generally, there is a relationship between P/B multiple and ROE %. SRC had a high negative ROE % but trading
at a much higher P/B multiple than its comparable companies. An indicator of potential over valuation.
2. Why ? Many reasons could be attributed for such instances but general reasons may include factors such as low
free float, investors believe that there is future growth potential and stocks not well covered by analyst amongst
others.LAST RESEARCH REPORT ISSUED ON 2
NOV 2007 THAT IS RETRIEVABLE FROM
BURSA SITE
CASE 3 – SRC
FINANCIAL ANALYSIS ON SRC
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MESSAGE
1. Low net margin between -1% to 1% except in FY 2014 when it reported a loss of approximately RM1,200 million
2. Reflected an unaudited net profit of RM352 million in FY2015, also the highest gross margin percentage at 9%
compared with a range of -2.2% to 1.5% between FY 2010 to FY 2014.
SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
REVENUE, RM BILLION 10.4 11.2 15.1 14.7 14.3 9.1
GROSS PROFIT / (LOSS), RM MILLION 154 (98) (132) 177 (308) 815
PROFIT / (LOSS ) AFTER TAXATION, RM MILLION 1061
(126) (95) (156) (1,189) 351.8
SALES VOLUME, THOUSAND BARRELS PER DAY 102 85 110 110 111 93
NET ASSETS, RM MILLION 2,092 1,854 1,705 1,513 325 677
NET ASSET PER SHARE, RM 6.97 6.18 5.68 5.04 1.08 2.26
GROSS MARGIN, % 1.5% -0.9% -0.9% 1.2% -2.2% 9.0%
NET MARGIN, % 1.0% -1.1% -0.6% -1.1% -8.3% 3.9%
RETURN OF EQUITY, % 5% -7% -6% -10% -366% 52%
BANK BALANCE, RM MILLION 151 125 33 41 9 176
BANK BORROWINGS, RM MILLION 450 831 1,185 1,740 1,758 1,481
SHARE CAPITAL, MILLION 300 300 300 300 300 300
* Major Statutory Turnarround for 44 days in FY2015
BREAKDOWN OF LOSS IN FY2014
FY 2014
RM MIL
STOCKHOLDING LOSSES * 625
IMPAIRMENT LOSSES - NON CASH TRANSACTION 461
OPERATIONAL LOSSES 103
1,189
Page 13, Annual Report for FY2014
CASE 3 – SRC
PAST 12 MONTHS P/B MULTIPLE OF SRC
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MESSAGE
Trading prices seems to be not affected by historical losses. It was trading at an average P/B of 3 times for the past
12 months and Current PE is NOT a meaningful comparison as SRC was loss making four years preceding FY2015.
CASE 3 – LOW TRADING VOLUME OF SRC PRIOR TO Q1-2016
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MESSAGE
1. Low trading volume except in Q1-2016, from 2015 to 2016.
CASE 3 – EFFECTS ON QUARTERLY EARNINGS RESULTS ON SHARE PRICE
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MESSAGE
1. Share price shows a dip upon the announcement of results.
Is the adjustment sufficient enough ?
CASE 3 – SRC
ANALYSIS OF LOSSES IN FY2014
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MESSAGE
1. The loss after tax of approximately RM1,200 billion in FY2014 was substantially due to impairment
and stockholding losses.
BREAKDOWN OF LOSS IN FY2014
FY 2014
RM MIL
STOCKHOLDING LOSSES * 625
IMPAIRMENT LOSSES - NON CASH TRANSACTION 461
OPERATIONAL LOSSES 103
1,189
The loss refers to the difference between the current cost of
inventories at the date of sale and the amount charged as the cost
of goods sold in computing historical profits – page 13, Annual
Report, FY2014
Commentary:-
1. Stock holding loss occurs when crude oil prices falls.
2. Stock holding gain occurs when crude oil prices rises.
The higher losses in 2014 are mainly contributed by stockholding losses of RM625.1 million due to fall in oil
prices (from average dated Brent marker of USD107/bbl in Jan 2014 to Dec 2014 of USD55/bbl), .
impairment losses of RM461 million, and operational losses of RM102.6million.
Page 19 of Q4, 2014 announcement made on 17 February 2015
CASE 3 – SRC
STOCK HOLDING LOSSES – CORRELATION WITH CRUDE OIL BRENT PRICES
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MESSAGE
1. STOCKHOLDING LOSSES HAS CORRELATION WITH FALLING CRUDE OIL BRENT PRICES IN FY 2014
The fall in oil prices in 2014, resulted in significant stockholding losses and lower first in first out (FIFO) margins (in
accordance to Malaysian Financial Reporting Standards 102). Generally, major oil companies would also consider the
current cost of supplies (CCS) margins, as the CCS margins would exclude stockholding impact as it is typically regarded as
an uncontrollable factor. Thus, your Company’s CCS margin in 2014 of US$2.65 per barrel is higher (2013: US$1.10 per
barrel). We recorded stockholding loss of US$4.99 per barrel in 2014 compared to a stockholding gain of US$0.80 per
barrel in 2013. Page 17- Annual Report, FY 2014
COMMENTARY:-
What does this statement actually mean ?
In periods of FALLING brent crude oil prices
Cost of sales - Higher cost Cost of sales - Lower Cost
Hence, margin is LOWER Hence, margin is HIGHER
The Gross Refining Margin ALREADY INCLUDED The Gross Refining Margin DOES NOT
the effects of stock holding gain / (losses) take into consideration stock holding
and hence no need to disclose separately gain / (losses ), and hence need to
the stockholding gain / (losses) per barrel compute separately.
IF policy for determing
cost of sale is FIFO
If policy of determining cost of
sale is using Current Cost System
FIFO
Gross
Margin
%
GRM per
barrel
(USD)
Stockholding
Margin per
barrel (USD)
Total Margin
per barrel
(USD)
FY2013 1.2% 1.10 0.80 1.90
FY2014 -2.2% 2.65 (4.99) (2.34)
CURRENT COST SYSTEM
NET PROFIT AFTER TAX AFTER ADJUSTING FOR EFFECTS OF STOCK HOLDING
LOSSES TO DETERMINE THE OPERATIONAL PROFIT / (LOSS) WITHOUT
STOCKHOLDING EFFECTS
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MESSAGE
1. ADJUSTED NET MARGIN BETWEEN -3% TO -1% FOR PERIOD FROM FY2010 TO FY 2014. FY2015 REPORTED
THE BEST ADJUSTED NET MARGIN AFTER STOCK HOLDING LOSSES – AT 5%. FROM FY2010 TO FY2014 = NET
LOSS AT OPERATION LEVEL
2. STOCKHOLDING PLAYS AN IMPORTANT ROLE IN THE BOTTOM LINE PROFITABILITY. IT IS AN EXTERNAL FACTOR
NOT WITHIN THE CONTROL OF THE COMPANY. MEANING SRC’S A SIGNIFICANT PORTION OF SRC’S RESULTS
ARE DUE TO EXTERNAL MARKET FACTORS
SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
REVENUE, RM BILLION 10.4 11.2 15.1 14.7 14.3 9.1
GROSS PROFIT / (LOSS), RM MILLION 154 (98) (132) 177 (308) 815
PROFIT / (LOSS ) AFTER TAXATION, RM MILLION 1061
(126) (95) (156) (1,189) 351.8
STOCKHOLDING GAIN / (LOSSES), RM MILLION 108 175 NA 96 (625) (133)
IMPAIRMENT LOSSES, RM MILLIONS 0 0 0 0 (461) 0
ADJUSTED PROFIT / (LOSS) AFTER TAX, RM MILLION (2) (301) (95) (252) (103) 485
ADJUSTED NET MARGIN, % 0% -3% -1% -2% -1% 5%
MAJOR STATUTORY TURNAROUND MTA MTA
Analysed by: ASIA EQUITY RESEARCH www.aer.global
SHARP DROP IN OIL
PRICE IN FY2014
CONTINUE NEXT SLIDE
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SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
PROFIT / (LOSS ) AFTER TAXATION, RM MILLION 1061
(126) (95) (156) (1,189) 351.8
STOCKHOLDING GAIN / (LOSSES), RM MILLION 108 175 NA 96 (625) (133)
IMPAIRMENT LOSSES, RM MILLIONS 0 0 0 0 (461) 0
ADJUSTED PROFIT / (LOSS) AFTER TAX, RM MILLION (2) (301) (95) (252) (103) 485
Analysed by: ASIA EQUITY RESEARCH www.aer.global
ADJUSTED PROFIT AFTER TAX EXCLUDING THE EFFECTS CAUSED BY STOCK HOLDING
MESSAGE:-
1. OPERATIONAL LOSSES RECORDED IN FY2010 TO FY 2014 AFTER
REMOVING THE EFFECTS OF STOCKHOLDING
2. FY2015 = REPORTED GOOD REFINING MARGIN
Q4-2014 = Announcement, Page 19 of 20
CASE 3 – SRC = DISCLOSURE OF STOCK HOLDING LOSSES
GATHERED FROM DISCLOSURES IN ANNUAL REPORT
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ANNUAL REPORT – FY2010, page 44
Annual Report – FY2011, page 48
MESSAGE
1. Stockholding losses are voluntary disclosure item that is not an item that appears as a stand alone in the audited
financial statement. It is embedded within the cost of sales. Discrepancy could possibly happen.
2. Stockholding losses and Gross Refining Margin at current cost is used to explain the total cost of sales
using FIFO method
CASE 3 – SRC = EFFECTS OF STOCKHOLDING GAIN / LOSSES DUE
TO EXTERNAL MARKET FACTORS BY ANALYSIS
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MESSAGE
1. FACTORS THAT DETERMINE STOCK HOLDING LOSSES BY ANALYSIS –
a) OIL INVENTORIES. - Average about 3.4 million barrels
b) EXCHANGE RATE
c) PRICE FLUCTUATION OF CRUDE OIL
2. A inc / (dec) of USD 10 per barrel translate to approximately gain / (loss) of RM 117 million .
Page 19, Annual Report FY
2014
SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
STOCKHOLDING GAIN / (LOSSES), RM MILLION 108 175 NA 96 (625) (133)
OIL INVENTORIES, MILLION BARRELS 3.4 3.5 3.0 3.6 3.4 NA
BREAKDOWN OF LOSS IN FY2014
USD per barrel
108
55
53 a
Number of barrel, million 3.35 b
exchange rate 3.5046 c
622 a x b x c
Difference between published and analysed probably due to some rounding on the figures used in computation.
Analysed by: ASIA EQUITY RESEARCH www.aer.global
Approximated stockholding loss computation, RM millions
Beginning financial year, FY 2014
Ending financial year, FY2014
CASE 3 – SRC
SIGNALS ON FUTURE STRATEGY FROM ANNUAL REPORT OF FY2014
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MESSAGE
SIGNAL ON FUTURE STRATEGY
As disclosed in Note 33 to the financial statements, and as announced on 9 January 2015 to Bursa Malaysia, the Board has
completed the structured review of SRC Refining Company’s resilience in the current poor margin environment as announced in
September 2014. The board has concluded that refining margins are expected to remain depressed due to overcapacity in the
global refining industry. Given the poor margin environment, the Board is proactively investigating long-term options in the best
interest of the Company. These will include, but are not limited to, the potential sale of the assets, or conversion of operations to
a storage terminal and/or other viable options. The focus near-term is to secure and sustain the safe and reliable operation of
the Refinery while long-term options are being pursued. Once the final option has been selected, the Company will seek the
necessary approval from shareholders in compliance with regulatory requirements. Further details on the selected option shall be
disclosed and announced to Bursa Malaysia in due course
Page 48. Annual Report, FY2014
CONVERSION TO A STORAGE TERMINAL POTENTIAL SALE OF ASSETS
Page 48, Annual Report = FY2014
CASE 3 – SRC
STOCK LOSSES IN OTHER OIL REFINERY COMPANIES AS EXTRACTED FROM
ANNUAL REPORTS
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COMPANY STATEMENTS EXTRACTED
Shell Refining Company The loss refers to the difference between the current cost of
inventories at the date of sale and the amount charged as the cost of
goods sold in computing historical profits – page 13, Annual Report,
FY2014
Caltex Australia Limited
(previously operated a refinery capacity with
capacity of 124,500 barrels a day and refinery
ceased operation in October 2014, to
become an import terminal)
The 2014 result includes a product and crude oil inventory loss of
$361 million after tax and reflects a significant fall in Brent crude oil
prices in the latter months of 2014. - Page 2, Annual Report FY2014
Reported ROE% = 18.6% - Slide 16
Message – Remains profitable after conversion to terminal operation.
CASE 3 – SRC
IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED ?
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Page 66 and Page 67 - Annual Report FY2014
CASE 3 – SRC
IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED ?
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Page 75 - Annual Report FY2014
CV
RM million
Land and improvements 2
Building 53
Plant and machinery 1,394
Work in progress 67
1,515
CV / NBV before impairment charges as at
31.12.2014
CASE 3 – SRC
IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED ?
33
Page 66 and Page 67 - Annual Report FY2014
CV RA Impairment
SCENARIO CGU, RM million RM million RM million
BASE 1,515 1,054 461
S1- Refinery margin 5% 1,515 1,303 212
S2 - Refinery margin 5% 1,515 828 687
S3 - Refinery margin 22% 1,515 0 1,515
S4 - Availability of export
market, a year earlier 1,515 994 521
Analysed by Asia Equity Research based on
report published by SRC
MESSAGE
Involves professional objective / subjective
elements. How does other assumptions affect
the value in use – such as pre tax discount rate
-to be presented in discussion
CASE 3 – SRC, RELATED PARTIES TRANSACTIONS
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Page 83 - Annual Report FY2014
Sale of refined products
FY 2014 FY 2013
Shell Malaysia Trading Sendirian Berhad 11.23 11.17
Shell Timur Sendirian Berhad 1.46 1.68
Shell International Eastern Trading Company 0.55 0.83
Shell Eastern Chemical Pte Ltd 0.36 0.37
TOTAL 13.60 14.06
Total sale of refined products over total reported revenue 93% 99%
Purchase of crude and products
FY 2014 FY 2013
Shell International Eastern Trading Company 13.85 13.09
Shell Eastern Trading Pte Limited 0.23 0.28
Shell Lubricant Supply Company 0.05 0.07
Sarawak Shell Berhad 0.00 1.11
Sabah Shell Petroleum Company Limited 0.00 0.31
TOTAL 14.13 14.87
Total purchase over cost of sales reported 97% 102%
RM Billions
RM Billions
MESSAGE
1. Related party activities within the Shell Group of which the Shell Refining Company purchases and sales to
other related companies within the Shell Group, with SRC focusses on refineries business
CASE 3 – SRC, RELATED PARTIES TRANSACTIONS
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Page 54 - Annual Report FY2014
MESSAGE
1. Related party activities within the Shell Group of which the Shell Refining Company’s trade receivable and
trade payables are with related parties with the Shell Group
CURRENT ASSETS
CURRENT LIABILITIES
AMOUNT DUE FROM RELATED COMPANIES
FY 2014 FY 2013
Shell Malaysia Trading Sendirian Berhad 628.6 1,006.0
Shell Timur Sendirian Berhad 49.2 147.5
Shell International Eastern Trading Company 46.4 40.9
TOTAL 724.2 1,194.4
Total amount due from related companies as above over
total audited amount due from related companies98% 97%
AMOUNT DUE TO RELATED COMPANIES
FY 2014 FY 2013
Shell International Eastern Trading Company 597.7 1,029.9
Shell Eastern Trading Pte Limited 30.4 28.5
Shell International Petroleum Company Limited 7.4 6.8
635.5 1,065.2
Total amount due torelated companies as above over total
audited amount due to related companies100% 100%
RM MILLION
RM MILLION
CASE 3 – SRC, RELATED PARTIES TRANSACTIONS
36
Page 53 and 83 - Annual Report FY2014
MESSAGE
1. Related party activities within the Shell Group of which the Shell Refining Company’s annual administrative
expenses are outsourced to other related parties with the Shell Group
ADMINISTRATIVE EXPENSES
37
RM MILLION USD MILLION
Interest RepaymentPrincipal Bullet
RepaymentNOTES
Local currency loan 450 KLIBOR +0.3%20 Quarterly
installments15 June 2015
Originally due on 15 June 2015 but was classified under non
current in Q4, 2015
Foreign currency loan 1,031 240 LIBOR + 0.75%20 Quarterly
installments14 Sept 2016
In conjunction with the USD loan, a Cross Currency Interest Rate
Swap was executed to hedge the exchange rate conversion,
with the resultant effect that repayment is measured in RM and
interest quoted in KLIBOR and receive from swap counterparty
LIBOR + 0.75%
1,481
Note: The all in interest cost ranges from 1.01 % to 4.16 % as at 31 December 2014.
Based on unaudited results for Q4, 2015
FY 2015
SRC has to conserve cash balance to be able to repay on due date or to restructure the loan.
Page 76, Annual Report, FY2014
LOAN REPAYMENT DUE ON 14 SEPT 2016 – RM 1 BILLION. CASH AS AT 31 DEC 2015 – RM 175 MILLION
CASE 3 – SRC
BASIS OF PRICING OF SALES OF 51% BLOCK FROM PUBLISHED MEDIA
38
BASIS OF PRICING THE SHARE SALE AT RM1.80 PER SHARE AS EXTRACTED
FROM INFORMATION PUBLISHED BY SRC
1. REFERENCE TO THE NET ASSETS AS T 3O SEPT 2015.
The net asset per share as at 31 December 2015 was approximately
RM2.26 per share. The price for the sale for the 51% block was made with
reference to the net asset of SRC as at 30 September 2015 of RM 1.93
per share.
2. FUTURE CAPITAL EXPENDITURE TO BE INCURRED
“Furthermore, in SOHL’s view SRC requires significant investment to meet Euro
4 and Euro 5 product specifications and it has significant existing debt of
MYR 1.2 billion maturing in the near future. Therefore two options have been
explored being a Terminal Conversion led by SRC and a sale by SOHL to a
buyer that is willing to invest in Euro 4 and Euro 5 and that can procure new
long term financing to SRC.” Extracted from Published Media Report by SRC
CASE 3 – SRC
LATEST ANNOUNCEMENTS GATHERED FROM PUBLIC DOMAIN
39
MESSAGE:-
1. Royal Dutch Shell Plc. shall focus on upstream ( exploration activities ) instead of downstream ( refinery ) after the
proposed sale of its 51% holding to Malaysian Hengyuan International Limited
Extracted:-
Following the sale of its shares in Shell Refining Company (federation of Malaya) Bhd (SRC) to a Chinese company, Royal
Dutch Shell plc is seeking new opportunities for further growth in its upstream portfolio in Malaysia and to reinforce its joint
ventures here with Petroliam Nasional Bhd (Petronas), besides strengthening its position in the retail segment. “If I look at
Shell in Malaysia, over the last two years, we have made 11 gas discoveries. We are very focused on our upstream business
in Malaysia, seeking new opportunities for further growth, but also reinforcing our joint ventures, like the Baram Delta
Offshore that we have [with Petronas]” In the upstream sector, Shell has been pioneering deepwater field developments in
Malaysia, through the Gumusut-Kakap and Malikai fields, both offshore Sabah, and the Central Luconia and Baram Delta
projects off Sarawak. According to Brown, Gumusut-Kakap has a peak production capacity of 135,000 barrels of oil
equivalent per day (boepd). About 20% of Malaysia’s average oil production of around 650,000 boepd, comes from
Gumusut-Kakap. Malikai will also be coming online soon. “When it comes to Malaysia, we’ve been here over 100 years,
starting with Miri in 1910, and we’ve grown from that position. Last year for instance, we produced half the gas in Malaysia.
Source:- This article first appeared in The Edge Financial Daily, on March 23, 2016. Continue
CASE 3 – SRC
LATEST ANNOUNCEMENTS GATHERED FROM PUBLIC DOMAIN
40
MESSAGE:-
2. Sale of 51% block, is a global strategy and to ensure continuation of fuel supply in Malaysia.
Extracted:-
In a press release dated Feb 17, Shell explained that the sale of the stake in SRC should be seen in context with the oil
major’s global strategy and portfolio activities. It said a refinery of SRC’s scale is not a strategic fit for its portfolio and that
it would find it difficult to compete for new capital.
Yesterday, Shell Malaysia Ltd chairman Datuk Iain Lo said the sale of the refinery is actually to ensure the stability and
continuation of fuel supply in the country, as there was a concern that the SRC is a weak link in the supply chain.
Source:- This article first appeared in The Edge Financial Daily, on March 23, 2016
41
SRC had undergone volatile performance in recent years.
Items shaded in red means thepercentages are outside itslower bound ranges, in 16% oftime. Periods of FY 2008 toFY 2014 experienced negativeterritories 4 out of 7 periods,signifying periods of extremevolatility.
Refinery margins areunder significant pressuresince FY2011 to FY 2014except FY 2015.
Revenue,
RM billions
Gross Profit
/ (Loss), RM
millions
Gross
Margin,
%
Net Profit
/ (Loss)
After
Tax, RM
Million
Net
Margin,
%
FY 1999 3.2 94 3.0% 74 2.3%
FY 2000 5.2 219 4.2% 112 2.2%
FY 2001 4.6 54 1.2% (0) 0.0%
FY 2002 4.5 204 4.6% 153 3.4%
FY 2003 5.5 287 5.2% 182 3.3%
FY 2004 7.5 790 10.5% 670 8.9%
FY 2005 9.7 743 7.7% 522 5.4%
FY 2006 10.9 407 3.7% 258 2.4%
FY 2007 11.4 807 7.1% 593 5.2%
FY 2008 13.1 (343) -2.6% (330) -2.5%
FY 2009 8.9 417 4.7% 290 3.2%
FY 2010 10.4 154 1.5% 106 1.0%
FY 2011 11.2 (98) -0.9% (126) -1.1%
FY 2012 15.1 (132) -0.9% (95) -0.6%
FY 2013 14.7 177 1.2% (156) -1.1%
FY 2014 14.3 (308) -2.2% (1,189) -8.3%
FY 2015 9.1 815 9.0% 352 3.9%
Average 3.3% 1.6%
Average +/- 1 SD
Lower bound -0.5% -2.2%
Upper bound 7.2% 5.5%
Analysed by: Asia Equity Research www.aer.global
Continue
42
Refinery margins are under pressure in
FY2012, 2013 and a certain extent in
FY2014.
Noted that refinery margin is a voluntary
disclosure and it is found in the chairman’s
statement and not part of a disclosure
item in the financial statements. FY2004
to FY 2009 has prominent disclosure on
the GRM but there was a change in
format thereafter.
Note: In FY 2008, total stock
holding losses was RM644million
Revenue,
RM billions
Gross Profit
/ (Loss), RM
millions
Gross
Margin,
%
Net Profit
/ (Loss)
After
Tax, RM
Million
Net
Margin,
%
FY 1999 3.2 94 3.0% 74 2.3% Not mentioned
FY 2000 5.2 219 4.2% 112 2.2% 2.60
FY 2001 4.6 54 1.2% (0) 0.0% Not mentioned
FY 2002 4.5 204 4.6% 153 3.4% Not mentioned
FY 2003 5.5 287 5.2% 182 3.3% Not mentioned
FY 2004 7.5 790 10.5% 670 8.9% 5.51
FY 2005 9.7 743 7.7% 522 5.4% 6.28
FY 2006 10.9 407 3.7% 258 2.4% 4.34
FY 2007 11.4 807 7.1% 593 5.2% 5.79
FY 2008 13.1 (343) -2.6% (330) -2.5% 6.73
FY 2009 8.9 417 4.7% 290 3.2% 3.44
FY 2010 10.4 154 1.5% 106 1.0% Not mentioned
FY 2011 11.2 (98) -0.9% (126) -1.1% Not mentioned
FY 2012 15.1 (132) -0.9% (95) -0.6% 1.25
FY 2013 14.7 177 1.2% (156) -1.1% 1.90
FY 2014 14.3 (308) -2.2% (1,189) -8.3% 2.65
FY 2015 9.1 815 9.0% 352 3.9% Not mentioned
Average 3.3% 1.6% 4.05
Average +/- 1 SD
Lower bound -0.5% -2.2% 2.10
Upper bound 7.2% 5.5% 6.00
Analysed by: Asia Equity Research www.aer.global
Average Gross Refining
Margin in USD per barrel
43
IN A NUT SHELL – KEY FACTORS THAT DETERMINES A REFINERY’S GROSS
PROFIT
REVENUE
GROSS PROFIT
MEASUREMENT INDICATORS ARREVIATION FOR INDICATORS RELATIONSHIP
GROSS REFINING MARGIN IN USD PER BARREL GRMChanges of finished goods price relative to
crude oil price
STOCKHOLDING GAIN / LOSS STOCKHOLDING GAIN/(LOSS)~ D Brent Crude Oil ( Year End v
Openning) and Inventory Level
NUMBER OF BARRELS SOLD IN A YEAREconomic activity of Malaysia specifically
and globally generally
ASIA EQUITY RESEARCH
www.aer.global
KEY FACTORS THAT DETERMINE THE GROSS PROFIT OF A REFINERY = FOR ILLUSTRATIVE PURPOSE ONLY
LESS COST OF SALES
AVERAGE REVENUE PER UNIT OF FINISHED PRODUCTS
LESS AVERAGE CURRENT COST PER BARREL
ADD/LESS STOCK HOLDING GAIN / (LOSS)
x NUMBER OF BARRELS SOLD IN A YEAR
44
What is the likely outcome if transaction is proceeded?
MHIL is required to extend a Mandatory General Offer for all remaining Shares of Shell Refining Company not
already held by MHIL.
Extracted from Page 19/19 of SRC’s Quarter 4 results.
END
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45
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