Sumatec's Diversification Spot On

The Star, 17 July 2004

SUMATEC Resources Bhd recently announced its intention to diversify into shipping services by acquiring the entire stakes in four shipping companies for RM50mil. To this end, the group has proposed to undertake a rights issue with detachable free warrants to finance part of the acquisition. As such the proposed rights exercise is conditional upon the proposed acquisitions.

The proposed exercise would be undertaken on the basis of two rights shares with on e new warrant for every eight existing shares held.

Worth a mention is that the group has obtained shareholders' approval to undertake a private placement of up to 13.3 million shares.

The deadline for the placement exercise is Nov 18, 2004.

As such, the proposed rights issue with warrants would involve the issuance of up to 36.5 million rights shares together with up to 18.3 million new warrants if the placement is concluded prior to the rights issue.

While it may be too early to speculate just how attractive the warrants will turn out to be, Sumatec's strategy of diversifying into a related business seems spot on at this juncture.

The four shipping companies - Semado Maritime Sdn Bhd, Semua Shipping Sdn Bhd, Tubau Oil Supply Sdn Bhd and Mini Tanker Chartering Sdn Bhd - purportedly have more than 20 years of experience in transporting petroleum products such as motor gasoline, diesel and aviation fuels from refineries to oil terminals.

Their major customers include Shell Trading Sdn Bhd and ExxonMobil Borneo Sdn Bhd.

Given that the companies have a clear head start in the industry, there is a greater likelihood of them securing additional contracts from major players in light of the oil and gas sector's current boom.

In addition, there is the possibility of adding new products such as crude petroleum and bulk cargo to the list.

Like other companies involved in the fiercely competitive engineering, procurement, construction and commissioning business in the oil and gas and petrochemical industries, SUMATEC knows what competition is all about.

While the prospects for the oil and gas sector have never shone brighter, it is a fact that turnover and earnings are driven by contract sizes.

And as a local research house explains it, contract values that vary from year to year provide little guidance when it comes to prospective earnings.

SUMATEC has an order book of around RM500mil. In addition, it secured the turnkey contract to build a RM150mil industrial waste treatment plant in Negeri Sembilan in April.

Apart from two bids for projects in Brunei and Chad, the group has also put in a joint bid with PJI Holdings Bhd for a rail job, rumoured to be worth RM4bil, in Sudan. To date, the outcome of the bids has not been announced.

Sumatec's share price, which has come off its high of RM3.40 last October, is currently trading slightly above its low of RM1.21.

An analyst says this could be the result of fading expectations that the bids will be successful. (The group took over the listing status of Malaysian General Investment Corp Bhd on Bursa Malaysia's main board last September).

Still, an analyst says that the shipping business will broaden Sumatec's earnings base.

The proposed acquisition of the shipping companies comes with a guarantee of an aggregate net profit of at least RM9mil for the financial year ending December 2004. For 2002, the four companies combined chalked up a net profit of RM3.4mil on a turnover of RM34mil.

TA Securities reckons the profit guarantee is achievable give the current high oil and marine transportation rates.

"Based on the minimum contribution of profit guarantee of RM9mil, the acquisition will drive up Sumatec's earnings by 40% for FY05," the house says in a report. (The proposals are expected to be completed in the first quarter for FY05).

Based on its enlarged share capital of some 200 million, TA Securities estimates that SUMATEC will trade at a price earnings ratio of about 9x for FY05.

"The acquisition is good for the long-term prospects of the company," it concludes.

For the first quarter ended March 2004, the group registered a net profit of RM2.8mil on a turnover of RM30mil.

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