CIMB: Attractive offer for SEB shares

Tags: Brokers Call | CIMB Research | SEB

Written by Financial Daily
Wednesday, 21 October 2009 10:26

FINANCING constraints could be the reason why the Sarawak State Financial Secretary is taking Sarawak Energy Bhd (SEB) private, opined CIMB Research in a note yesterday.

“While the major shareholder did not disclose a reason for its privatisation move, we suspect that financing could be a reason. As a wholly-owned government entity after the privatisation, SEB would be in a better position to raise cheaper funding,” it said in a note yesterday.

CIMB, which upgraded the stock from sell to hold, noted that SEB has an aggressive capacity plant-up strategy with the objective to boost its total power installed capacity from 1,343MW by year-end to 4,037MW by 2015.

In the longer term, it noted the utility giant’s plans to raise installed capacity to 12,000MW.

“So far, progress on these expansion plans has been slow and we suspect that the stumbling block could be financing,” it added.

The house said the privatisation could also be a prelude to an industry restructuring.

While the privatisation came as a surprise, CIMB advised investors to accept the offer given an attractive offer price of RM2.65 per share, which translates into a 24% premium over the stock’s last trading price and 39% premium over book value.

It said the offer is also 29% ahead of its previous end-2009 target price of RM2.06.

“Unlike most privatisation targets, SEB’s share price was relatively stagnant in the few days leading up to the announcement, suggesting that this privatisation exercise was a very well-kept secret,” it added.

CIMB said the offer price implies an FY10 price-to-earnings (PE) ratio of 17 times, above the market PE of 15 times and the power sector’s 11 times.

From a price-to-book value perspective, the RM2.65 per share consideration implies a 1.3 times forward multiple, lower than its peers’ average of 1.5 times.

However, it noted the offer price is 20% short of the stock’s 52-week high of RM3.30.

“Having said that, a quick browse through recent privatisation exercises suggests that SEB’s offer price could be one of the more attractive ones,” it said.

CIMB noted that recent privatisation exercises have not considered offers that were at premiums to market prices and net tangible asset values.

For instance, the offer price for the just announced The New Straits Times Press (Malaysia) Bhd privatisation stands at a 19% discount to its last traded price.

CIMB said SEB’s minority shareholders’ best option is to take up the offer given that the Sarawak government does not intend to maintain SEB’s listing status.

The stock’s unexciting dividend yield of 2.3% is another reason to accept the offer, it added.

It noted SEB’s only other substantial shareholder is the Employees Provident Fund (EPF) with a 5.1% stake.

CIMB advised investors to switch to TENAGA NASIONAL BHD [] for exposure to the power sector as the potential delisting of SEB could work in favour of Tenaga as the latter would become the sole pure local power play in the FBMKLCI.

For a play on Sarawak Corridor of Renewable Energy (Score), CIMB’s preferred pick is now CAHYA MATA SARAWAK BHD [].

SEB jumped 45 sen to close at RM2.59 yesterday.


This article appeared in The Edge Financial Daily, October 21, 2009.