Since my initial coverage of Melewar on Nov'06. It share price has increase from RM0.8775* to RM1.65 and warrant price from RM0.188* to RM0.90.
It warrant share price has appreciated ~5x. Based on the exercise price of RM1 .50 with mother price of RM1.65, the warrant look expensive. Investor can switch from warrant to mother share for better value buy.
* price after bonus issue 1 for 3 on Jan'07.
News from TheStar
IT HAS been a while since Melewar Industrial Group Bhd was on the radar of investors. What has held most investors back is the belief that the company's fortunes are solely dependant on the prospects of the cyclical steel industry, which not too long ago was besieged with problems.
That observation would have been true a few years ago. Recent years, however, have seen Melewar acquire stakes in several companies to diversify its income stream.
The diversification strategy kicked off in early 2004 with the purchase of a stake in an Australian-listed iron ore mining company. In January 2005, Melewar penetrated the oil and gas sector by acquiring a 23% stake in M3nergy Bhd, the owner and operator of floating production, storage and offloading (FPSO) ships. It made inroads into the power sector the same year when it purchased a 70% stake in Siam Power Generation Co Ltd.
It would seem, according to TA Securities, that the stage is set and the time has arrived for Melewar to start unearthing value from its recent pursuits.
The group now has three core businesses namely iron and steel; engineering and power and; oil and gas.
The oil and gas sector, in particular, is seeing a pick-up in activity, which bodes well for FPSO ships. TA notes that the demand for FPSO will be high with more new oil wells coming onstream.
“We expect to see an improvement in M3nergy profitability in financial year (FY) 2008, compared with FY07 earnings. The current FPSO rate is about RM400,000 a day. This is expected to increase in the near future owing to the scarcity of ships and high demand,” it says.
The house is optimistic that M3nergy will be able to charge higher rates in the future as both the FPSO ship contracts expire in 2008.
On the power generation side, its 70% owned subsidiary has a total licensed capacity of 450 megawatt (mw) to built, operate and own a power plant in Rayong, Thailand. The group will construct the first phase comprising 185mw, which is expected to start operation in 2009. Additionally, the group has signed a power purchasing agreement (PPA) with Electricity Generating Authority of Thailand for 25 years, with a fuel pass-through formula.
“Based on the current fuel price and currency, the average selling price is around US$0.0753 per kilowatt hour (kwh) which translates into 26 sen/kwh. We believe the internal rate of return of the project is above 15%, which is comparable to the first generation PPAs signed in Malaysia,” TA notes.
Melewar's engineering division also shows potential to surprise on the upside. Its internal engineering and construction arm has close to RM3.3bil worth of outstanding orderbook derived from in-house projects. Melewar has also tendered for the Penang Monorail project.
But even without the Penang job, TA reckons Melewar will have its hands full with in-house jobs. Assuming Melewar's current orderbook lasts for six years and the group enjoys a minimum 1.5% pre-tax profit margin, the research house says the division's net earnings will be in the region of RM6mil in FY08.
Important to note is that Melewar's bread and butter, its iron and steel division, is starting to show better growth prospects after suffering a major setback last year. The division then was hit by an inventory impairment loss of more than RM30mil owing to the drop in hot rolled coil (HRC) prices around the world.
The price of HRC is now on the mend given the pick-up in demand. TA expects the demand for HRC to continue to be strong over the next three to five years.
Local demand is expected to improve with the implementation of projects under the Ninth Malaysia Plan. As it is, the engineering and construction industry account for 50% of the division's total sales.
Its Gindalbie Metals Ltd investment also appears to be paying off.
The group purchased Gindalbie back in May 2004 for A$0.10 per share. It is now worth more than A$1.20 per share. Furthermore, the mining company has reported a more than 60% increase in its estimated iron ore reserves at one of its project sites in Australia.
TA has arrived at a higher fair value of RM2.70, from RM1.80 previously, for Melewar after changing its valuation method from price earnings ratio to the sum-of-parts method, which more appropriately values the group's three core businesses and reflects the potential of its new mining and power divisions.
