Tuesday, October 17, 2006

The Next Big Thing?
After Puncak, What Can We Hope For?

Puncak gave investors a good boost. RHB Capital was threatening to do the same for a while but held back. I think based on what was reported and transacted, the next best thing will involve Roadbuilder, IJM, IJM-WB and possibly Tronoh.

There was a big transaction at RM2.55 and then at RM3.00 for Roadbuilder. Chua Hock Chin sold 68 million shares @ RM3. Earlier a 12 million shares block was crossed @ RM2.55. These two blocks amounted to 15% of Roadbuilder outstanding shares. The new owner has not surfaced yet but the old owner of Roadbuilder has basically waved goodbye. Roadbuilder is a very well managed company with good asets and projects.

IJM has been trying to woo Roadbuilder for sometime. IJM is in a solid position, order book nearly RM4 billio, and has ventured overseas successfully. Over the next 3 years, IJM should be able to deliver 20% growth p.a. ... Why does it need to buy Roadbuilder?

Construction companies are evolving. There are not enough growth in big projects to satisfy the top 10 big players. Unless you venture overseas, you will not be able to sustain earnings growth. IJM has done very well in Dubai and has solidified its reputation, on the path to getting more jobs around that region. IJM is presently doing the Swiss Tower in Dubai worth RM49m; the Al Reem project in Abu Dhabi worth RM330m and a 34 storey office complex in Dubai worth RM126m. Also in India, IJM has done exceedingly well. There is no organic growth in domestic markets. Well connected and government linked vehicles will get the bulk of major construction projects. Hence we should be seeing the beginning of a consolidation among the construction players. Already Metacorp has started the ball rolling a couple of years ago.

Even without Roadbuilder, IJM is a buy with a 6 month target price of between RM7.50 to RM8.00. Currently it is at RM6.40-6.50. The terms of purchase price for Roadbuilder has been widely speculated. Apparently, It seems that the deal will not be predicated on an actual price to buy out Roadbuilder, but rather a full-on share exchange. Roadbuilder is at RM2.80 while IJM is at RM6.40, a two for one share exchange would be ideal, i.e. two Roadbuilder for one IJM. This will boost Roadbuilder shares to match IJM's share price. However, knowing the markets, once a deal like this is announced, IJM's share price will run and prompt a similar run up in Roadbuilder's share price. For example, if IJM jumps to RM7.00 on the news, Roadbuilder will be worth RM3.50 but it will trade at a discount as you still have to hold for the actual exchange, so Roadbuilder could go to RM3.20.

That being the case, the upside is not enormous for all. Tronoh may rally a bit as it owns some related shares in the group. The best instrument to have exposure to this pending deal would be IJM-WB. Expiring in 2010, with an exercise price of RM4.80, it is currently at a slight discount even at RM1.50. If IJM jumps to RM7.00, you should see IJM-WB come close to RM2.00. IJM will jump should the hypothesis be true because its a huge feather in IJM's cap, extending the company's skills and breadth of coverage.

4 comments:

TradeAnything said...

so.. u have written off the chance for RHB Cap to stage something interesting?? Good things are worth waiting for..

Could Magnum be the next big thing??

Chairman Q said...

I am not convinced with the rationale of IJM's purchase of Roadbuilder. There is little to gain from the merger as Roadbuilder is facing with declining order book. IJM is better off focusing on building its own order book or buying concessionary assets from roadbuilder. I suspect Tan Sri Chuah is a nominee and his exit is pre-planned long time ago.

BINLABI said...

ITS EASIER TO SAY THAN DONE ON THE POTENTIAL M&A PLAY IN THE CONSTRUCTION SECTOR. BESIDE WHAT WAS KNOWN + INTERNAL RESTR. VR DIFFICULT TO GAUGE THIS M&A STORY. LACK OF CANDIDATES. DON'T THINK THE LIKE MUHIBBAH(MARINE SPECIALIST)OR LOH&LOH(DAM SPECIALIST) WILLING TO LET GO THEIR BUSINESS. AND BIG GUYS THE BALANCE SHEET NOT STRONG ENOUGH TO ACQ THEM EVEN IJM, I DON'T THINK ABLE TO DO THE GEN OFFER. WHAT DO U THINK. THKS

Salvatore_Dali said...

dear tradeanything,

no, i think rhb cap still good, whether its a direct acquisition or via rhb, it will take some time to pan out, too many parties getting involved.... i still think rhb bank has to be sold off, just the number of players are making thing convoluted, better to buy and trade something else