FOLLOWING intense speculation on what possible form the debt restructuring of the United Engineers (M) Bhd-Renong Bhd group would take; it appears as though all that pent-up excitement has, in a flash, been snuffed out.
The plan has finally been unveiled and the crowd – to term the investing fraternity loosely – has been left somewhat unimpressed.
But who can blame them? Left nearly crippled by RM5 billion debts, expectations were high that the restructuring would involve at least the sale of assets (meaning, buyers have actually been identified), some equity injection by shareholders and/or the privatisation of Renong.
In the end, save for the fact that Renong will indeed be taken private and its listing status transferred to a new company (Newco), analysts are saying that the restructuring plan, in a nutshell, involves asset reshuffling to help address Renong's debt obligations arising mainly from the Special Purpose Vehicle (SPV) bonds.
They concede that the exercise will certain neaten up the group's structure by streamlining its businesses into four core areas: engineering and construction; healthcare; environmental services and property development.
Over and above that, Renong will benefit from interest savings of some RM278.6 million a year and the Newco's pro-forma shareholders' fund will rise to RM1.1 billion compared to RM234.2 million for Renong as at Dec 31, 2002. This should effectively remove some of the group's medium-term cashflow pressures.
Nevertheless, analysts contend that the exercise has its fair share of weaknesses.
According to one analyst, the Newco, which will be injected with five companies currently under UEM, will end up looking very much like the pre-privatised UEM, but this time without the crown jewel – PLUS.
He reckons that the implied valuation for the Newco is rather steep at 19x price/earnings ratio (PER) and 2.8x net tangible asset (NTA). The four-for-one share exchange means that shareholders would have to fork out RM1.86 per Newco share at the current Renong price of 46.5 sen per share.
An observer argues that the exercise removes the urgency for the group to sell those non-performing assets that had previously been earmarked for disposal.
“Now that Renong's SPV bonds have been reduced to RM1.9 billion from about RM3.7 billion and its redemption period has been extended for another 10 years, the group can rest easy for a while,” she says.
A proponent of the deal sees nothing wrong with that. “Sure, if you can buy time to sell assets, it always means you may be able to fetch a better price as opposed to when the company is desperate.”
Yet, worth noting is that many are of the opinion that the entire exercise, once completed, still lacks value creation. “Perhaps the one good thing that will come out of the whole exercise is that Intria will emerge stronger, serving as the UEM group's flagship engineering and construction arm,” one observer claims.
In addition to Projek Penyelenggaraan Lebuhraya Bhd (Propel) being de-listed and absorbed into Intria, the latter has also proposed to buy UEM's wholly-owned subsidiary UE Construction Sdn Bhd in order to take over its RM2.4 billion order book.
According to a research house, Intria's net tangible asset post restructuring will be maintained at 50 sen per share and its borrowings reduced to 1.3x shareholders' fund on expanded capital after the issue of new shares.
Incorporating the pro-forma earnings of UE Construction and Propel, Intria should see its 4 sen earnings per share in 2002 enhanced to about 8 sen.
A research head backs this opinion, saying that unlike Intria and Propel shareholders who can either cash out of these companies at a premium or benefit from a healthier Intria in the future, Renong shareholders will be forced to accept a haircut.
Even Khazanah Nasional Bhd, which just late last year subscribed to 88 million new shares in Renong via a private placement offer will be subject to this capital reduction, he says.
According to Renong's proposed four-for-one share exchange scheme, one Renong share is equivalent to only a quarter of a new Newco share. Thus if based on 2002's historical earnings, one Newco share, fair valued at about 50 sen, only amounts to about 13 sen.
“When you look at it this way, Renong shareholders are actually losing out big time,” he says.
Then there is also the impression that the prospective earnings of Newco is way too small and unattractive for a company that will have a large share capital base of some 1.4 billion.
Based roughly on the 2002 earnings of the five companies that UEM plans to inject into Newco, the earnings of the latter will add up to less than RM100 million.
“If the Newco's return on shareholders' fund is going to be so low, investors would be better off looking at other more attractive companies,” a research head says.
But to be fair, pundits reckon the group has probably done the best it can to address its debt obligations at a time when trading on the local stock exchange is so lacklustre and buyers for even performing assets are hard to come by.
“We are encouraged that the group has kept to its deadline of announcing the restructuring by end-March,” an observer says.
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