IEV Holdings

UOBKayhian on 8 Oct 2012

What’s New                      
·       Reducing stake in subsidiary from 100% to 42%. IEV Holdings (IEV) has entered into a sale and purchase agreement with Altfield Global Resources Limited (Altfield) on 3 Oct 12 for the sale of 1,508,000 shares in the capital of wholly-owned subsidiary IEV Energy Investment Pte. Ltd. (IEV Energy), representing 58% of IEV Energy’s total issued and paid-up share capital. IEV Energy has a 95% interest in the Pabuaran Block concession. The consideration for the disposal is S$7.6m.
·       Right of first refusal. Pursuant to the agreement, IEV will have the right of first refusal in the off-take of natural gas produced in the Pabuaran Block, which will be used as feed gas for its gas distribution business. Also, in the event any company within the IEV group enters into an off-take agreement with Pertamina for the Pabuaran Gas, Altfield has the right to acquire up to 25% of the shares in such a company.

Stock Impact
·      Secured funding for expansion. The partial sale of IEV Energy will enhance the financial position of IEV, as the net proceeds after expenses of S$7.2m (RM17.8m) may be used for funding IEV’s working capital requirements or further investment in IEV Energy.
·      One-off gains. As a result of the sale, IEV will recognise a one-off gain of S$7.2m (RM17.8m) in 2012. In addition, end-12 book value per share will increase from S$0.26 to S$0.30.
·      Loss of majority control. The rationale for upstream expansion was to mitigate the rising cost of feed gas used for IEV’s gas distribution business. We note that IEV may not be able to keep its raw material costs low after losing majority control of its upstream subsidiary. IEV Energy will also be classified as an associate entity pursuant to the share sale.

Earnings Revision
·      Revised earnings forecast. We increased our 2012 net profit forecast by 41.7% to account for one-off gains due to the share sale. We have yet to factor in associate contribution from IEV Energy pending further details.

Valuation
·       Maintain HOLD with a lower target price of S$0.55 (previously S$0.56), implying a 6.0% downside. We recommend entry price of S$0.44 for 25% upside. We roll over our valuation basis to 2013, and value IEV based on a sum-of-the-parts methodology, consisting of: a) the offshore engineering and natural gas distribution segments, valued at 9.5x and 11.8x 2013F PE respectively, at a 20% discount to peers’, and b) market value of IEV’s 20.5% stake in listed associate CNG Vietnam.
·       Potential earnings vacuum in 2013. Ytd, IEV has not won any significant turnkey projects and we highlight the risk of an earnings vacuum in 2013 after the completion of the D21 rig reuse project. The D21 project comprises 73% of our 2012 revenue forecast.