CORPORATE EXERCISES AND WHAT INVESTORS ...aer.global/wp-content/uploads/2016/04/MSWG-AER-R11.pdfCORPORATE EXERCISES AND WHAT INVESTORS SHOULD LOOK FOR JOINT PRESENTATION BY MSWG AND

CORPORATE EXERCISES AND WHAT INVESTORS SHOULD LOOK

FORJOINT PRESENTATION BY MSWG AND ASIA EQUITY RESEARCH

1 APRIL 2016

This presentation illustrates corporate exercises of three listed companies, involving Mandatory / Voluntary

General Offers and some key messages that we could gather from such exercises namely:-

(i) Broad understanding of the types of privatization approaches for listed companies – Mandatory General

Offer (MGO) and Conditional Voluntary General Offer (VGO)

(ii) Traded Share Price and Intrinsic Value – Circumstances when traded share price may not fully reflect

its intrinsic value

(iii) Broad overview of equity valuation techniques and key points investors should for on the valuation

methods being used in ascribing fair value.

1

COMMON TYPES OF PRIVATISATION METHODS FOR LISTED COMPANIES

(i) MANDATORY GENERAL OFFER (UNCONDITIONAL)

UPON TRIGGERING THE CODE OF TAKEOVER AND MERGERS, WHEN OFFEROR SHAREHOLDING REACHES 33%

OR MORE.

(ii) CONDITIONAL GENERAL OFFER

A CONDITIONAL VOLUNTARY OFFER TO ACQUIRE SHARES NOT OWNED BY THE OFFEROR. TYPICALLY, OFFER

BECOMES UNCONDITIONAL WHEN ACCEPTANCE RESULTS IN OFFEROR SHAREHOLDING, EQUAL OR EXCEEDS 90%

OF TOTAL ISSUED SHARES OF LISTED COMPANIES.

Why 90% is chosen ?

BURSA SAHAM LISTING REQUIREMENTS – IN A TAKEOVER AND MERGERS, WHEN ACCEPTANCES LEVEL ACHIEVES

90% OR MORE, ( PARAGRAPH 16.07 ) A LISTED COMPANY CAN BE VOLUNTARILY PRIVATISED

2

3

POINTS Explanation

Prices MAY NOT trade at its fair price in normal trading

circumstances

Bernas – Concession related business and possess classified

information or other information not released to the market.

Market participants may not be fully aware of true value,

until corporate exercise undertaken.

SRC – Not under research coverage

What are the privatization methods available ? Mandatory ( Unconditional ) = Bernas, possibly SRC

and Conditional General Offer = MISC

How to uncover signals prior to corporate exercise if no

announcements are made yet by company

Studying the recent / past annual reports especially the

chairman and managing director’s statements or any other

“signals” from other published information

Valuation concepts We should not look into P/E and P/B alone and make

conclusions. Rather a study of other financial indicators and

qualitative aspects to determine the health of a company.

Rights of shareholders in a MGO Vote for / against depending on investors’ evaluation

Substantial information could be gathered from a

detailed study of annual reports for a period of say 5

years

Illustration by using SRC

SOME LESSONS LEARNT FROM PAST CORPORATE EXERCISES – TO BE ILLUSTRATED

4

Bernas means Padiberas Nasional Berhad, a completed case and now Bernas has been delisted.

SRC means Shell Refining Company (Federation of Malaya)Berhad, a recent exercise that may trigger

a Mandatory General Offer if propose transaction is proceeded.

MISC means MISC Berhad, a case whereby shareholders acceptances level of 90% as stipulated, was not achieved by offeror. Continue to be listed, today.

Privatisation Methods Companies

1 MGO Bernas, Possibly SRC

2 Conditional Takeover Offer MISC

Cases to be discussed

CASE 1 - BERNAS

5

HOW WAS THE TAKEOVER CODE TRIGGERED? When Parties Acting in Concert (PAC) owns 72.57%

share in Bernas. This triggers a Mandatory General Offer by PAC to acquire shares that it does not

own at RM3.70 per share

6

Case 1 – Bernas

An Overview of MGO

and Exit Offer under

paragraph 16.06 of

Bursa Saham LR

1. Accepted by 75% or more shareholders (in value ) who attend meeting

2. Not rejected by 10% or more shareholders (in value) who attend meeting

Asia Equity Research www.aer.global

PROPOSED DELISTING / VOLUNTARY WITHDRAWAL - ILLUSTRATION ONLY AND DOES NOT CONSTITUTE ANY FORM OF ADVICE

PARAGRAPH 16.06 BURSA SAHAM LISTING REQUIREMENTS

COMPULSORY

ACQUISITION

SHAREHOLDERS HOLD

UNLISTED SHARES

NOT APPROVED BY

SHAREHOLDERS

CONTINUE TO BE LISTED

APPROVED BY

SHAREHOLDERS

A VOLUNTARY TAKE-OVER OFFER WILL BE

EXTENDED TOGETHER WITH THE PROPOSED

DELISTING

COMPANY SHALL BE DELISTED

ACCEPTING

SHAREHOLDERS

NON-ACCEPTING

SHAREHOLDERS

RECEIVED TAKE OVER

PRICE

ACCEPTANCE EQUAL

TO 90% OR MORE

OFFER SHARES

ACCEPTANCE LESS THAN

90% OF OFFER SHARES

CASE 1 – BERNAS

KEY MESSAGES

7

CASES KEY MESSAGES

BERNAS Valuation point Concession related business. Share price was low until privatisation offer takes place. Possible reason: concession agreements are private documents, and not much information could be gathered unless disseminated to the public in past corporate exercises.

Valuation methodology most appropriate – Free Cash Flow. Subjective but governed by valuation standards

In a span of one year, 3 offfers were made to complete the privatisation process.

Concept of Fair and Resonableness

8

CASE 1 – BERNAS

KEY MESSAGES

9

VALUATION POINTS:-

1. For equity valuation of concession, most appropriate valuation approach is Free Cash Flow.

However, in most instances, this method requires inputs on business model, certain details of

concession arrangements (which are sometimes classified information) and hence traded

share price may not be reflect the intrinsic value of a company.

2. This is seen in Bernas, when the offered price by the offerors was higher than the average

price. i.e. the offered price was RM 3.70 whilst the average price was RM 3.25 and 68%

of the time, the price was between RM 2.95 to 3.56

3. Also, in most instances valuation requires some professional input and it is essential that the

reader appreciates what and how the main inputs affects the share price ascribed.

CASE 2 - MISC

10

HOW WAS THE TAKEOVER CODE TRIGGERED? When Petroliam Nasional Berhad (PETRONAS) makes an offer to

all the remaining shareholders of MISC to acquire at a cash price of RM5.30 per share for each MISC share that it

does not own with a condition that acceptance by PETRONAS is conditional that it shall result in an ownership of

90% or more in MISC. This is a Conditional General Offer of which acceptance by offeror is subject to condition

stipulated by offeror is met.

11

ASIA EQUITY RESEARCH www.aer.global

90% or more of the issued

capital of listed company but

less than 90% of offer

shares

Paragraph 16.07 - Bursa = Listed issuer can apply for withdrawal if offeror owns 90% or more shares

in a listed company and offeror expressed intention not to be listed

Dissenting shareholders can

invoke Section 223 of the

CMSA to compel offeror to

acquire at OFFER PRICE or

such other terms that are

agreed between Offeror and

dissenting shareholder

ACCEPTING CONDITION MET IF OFFEROR

RECEIVES ACCEPTANCE OF 90% OR MORE OF

ISSUED SHARE CAPITAL

More than 90% of the offer shares

Offeror can invoke compulsory

acquisition under Section 222 of the

CMSA on dissenting shareholder

ACCEPTING CONDITION

NOT MET ( LESS THAN

90% ) OF ISSUED SHARE

COMPANY CONTINUE TO BE LISTED

HOLDERS CONTINUE TO HOLD COMPANY'S

SHARES

OFFER - UNCONDITIONAL

CONDITIONAL GENERAL OFFER - FOR ILLUSTRATION PURPOSE ONLY. THIS DOES NOT CONSTITUTE ANY FORM OF ADVICE

Case 2 – MISC

An Overview of

Conditional Take-Over

Offer

12

CASE 2 – MISC ( IN HINDSIGHT… OFFER WAS NOT SUCCESSFUL….

IAC ADVISED AS NOT FAIR BUT REASONABLE)

13

CASE 2 – MISC

RELATIVE VALUATION ANALYSIS (RVA) – CURRENT MISC RVA

14

MESSAGE

1. RVA has to be interpreted together with other financial analysis to gather meaningful results

2. Generally, there is a relationship between P/B multiple and ROE %. This matter is explored further in case of SRC

Market Cap (RM) Price, RM P/E Div Yield

MISC BHD 39.8 8.92 16.1 1.1 8.7% 2.8%

National Shipping Company of Saudi Arabia (Bahri) 17.4B 8.8 1.7 21.3% 2.5%

Qatar Gas Transport Company (Nakilat) 13.9B 12.6 2.8 23.9% 5.6%

Source: Bloomberg 17 March 2016

Analyzed by: ASIA EQUITY RESEARCH www.aer.global

MESSAGE

1. Though MISC BHD, P/E appears to be higher than the Comparable Companies sampled, its Price to Book is the lowest. Also noted is that it registers the lowest ROE %.

2. Generally, in an efficient market, there is a positive relationship between P/B and ROE %. A higher ROE% signifies future growth potential and hence a higher P/B is

ascribed. The opposite is also true.

3. Relative valuation metrics has to be studied together with other financial parameters.

COMPARABLE COMPANIES

P/B ROE

CASE 3 - SRC

15

HOW WAS THE TAKEOVER CODE TRIGGERED? On 1 February 2016, Shell Overseas Holdings Limited (SOHL)

the major shareholder of Shell had entered into a conditional SPA with Malaysian Hengyuan International Limited

(MHIL) for the disposal of 51% issued share capital of SRC for a total cash consideration of USD 66.30 million at

a price of RM1.80 per share, by making reference to the unaudited net assets of SRC at 30 September 2015 of

RM1.93 per share. This propose transaction shall oblige MHIL to extend a MGO to all remaining shares in SRC not

held by MHIL.

16

FY1999 TO FY2007 =

PROFITABLE EVERY YEAR

EXCEPT BREAKEVEN IN

FY2000

FY 2008 TO FY 2015 =

EXHIBIT VOLATILE

PERFORMANCE RESULTS

FY 2008, FY, 2011, FY2012,

FY2013 and FY2014 =

LOSSES

FY2015 = CONSIDERABLE

IMPROVED RESULTS

CONTINUE ON

Revenue,

RM billions

Gross Profit

/ (Loss), RM

millions

Gross

Margin,

%

Net Profit

/ (Loss)

After

Tax, RM

Million

Net

Margin,

%

FY 1999 3.2 94 3.0% 74 2.3%

FY 2000 5.2 219 4.2% 112 2.2%

FY 2001 4.6 54 1.2% (0) 0.0%

FY 2002 4.5 204 4.6% 153 3.4%

FY 2003 5.5 287 5.2% 182 3.3%

FY 2004 7.5 790 10.5% 670 8.9%

FY 2005 9.7 743 7.7% 522 5.4%

FY 2006 10.9 407 3.7% 258 2.4%

FY 2007 11.4 807 7.1% 593 5.2%

FY 2008 13.1 (343) -2.6% (330) -2.5%

FY 2009 8.9 417 4.7% 290 3.2%

FY 2010 10.4 154 1.5% 106 1.0%

FY 2011 11.2 (98) -0.9% (126) -1.1%

FY 2012 15.1 (132) -0.9% (95) -0.6%

FY 2013 14.7 177 1.2% (156) -1.1%

FY 2014 14.3 (308) -2.2% (1,189) -8.3%

FY 2015 9.1 815 9.0% 352 3.9%

Average 3.3% 1.6%

Analysed by: Asia Equity Research www.aer.global

17

CASE 3 – SRC

RELATIVE VALUATION ANALYSIS (RVA) ON SRC

18

MESSAGE

1. Generally, there is a relationship between P/B multiple and ROE %. SRC had a high negative ROE % but trading

at a much higher P/B multiple than its comparable companies. An indicator of potential over valuation.

2. Why ? Many reasons could be attributed for such instances but general reasons may include factors such as low

free float, investors believe that there is future growth potential and stocks not well covered by analyst amongst

others.LAST RESEARCH REPORT ISSUED ON 2

NOV 2007 THAT IS RETRIEVABLE FROM

BURSA SITE

CASE 3 – SRC

FINANCIAL ANALYSIS ON SRC

19

MESSAGE

1. Low net margin between -1% to 1% except in FY 2014 when it reported a loss of approximately RM1,200 million

2. Reflected an unaudited net profit of RM352 million in FY2015, also the highest gross margin percentage at 9%

compared with a range of -2.2% to 1.5% between FY 2010 to FY 2014.

SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

REVENUE, RM BILLION 10.4 11.2 15.1 14.7 14.3 9.1

GROSS PROFIT / (LOSS), RM MILLION 154 (98) (132) 177 (308) 815

PROFIT / (LOSS ) AFTER TAXATION, RM MILLION 1061

(126) (95) (156) (1,189) 351.8

SALES VOLUME, THOUSAND BARRELS PER DAY 102 85 110 110 111 93

NET ASSETS, RM MILLION 2,092 1,854 1,705 1,513 325 677

NET ASSET PER SHARE, RM 6.97 6.18 5.68 5.04 1.08 2.26

GROSS MARGIN, % 1.5% -0.9% -0.9% 1.2% -2.2% 9.0%

NET MARGIN, % 1.0% -1.1% -0.6% -1.1% -8.3% 3.9%

RETURN OF EQUITY, % 5% -7% -6% -10% -366% 52%

BANK BALANCE, RM MILLION 151 125 33 41 9 176

BANK BORROWINGS, RM MILLION 450 831 1,185 1,740 1,758 1,481

SHARE CAPITAL, MILLION 300 300 300 300 300 300

* Major Statutory Turnarround for 44 days in FY2015

BREAKDOWN OF LOSS IN FY2014

FY 2014

RM MIL

STOCKHOLDING LOSSES * 625

IMPAIRMENT LOSSES - NON CASH TRANSACTION 461

OPERATIONAL LOSSES 103

1,189

Page 13, Annual Report for FY2014

CASE 3 – SRC

PAST 12 MONTHS P/B MULTIPLE OF SRC

20

MESSAGE

Trading prices seems to be not affected by historical losses. It was trading at an average P/B of 3 times for the past

12 months and Current PE is NOT a meaningful comparison as SRC was loss making four years preceding FY2015.

CASE 3 – LOW TRADING VOLUME OF SRC PRIOR TO Q1-2016

21

MESSAGE

1. Low trading volume except in Q1-2016, from 2015 to 2016.

CASE 3 – EFFECTS ON QUARTERLY EARNINGS RESULTS ON SHARE PRICE

22

MESSAGE

1. Share price shows a dip upon the announcement of results.

Is the adjustment sufficient enough ?

CASE 3 – SRC

ANALYSIS OF LOSSES IN FY2014

23

MESSAGE

1. The loss after tax of approximately RM1,200 billion in FY2014 was substantially due to impairment

and stockholding losses.


FY 2014

RM MIL

STOCKHOLDING LOSSES * 625

IMPAIRMENT LOSSES - NON CASH TRANSACTION 461

OPERATIONAL LOSSES 103

1,189

The loss refers to the difference between the current cost of

inventories at the date of sale and the amount charged as the cost

of goods sold in computing historical profits – page 13, Annual

Report, FY2014

Commentary:-

1. Stock holding loss occurs when crude oil prices falls.

2. Stock holding gain occurs when crude oil prices rises.

The higher losses in 2014 are mainly contributed by stockholding losses of RM625.1 million due to fall in oil

prices (from average dated Brent marker of USD107/bbl in Jan 2014 to Dec 2014 of USD55/bbl), .

impairment losses of RM461 million, and operational losses of RM102.6million.

Page 19 of Q4, 2014 announcement made on 17 February 2015

CASE 3 – SRC

STOCK HOLDING LOSSES – CORRELATION WITH CRUDE OIL BRENT PRICES

24

MESSAGE

1. STOCKHOLDING LOSSES HAS CORRELATION WITH FALLING CRUDE OIL BRENT PRICES IN FY 2014

The fall in oil prices in 2014, resulted in significant stockholding losses and lower first in first out (FIFO) margins (in

accordance to Malaysian Financial Reporting Standards 102). Generally, major oil companies would also consider the

current cost of supplies (CCS) margins, as the CCS margins would exclude stockholding impact as it is typically regarded as

an uncontrollable factor. Thus, your Company’s CCS margin in 2014 of US$2.65 per barrel is higher (2013: US$1.10 per

barrel). We recorded stockholding loss of US$4.99 per barrel in 2014 compared to a stockholding gain of US$0.80 per

barrel in 2013. Page 17- Annual Report, FY 2014

COMMENTARY:-

What does this statement actually mean ?

In periods of FALLING brent crude oil prices

Cost of sales - Higher cost Cost of sales - Lower Cost

Hence, margin is LOWER Hence, margin is HIGHER

The Gross Refining Margin ALREADY INCLUDED The Gross Refining Margin DOES NOT

the effects of stock holding gain / (losses) take into consideration stock holding

and hence no need to disclose separately gain / (losses ), and hence need to

the stockholding gain / (losses) per barrel compute separately.

IF policy for determing

cost of sale is FIFO

If policy of determining cost of

sale is using Current Cost System

FIFO

Gross

Margin

%

GRM per

barrel

(USD)

Stockholding

Margin per

barrel (USD)

Total Margin

per barrel

(USD)

FY2013 1.2% 1.10 0.80 1.90

FY2014 -2.2% 2.65 (4.99) (2.34)

CURRENT COST SYSTEM

NET PROFIT AFTER TAX AFTER ADJUSTING FOR EFFECTS OF STOCK HOLDING

LOSSES TO DETERMINE THE OPERATIONAL PROFIT / (LOSS) WITHOUT

STOCKHOLDING EFFECTS

25

MESSAGE

1. ADJUSTED NET MARGIN BETWEEN -3% TO -1% FOR PERIOD FROM FY2010 TO FY 2014. FY2015 REPORTED

THE BEST ADJUSTED NET MARGIN AFTER STOCK HOLDING LOSSES – AT 5%. FROM FY2010 TO FY2014 = NET

LOSS AT OPERATION LEVEL

2. STOCKHOLDING PLAYS AN IMPORTANT ROLE IN THE BOTTOM LINE PROFITABILITY. IT IS AN EXTERNAL FACTOR

NOT WITHIN THE CONTROL OF THE COMPANY. MEANING SRC’S A SIGNIFICANT PORTION OF SRC’S RESULTS

ARE DUE TO EXTERNAL MARKET FACTORS


FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

REVENUE, RM BILLION 10.4 11.2 15.1 14.7 14.3 9.1

GROSS PROFIT / (LOSS), RM MILLION 154 (98) (132) 177 (308) 815


(126) (95) (156) (1,189) 351.8

STOCKHOLDING GAIN / (LOSSES), RM MILLION 108 175 NA 96 (625) (133)

IMPAIRMENT LOSSES, RM MILLIONS 0 0 0 0 (461) 0

ADJUSTED PROFIT / (LOSS) AFTER TAX, RM MILLION (2) (301) (95) (252) (103) 485

ADJUSTED NET MARGIN, % 0% -3% -1% -2% -1% 5%

MAJOR STATUTORY TURNAROUND MTA MTA

Analysed by: ASIA EQUITY RESEARCH www.aer.global

SHARP DROP IN OIL

PRICE IN FY2014

CONTINUE NEXT SLIDE

26


FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015


(126) (95) (156) (1,189) 351.8


IMPAIRMENT LOSSES, RM MILLIONS 0 0 0 0 (461) 0

ADJUSTED PROFIT / (LOSS) AFTER TAX, RM MILLION (2) (301) (95) (252) (103) 485


ADJUSTED PROFIT AFTER TAX EXCLUDING THE EFFECTS CAUSED BY STOCK HOLDING

MESSAGE:-

1. OPERATIONAL LOSSES RECORDED IN FY2010 TO FY 2014 AFTER

REMOVING THE EFFECTS OF STOCKHOLDING

2. FY2015 = REPORTED GOOD REFINING MARGIN

Q4-2014 = Announcement, Page 19 of 20

CASE 3 – SRC = DISCLOSURE OF STOCK HOLDING LOSSES

GATHERED FROM DISCLOSURES IN ANNUAL REPORT

27

ANNUAL REPORT – FY2010, page 44

Annual Report – FY2011, page 48

MESSAGE

1. Stockholding losses are voluntary disclosure item that is not an item that appears as a stand alone in the audited

financial statement. It is embedded within the cost of sales. Discrepancy could possibly happen.

2. Stockholding losses and Gross Refining Margin at current cost is used to explain the total cost of sales

using FIFO method

CASE 3 – SRC = EFFECTS OF STOCKHOLDING GAIN / LOSSES DUE

TO EXTERNAL MARKET FACTORS BY ANALYSIS

28

MESSAGE

1. FACTORS THAT DETERMINE STOCK HOLDING LOSSES BY ANALYSIS –

a) OIL INVENTORIES. - Average about 3.4 million barrels

b) EXCHANGE RATE

c) PRICE FLUCTUATION OF CRUDE OIL

2. A inc / (dec) of USD 10 per barrel translate to approximately gain / (loss) of RM 117 million .

Page 19, Annual Report FY

2014


FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015


OIL INVENTORIES, MILLION BARRELS 3.4 3.5 3.0 3.6 3.4 NA


USD per barrel

108

55

53 a

Number of barrel, million 3.35 b

exchange rate 3.5046 c

622 a x b x c

Difference between published and analysed probably due to some rounding on the figures used in computation.


Approximated stockholding loss computation, RM millions

Beginning financial year, FY 2014

Ending financial year, FY2014

CASE 3 – SRC

SIGNALS ON FUTURE STRATEGY FROM ANNUAL REPORT OF FY2014

29

MESSAGE

SIGNAL ON FUTURE STRATEGY

As disclosed in Note 33 to the financial statements, and as announced on 9 January 2015 to Bursa Malaysia, the Board has

completed the structured review of SRC Refining Company’s resilience in the current poor margin environment as announced in

September 2014. The board has concluded that refining margins are expected to remain depressed due to overcapacity in the

global refining industry. Given the poor margin environment, the Board is proactively investigating long-term options in the best

interest of the Company. These will include, but are not limited to, the potential sale of the assets, or conversion of operations to

a storage terminal and/or other viable options. The focus near-term is to secure and sustain the safe and reliable operation of

the Refinery while long-term options are being pursued. Once the final option has been selected, the Company will seek the

necessary approval from shareholders in compliance with regulatory requirements. Further details on the selected option shall be

disclosed and announced to Bursa Malaysia in due course

Page 48. Annual Report, FY2014

CONVERSION TO A STORAGE TERMINAL POTENTIAL SALE OF ASSETS

Page 48, Annual Report = FY2014

CASE 3 – SRC

STOCK LOSSES IN OTHER OIL REFINERY COMPANIES AS EXTRACTED FROM

ANNUAL REPORTS

30

COMPANY STATEMENTS EXTRACTED

Shell Refining Company The loss refers to the difference between the current cost of

inventories at the date of sale and the amount charged as the cost of

goods sold in computing historical profits – page 13, Annual Report,

FY2014

Caltex Australia Limited

(previously operated a refinery capacity with

capacity of 124,500 barrels a day and refinery

ceased operation in October 2014, to

become an import terminal)

The 2014 result includes a product and crude oil inventory loss of

$361 million after tax and reflects a significant fall in Brent crude oil

prices in the latter months of 2014. - Page 2, Annual Report FY2014

Reported ROE% = 18.6% - Slide 16

Message – Remains profitable after conversion to terminal operation.

CASE 3 – SRC

IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED ?

31

Page 66 and Page 67 - Annual Report FY2014

CASE 3 – SRC


32

Page 75 - Annual Report FY2014

CV

RM million

Land and improvements 2

Building 53

Plant and machinery 1,394

Work in progress 67

1,515

CV / NBV before impairment charges as at

31.12.2014

CASE 3 – SRC


33

Page 66 and Page 67 - Annual Report FY2014

CV RA Impairment

SCENARIO CGU, RM million RM million RM million

BASE 1,515 1,054 461

S1- Refinery margin 5% 1,515 1,303 212

S2 - Refinery margin 5% 1,515 828 687

S3 - Refinery margin 22% 1,515 0 1,515

S4 - Availability of export

market, a year earlier 1,515 994 521

Analysed by Asia Equity Research based on

report published by SRC

MESSAGE

Involves professional objective / subjective

elements. How does other assumptions affect

the value in use – such as pre tax discount rate

-to be presented in discussion

CASE 3 – SRC, RELATED PARTIES TRANSACTIONS

34


Sale of refined products

FY 2014 FY 2013

Shell Malaysia Trading Sendirian Berhad 11.23 11.17

Shell Timur Sendirian Berhad 1.46 1.68

Shell International Eastern Trading Company 0.55 0.83

Shell Eastern Chemical Pte Ltd 0.36 0.37

TOTAL 13.60 14.06

Total sale of refined products over total reported revenue 93% 99%

Purchase of crude and products

FY 2014 FY 2013


Shell Eastern Trading Pte Limited 0.23 0.28

Shell Lubricant Supply Company 0.05 0.07

Sarawak Shell Berhad 0.00 1.11

Sabah Shell Petroleum Company Limited 0.00 0.31

TOTAL 14.13 14.87

Total purchase over cost of sales reported 97% 102%

RM Billions

RM Billions

MESSAGE

1. Related party activities within the Shell Group of which the Shell Refining Company purchases and sales to

other related companies within the Shell Group, with SRC focusses on refineries business


35


MESSAGE

1. Related party activities within the Shell Group of which the Shell Refining Company’s trade receivable and

trade payables are with related parties with the Shell Group

CURRENT ASSETS

CURRENT LIABILITIES

AMOUNT DUE FROM RELATED COMPANIES

FY 2014 FY 2013

Shell Malaysia Trading Sendirian Berhad 628.6 1,006.0

Shell Timur Sendirian Berhad 49.2 147.5


TOTAL 724.2 1,194.4

Total amount due from related companies as above over

total audited amount due from related companies98% 97%

AMOUNT DUE TO RELATED COMPANIES

FY 2014 FY 2013

Shell International Eastern Trading Company 597.7 1,029.9

Shell Eastern Trading Pte Limited 30.4 28.5

Shell International Petroleum Company Limited 7.4 6.8

635.5 1,065.2

Total amount due torelated companies as above over total

audited amount due to related companies100% 100%

RM MILLION

RM MILLION


36

Page 53 and 83 - Annual Report FY2014

MESSAGE

1. Related party activities within the Shell Group of which the Shell Refining Company’s annual administrative

expenses are outsourced to other related parties with the Shell Group

ADMINISTRATIVE EXPENSES

37

RM MILLION USD MILLION

Interest RepaymentPrincipal Bullet

RepaymentNOTES

Local currency loan 450 KLIBOR +0.3%20 Quarterly

installments15 June 2015

Originally due on 15 June 2015 but was classified under non

current in Q4, 2015

Foreign currency loan 1,031 240 LIBOR + 0.75%20 Quarterly

installments14 Sept 2016

In conjunction with the USD loan, a Cross Currency Interest Rate

Swap was executed to hedge the exchange rate conversion,

with the resultant effect that repayment is measured in RM and

interest quoted in KLIBOR and receive from swap counterparty

LIBOR + 0.75%

1,481

Note: The all in interest cost ranges from 1.01 % to 4.16 % as at 31 December 2014.

Based on unaudited results for Q4, 2015

FY 2015

SRC has to conserve cash balance to be able to repay on due date or to restructure the loan.

Page 76, Annual Report, FY2014

LOAN REPAYMENT DUE ON 14 SEPT 2016 – RM 1 BILLION. CASH AS AT 31 DEC 2015 – RM 175 MILLION

CASE 3 – SRC

BASIS OF PRICING OF SALES OF 51% BLOCK FROM PUBLISHED MEDIA

38

BASIS OF PRICING THE SHARE SALE AT RM1.80 PER SHARE AS EXTRACTED

FROM INFORMATION PUBLISHED BY SRC

1. REFERENCE TO THE NET ASSETS AS T 3O SEPT 2015.

The net asset per share as at 31 December 2015 was approximately

RM2.26 per share. The price for the sale for the 51% block was made with

reference to the net asset of SRC as at 30 September 2015 of RM 1.93

per share.

2. FUTURE CAPITAL EXPENDITURE TO BE INCURRED

“Furthermore, in SOHL’s view SRC requires significant investment to meet Euro

4 and Euro 5 product specifications and it has significant existing debt of

MYR 1.2 billion maturing in the near future. Therefore two options have been

explored being a Terminal Conversion led by SRC and a sale by SOHL to a

buyer that is willing to invest in Euro 4 and Euro 5 and that can procure new

long term financing to SRC.” Extracted from Published Media Report by SRC

CASE 3 – SRC

LATEST ANNOUNCEMENTS GATHERED FROM PUBLIC DOMAIN

39

MESSAGE:-

1. Royal Dutch Shell Plc. shall focus on upstream ( exploration activities ) instead of downstream ( refinery ) after the

proposed sale of its 51% holding to Malaysian Hengyuan International Limited

Extracted:-

Following the sale of its shares in Shell Refining Company (federation of Malaya) Bhd (SRC) to a Chinese company, Royal

Dutch Shell plc is seeking new opportunities for further growth in its upstream portfolio in Malaysia and to reinforce its joint

ventures here with Petroliam Nasional Bhd (Petronas), besides strengthening its position in the retail segment. “If I look at

Shell in Malaysia, over the last two years, we have made 11 gas discoveries. We are very focused on our upstream business

in Malaysia, seeking new opportunities for further growth, but also reinforcing our joint ventures, like the Baram Delta

Offshore that we have [with Petronas]” In the upstream sector, Shell has been pioneering deepwater field developments in

Malaysia, through the Gumusut-Kakap and Malikai fields, both offshore Sabah, and the Central Luconia and Baram Delta

projects off Sarawak. According to Brown, Gumusut-Kakap has a peak production capacity of 135,000 barrels of oil

equivalent per day (boepd). About 20% of Malaysia’s average oil production of around 650,000 boepd, comes from

Gumusut-Kakap. Malikai will also be coming online soon. “When it comes to Malaysia, we’ve been here over 100 years,

starting with Miri in 1910, and we’ve grown from that position. Last year for instance, we produced half the gas in Malaysia.

Source:- This article first appeared in The Edge Financial Daily, on March 23, 2016. Continue

CASE 3 – SRC

LATEST ANNOUNCEMENTS GATHERED FROM PUBLIC DOMAIN

40

MESSAGE:-

2. Sale of 51% block, is a global strategy and to ensure continuation of fuel supply in Malaysia.

Extracted:-

In a press release dated Feb 17, Shell explained that the sale of the stake in SRC should be seen in context with the oil

major’s global strategy and portfolio activities. It said a refinery of SRC’s scale is not a strategic fit for its portfolio and that

it would find it difficult to compete for new capital.

Yesterday, Shell Malaysia Ltd chairman Datuk Iain Lo said the sale of the refinery is actually to ensure the stability and

continuation of fuel supply in the country, as there was a concern that the SRC is a weak link in the supply chain.

Source:- This article first appeared in The Edge Financial Daily, on March 23, 2016

41

SRC had undergone volatile performance in recent years.

Items shaded in red means thepercentages are outside itslower bound ranges, in 16% oftime. Periods of FY 2008 toFY 2014 experienced negativeterritories 4 out of 7 periods,signifying periods of extremevolatility.

Refinery margins areunder significant pressuresince FY2011 to FY 2014except FY 2015.

Revenue,

RM billions

Gross Profit

/ (Loss), RM

millions

Gross

Margin,

%

Net Profit

/ (Loss)

After

Tax, RM

Million

Net

Margin,

%

FY 1999 3.2 94 3.0% 74 2.3%

FY 2000 5.2 219 4.2% 112 2.2%

FY 2001 4.6 54 1.2% (0) 0.0%

FY 2002 4.5 204 4.6% 153 3.4%

FY 2003 5.5 287 5.2% 182 3.3%

FY 2004 7.5 790 10.5% 670 8.9%

FY 2005 9.7 743 7.7% 522 5.4%

FY 2006 10.9 407 3.7% 258 2.4%

FY 2007 11.4 807 7.1% 593 5.2%

FY 2008 13.1 (343) -2.6% (330) -2.5%

FY 2009 8.9 417 4.7% 290 3.2%

FY 2010 10.4 154 1.5% 106 1.0%

FY 2011 11.2 (98) -0.9% (126) -1.1%

FY 2012 15.1 (132) -0.9% (95) -0.6%

FY 2013 14.7 177 1.2% (156) -1.1%

FY 2014 14.3 (308) -2.2% (1,189) -8.3%

FY 2015 9.1 815 9.0% 352 3.9%

Average 3.3% 1.6%

Average +/- 1 SD

Lower bound -0.5% -2.2%

Upper bound 7.2% 5.5%


Continue

42

Refinery margins are under pressure in

FY2012, 2013 and a certain extent in

FY2014.

Noted that refinery margin is a voluntary

disclosure and it is found in the chairman’s

statement and not part of a disclosure

item in the financial statements. FY2004

to FY 2009 has prominent disclosure on

the GRM but there was a change in

format thereafter.

Note: In FY 2008, total stock

holding losses was RM644million

Revenue,

RM billions

Gross Profit

/ (Loss), RM

millions

Gross

Margin,

%

Net Profit

/ (Loss)

After

Tax, RM

Million

Net

Margin,

%

FY 1999 3.2 94 3.0% 74 2.3% Not mentioned

FY 2000 5.2 219 4.2% 112 2.2% 2.60

FY 2001 4.6 54 1.2% (0) 0.0% Not mentioned

FY 2002 4.5 204 4.6% 153 3.4% Not mentioned

FY 2003 5.5 287 5.2% 182 3.3% Not mentioned

FY 2004 7.5 790 10.5% 670 8.9% 5.51

FY 2005 9.7 743 7.7% 522 5.4% 6.28

FY 2006 10.9 407 3.7% 258 2.4% 4.34

FY 2007 11.4 807 7.1% 593 5.2% 5.79

FY 2008 13.1 (343) -2.6% (330) -2.5% 6.73

FY 2009 8.9 417 4.7% 290 3.2% 3.44

FY 2010 10.4 154 1.5% 106 1.0% Not mentioned

FY 2011 11.2 (98) -0.9% (126) -1.1% Not mentioned

FY 2012 15.1 (132) -0.9% (95) -0.6% 1.25

FY 2013 14.7 177 1.2% (156) -1.1% 1.90

FY 2014 14.3 (308) -2.2% (1,189) -8.3% 2.65

FY 2015 9.1 815 9.0% 352 3.9% Not mentioned

Average 3.3% 1.6% 4.05

Average +/- 1 SD

Lower bound -0.5% -2.2% 2.10

Upper bound 7.2% 5.5% 6.00


Average Gross Refining

Margin in USD per barrel

43

IN A NUT SHELL – KEY FACTORS THAT DETERMINES A REFINERY’S GROSS

PROFIT

REVENUE

GROSS PROFIT

MEASUREMENT INDICATORS ARREVIATION FOR INDICATORS RELATIONSHIP

GROSS REFINING MARGIN IN USD PER BARREL GRMChanges of finished goods price relative to

crude oil price

STOCKHOLDING GAIN / LOSS STOCKHOLDING GAIN/(LOSS)~ D Brent Crude Oil ( Year End v

Openning) and Inventory Level

NUMBER OF BARRELS SOLD IN A YEAREconomic activity of Malaysia specifically

and globally generally

ASIA EQUITY RESEARCH

www.aer.global

KEY FACTORS THAT DETERMINE THE GROSS PROFIT OF A REFINERY = FOR ILLUSTRATIVE PURPOSE ONLY

LESS COST OF SALES

AVERAGE REVENUE PER UNIT OF FINISHED PRODUCTS

LESS AVERAGE CURRENT COST PER BARREL

ADD/LESS STOCK HOLDING GAIN / (LOSS)

x NUMBER OF BARRELS SOLD IN A YEAR

44

What is the likely outcome if transaction is proceeded?

MHIL is required to extend a Mandatory General Offer for all remaining Shares of Shell Refining Company not

already held by MHIL.

Extracted from Page 19/19 of SRC’s Quarter 4 results.

END

QUESTIONS AND ANSWERS

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CONTACT PARTY E-MAIL

Ong Tee Chin, CFA, FRM representative

from Asia Equity Research

[email protected]

No reproduction, extraction, reprinting or re-distribution of this presentation material is permitted

without the expressed written consent obtained from Asia Equity Research.

www.aer.global

45

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accuracy or adequacy and it should not be relied upon as such.. Assumptions, opinions and estimates constitute our judgment as of the date of this material

and are subject to change without notice. Neither AER nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this

information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of

any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions

expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or

income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the

amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from

such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in

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investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you.

Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek

professional advice.

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