CORPORATE EXERCISES AND WHAT INVESTORS SHOULD LOOK FOR

Transcription

1 CORPORATE EXERCISES AND WHAT INVESTORS SHOULD LOOK FOR JOINT 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

2 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 ) A LISTED COMPANY CAN BE VOLUNTARILY PRIVATISED 2

3 SOME LESSONS LEARNT FROM PAST CORPORATE EXERCISES TO BE ILLUSTRATED POINTS Prices MAY NOT trade at its fair price in normal trading circumstances What are the privatization methods available? How to uncover signals prior to corporate exercise if no announcements are made yet by company Valuation concepts Rights of shareholders in a MGO Substantial information could be gathered from a detailed study of annual reports for a period of say 5 years Explanation 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 Mandatory ( Unconditional ) = Bernas, possibly SRC and Conditional General Offer = MISC Studying the recent / past annual reports especially the chairman and managing director s statements or any other signals from other published information 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. Vote for / against depending on investors evaluation Illustration by using SRC 3

4 Cases to be discussed Privatisation Methods Companies 1 MGO Bernas, Possibly SRC 2 Conditional Takeover Offer MISC 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. 4

5 CASE 1 - BERNAS 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 5

6 PROPOSED DELISTING / VOLUNTARY WITHDRAWAL - ILLUSTRATION ONLY AND DOES NOT CONSTITUTE ANY FORM OF ADVICE PARAGRAPH BURSA SAHAM LISTING REQUIREMENTS APPROVED BY SHAREHOLDERS 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 COMPANY SHALL BE DELISTED A VOLUNTARY TAKE-OVER OFFER WILL BE EXTENDED TOGETHER WITH THE PROPOSED DELISTING NOT APPROVED BY SHAREHOLDERS CONTINUE TO BE LISTED Case 1 Bernas An Overview of MGO and Exit Offer under paragraph of Bursa Saham LR ACCEPTING SHAREHOLDERS NON-ACCEPTING SHAREHOLDERS ACCEPTANCE EQUAL TO 90% OR MORE OFFER SHARES ACCEPTANCE LESS THAN 90% OF OFFER SHARES RECEIVED TAKE OVER PRICE Asia Equity Research COMPULSORY ACQUISITION SHAREHOLDERS HOLD UNLISTED SHARES 6

7 CASE 1 BERNAS KEY MESSAGES CASES BERNAS KEY MESSAGES 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 7

8 8

9 CASE 1 BERNAS KEY MESSAGES 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 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. 9

10 CASE 2 - MISC 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. 10

11 CONDITIONAL GENERAL OFFER - FOR ILLUSTRATION PURPOSE ONLY. THIS DOES NOT CONSTITUTE ANY FORM OF ADVICE ACCEPTING CONDITION MET IF OFFEROR RECEIVES ACCEPTANCE OF 90% OR MORE OF ISSUED SHARE CAPITAL OFFER - UNCONDITIONAL ACCEPTING CONDITION NOT MET ( LESS THAN 90% ) OF ISSUED SHARE COMPANY CONTINUE TO BE LISTED HOLDERS CONTINUE TO HOLD COMPANY'S SHARES Case 2 MISC An Overview of Conditional Take-Over Offer 90% or more of the issued capital of listed company but less than 90% of offer shares More than 90% of the offer shares Paragraph 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 Offeror can invoke compulsory acquisition under Section 222 of the CMSA on dissenting shareholder 11 ASIA EQUITY RESEARCH

12 12

13 CASE 2 MISC ( IN HINDSIGHT OFFER WAS NOT SUCCESSFUL. IAC ADVISED AS NOT FAIR BUT REASONABLE) 13

14 CASE 2 MISC RELATIVE VALUATION ANALYSIS (RVA) CURRENT MISC RVA 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 P/B ROE Div Yield MISC BHD % 2.8% COMPARABLE COMPANIES National Shipping Company of Saudi Arabia (Bahri) 17.4B % 2.5% Qatar Gas Transport Company (Nakilat) 13.9B % 5.6% Source: Bloomberg 17 March 2016 Analyzed by: ASIA EQUITY RESEARCH 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. 14

15 CASE 3 - SRC 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 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. 15

16 Revenue, RM billions Gross Profit / (Loss), RM millions Gross Margin, % Net Profit / (Loss) After Tax, RM Million Net Margin, % FY % % FY % % FY % (0) 0.0% FY % % FY % % FY % % FY % % FY % % FY % % FY (343) -2.6% (330) -2.5% FY % % FY % % FY (98) -0.9% (126) -1.1% FY (132) -0.9% (95) -0.6% FY % (156) -1.1% FY (308) -2.2% (1,189) -8.3% FY % % Average 3.3% 1.6% Analysed by: Asia Equity Research 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 16

17 17

18 CASE 3 SRC RELATIVE VALUATION ANALYSIS (RVA) ON SRC 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 18

19 CASE 3 SRC FINANCIAL ANALYSIS ON SRC 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 SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 REVENUE, RM BILLION GROSS PROFIT / (LOSS), RM MILLION 154 (98) (132) 177 (308) 815 PROFIT / (LOSS ) AFTER TAXATION, RM MILLION (126) (95) (156) (1,189) SALES VOLUME, THOUSAND BARRELS PER DAY NET ASSETS, RM MILLION 2,092 1,854 1,705 1, NET ASSET PER SHARE, RM 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 BANK BORROWINGS, RM MILLION ,185 1,740 1,758 1,481 SHARE CAPITAL, MILLION * 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 Page 13, Annual Report for FY2014 1,189 19

20 CASE 3 SRC PAST 12 MONTHS P/B MULTIPLE OF SRC 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 FY

21 CASE 3 LOW TRADING VOLUME OF SRC PRIOR TO Q MESSAGE 1. Low trading volume except in Q1-2016, from 2015 to

22 CASE 3 EFFECTS ON QUARTERLY EARNINGS RESULTS ON SHARE PRICE MESSAGE 1. Share price shows a dip upon the announcement of results. Is the adjustment sufficient enough? 22

23 CASE 3 SRC ANALYSIS OF LOSSES IN FY2014 MESSAGE 1. The loss after tax of approximately RM1,200 billion in FY2014 was substantially due to impairment and stockholding losses. BREAKDOWN OF LOSS IN FY2014 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

24 CASE 3 SRC STOCK HOLDING LOSSES CORRELATION WITH CRUDE OIL BRENT PRICES 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 Page 17- Annual Report, FY 2014 COMMENTARY:- What does this statement actually mean? In periods of FALLING brent crude oil prices IF policy for determing cost of sale is FIFO If policy of determining cost of sale is using Current Cost System 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. FIFO Gross Margin % GRM per barrel (USD) CURRENT COST SYSTEM Stockholding Margin per barrel (USD) Total Margin per barrel (USD) FY % FY % 2.65 (4.99) (2.34) 24

25 NET PROFIT AFTER TAX AFTER ADJUSTING FOR EFFECTS OF STOCK HOLDING LOSSES TO DETERMINE THE OPERATIONAL PROFIT / (LOSS) WITHOUT STOCKHOLDING EFFECTS MESSAGE 1. ADJUSTED NET MARGIN BETWEEN -3% TO -1% FOR PERIOD FROM FY2010 TO FY 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 SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 REVENUE, RM BILLION GROSS PROFIT / (LOSS), RM MILLION 154 (98) (132) 177 (308) 815 PROFIT / (LOSS ) AFTER TAXATION, RM MILLION (126) (95) (156) (1,189) STOCKHOLDING GAIN / (LOSSES), RM MILLION NA 96 (625) (133) IMPAIRMENT LOSSES, RM MILLIONS (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 SHARP DROP IN OIL PRICE IN FY2014 CONTINUE NEXT SLIDE 25

26 ADJUSTED PROFIT AFTER TAX EXCLUDING THE EFFECTS CAUSED BY STOCK HOLDING SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 PROFIT / (LOSS ) AFTER TAXATION, RM MILLION (126) (95) (156) (1,189) STOCKHOLDING GAIN / (LOSSES), RM MILLION NA 96 (625) (133) IMPAIRMENT LOSSES, RM MILLIONS (461) 0 ADJUSTED PROFIT / (LOSS) AFTER TAX, RM MILLION (2) (301) (95) (252) (103) 485 Analysed by: ASIA EQUITY RESEARCH MESSAGE:- 1. OPERATIONAL LOSSES RECORDED IN FY2010 TO FY 2014 AFTER REMOVING THE EFFECTS OF STOCKHOLDING 2. FY2015 = REPORTED GOOD REFINING MARGIN Q = Announcement, Page 19 of 20 26

27 CASE 3 SRC = DISCLOSURE OF STOCK HOLDING LOSSES GATHERED FROM DISCLOSURES IN ANNUAL REPORT 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 27

28 CASE 3 SRC = EFFECTS OF STOCKHOLDING GAIN / LOSSES DUE TO EXTERNAL MARKET FACTORS BY ANALYSIS SHELL REFINING COMPANY (FEDERATION OF MALAYA) BERHAD FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 STOCKHOLDING GAIN / (LOSSES), RM MILLION NA 96 (625) (133) OIL INVENTORIES, MILLION BARRELS NA BREAKDOWN OF LOSS IN FY2014 Analysed by: ASIA EQUITY RESEARCH Page 19, Annual Report FY 2014 Beginning financial year, FY 2014 Ending financial year, FY2014 USD per barrel a Number of barrel, million 3.35 b exchange rate c Approximated stockholding loss computation, RM millions 622 a x b x c Difference between published and analysed probably due to some rounding on the figures used in computation. 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. 28

29 CASE 3 SRC SIGNALS ON FUTURE STRATEGY FROM ANNUAL REPORT OF FY2014 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 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 Page 48, Annual Report = FY CONVERSION TO A STORAGE TERMINAL POTENTIAL SALE OF ASSETS

30 CASE 3 SRC STOCK LOSSES IN OTHER OIL REFINERY COMPANIES AS EXTRACTED FROM ANNUAL REPORTS COMPANY Shell Refining Company 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) STATEMENTS EXTRACTED 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 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 Page 2, Annual Report FY2014 Reported ROE% = 18.6% - Slide 16 Message Remains profitable after conversion to terminal operation. 30

31 CASE 3 SRC IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED? Page 66 and Page 67 - Annual Report FY

32 CASE 3 SRC IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED? 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

33 CASE 3 SRC IMPAIRMENT LOSS OF RM461MILLION. HOW WAS IT DETERMINED? Page 66 and Page 67 - Annual Report FY2014 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 CV RA Impairment SCENARIO CGU, RM million RM million RM million BASE 1,515 1, S1- Refinery margin 5% 1,515 1, S2 - Refinery margin 5% 1, S3 - Refinery margin 22% 1, ,515 S4 - Availability of export market, a year earlier 1, Analysed by Asia Equity Research based on report published by SRC 33

34 CASE 3 SRC, RELATED PARTIES TRANSACTIONS Page 83 - Annual Report FY2014 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 Sale of refined products RM Billions FY 2014 FY 2013 Shell Malaysia Trading Sendirian Berhad Shell Timur Sendirian Berhad Shell International Eastern Trading Company Shell Eastern Chemical Pte Ltd TOTAL Total sale of refined products over total reported revenue 93% 99% Purchase of crude and products RM Billions FY 2014 FY 2013 Shell International Eastern Trading Company Shell Eastern Trading Pte Limited Shell Lubricant Supply Company Sarawak Shell Berhad Sabah Shell Petroleum Company Limited TOTAL Total purchase over cost of sales reported 97% 102% 34

35 CASE 3 SRC, RELATED PARTIES TRANSACTIONS Page 54 - Annual Report FY2014 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 AMOUNT DUE FROM RELATED COMPANIES RM MILLION FY 2014 FY 2013 Shell Malaysia Trading Sendirian Berhad ,006.0 Shell Timur Sendirian Berhad Shell International Eastern Trading Company TOTAL ,194.4 Total amount due from related companies as above over total audited amount due from related companies 98% 97% CURRENT LIABILITIES AMOUNT DUE TO RELATED COMPANIES RM MILLION FY 2014 FY 2013 Shell International Eastern Trading Company ,029.9 Shell Eastern Trading Pte Limited Shell International Petroleum Company Limited ,065.2 Total amount due torelated companies as above over total audited amount due to related companies 100% 100% 35

36 CASE 3 SRC, RELATED PARTIES TRANSACTIONS 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 36

37 LOAN REPAYMENT DUE ON 14 SEPT 2016 RM 1 BILLION. CASH AS AT 31 DEC 2015 RM 175 MILLION RM MILLION USD MILLION FY 2015 Interest Repayment Principal Bullet Repayment NOTES Local currency loan 450 KLIBOR +0.3% 20 Quarterly installments 15 June 2015 Originally due on 15 June 2015 but was classified under non current in Q4, 2015 Foreign currency loan 1, LIBOR % 20 Quarterly installments 14 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 % 1,481 SRC has to conserve cash balance to be able to repay on due date or to restructure the loan. Note: The all in interest cost ranges from 1.01 % to 4.16 % as at 31 December Based on unaudited results for Q4, Page 76, Annual Report, FY2014

38 CASE 3 SRC BASIS OF PRICING OF SALES OF 51% BLOCK FROM PUBLISHED MEDIA 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 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 38

39 CASE 3 SRC LATEST ANNOUNCEMENTS GATHERED FROM PUBLIC DOMAIN 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. 39 Source:- This article first appeared in The Edge Financial Daily, on March 23, Continue

40 CASE 3 SRC LATEST ANNOUNCEMENTS GATHERED FROM PUBLIC DOMAIN 2. Sale of 51% block, is a global strategy and to ensure continuation of fuel supply in Malaysia. MESSAGE:- 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,

41 Revenue, RM billions Gross Profit / (Loss), RM millions Gross Margin, % Net Profit / (Loss) After Tax, RM Million Net Margin, % FY % % FY % % FY % (0) 0.0% FY % % FY % % FY % % FY % % FY % % FY % % FY (343) -2.6% (330) -2.5% FY % % FY % % FY (98) -0.9% (126) -1.1% FY (132) -0.9% (95) -0.6% FY % (156) -1.1% FY (308) -2.2% (1,189) -8.3% FY % % Average 3.3% 1.6% Average +/- 1 SD Lower bound -0.5% -2.2% Upper bound 7.2% 5.5% Analysed by: Asia Equity Research SRC had undergone volatile performance in recent years. Items shaded in red means the percentages are outside its lower bound ranges, in 16% of time. Periods of FY 2008 to FY 2014 experienced negative territories 4 out of 7 periods, signifying periods of extreme volatility. Refinery margins are under significant pressure since FY2011 to FY 2014 except FY Continue 41

42 Revenue, RM billions Gross Profit / (Loss), RM millions Gross Margin, % Net Profit / (Loss) After Tax, RM Million Net Margin, % Average Gross Refining Margin in USD per barrel FY % % Not mentioned FY % % 2.60 FY % (0) 0.0% Not mentioned FY % % Not mentioned FY % % Not mentioned FY % % 5.51 FY % % 6.28 FY % % 4.34 FY % % 5.79 FY (343) -2.6% (330) -2.5% 6.73 FY % % 3.44 FY % % Not mentioned FY (98) -0.9% (126) -1.1% Not mentioned FY (132) -0.9% (95) -0.6% 1.25 FY % (156) -1.1% 1.90 FY (308) -2.2% (1,189) -8.3% 2.65 FY % % 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 Analysed by: Asia Equity Research 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 42

43 IN A NUT SHELL KEY FACTORS THAT DETERMINES A REFINERY S GROSS PROFIT KEY FACTORS THAT DETERMINE THE GROSS PROFIT OF A REFINERY = FOR ILLUSTRATIVE PURPOSE ONLY REVENUE 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 GROSS PROFIT MEASUREMENT INDICATORS ARREVIATION FOR INDICATORS RELATIONSHIP GROSS REFINING MARGIN IN USD PER BARREL STOCKHOLDING GAIN / LOSS GRM STOCKHOLDING GAIN/(LOSS) Changes of finished goods price relative to crude oil price ~ D Brent Crude Oil ( Year End v Openning) and Inventory Level NUMBER OF BARRELS SOLD IN A YEAR Economic activity of Malaysia specifically and globally generally ASIA EQUITY RESEARCH 43

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 For any enquiries or any clarification on this presentation, kindly contact CONTACT PARTY Ong Tee Chin, CFA, FRM representative from Asia Equity Research general@aer.global No reproduction, extraction, reprinting or re-distribution of this presentation material is permitted without the expressed written consent obtained from Asia Equity Research. 44

45 DISCLAIMER This material is based upon information that we consider to be reliable, but neither ASIA EQUITY RESEARCH (AER) nor its affiliates warrant its completeness, 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 rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular 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. All queries in relation to this report should be referred to Ong Tee Chin, CFA, FRM 45