MALAYSIA INVESTMENT RESEARCH REPORT KDN PP13226/04/2010 (023662)

JF APEX SECURITIES BERHAD

(47680-X)

JF Apex Securities Berhad Newsletter

3 January 2011

IPO: Benalec Holdings Bhd

Integrated operations for a niche market IPO Price
Stock Data Board / Sector Post-IPO issued shares Post-IPO market cap (RM)* Financial Forecast (RMm) 00A Revenue 120.9 35.58 EBITDA Operating profit 29.12 Pretax profit 23.88 Net profit 17.27 DPS (sen)** EPS (sen) 2.74 PER (X)* 36.48 24.08 Gross profit margin (%) PBT margin (%) PAT margin (%) Effective tax rate (%) 19.75 14.28 27.70 10A 116.5 82.31 56.65 68.63 58.38 9.27 10.79 48.63 58.92 50.12 14.93

FULLY VALUED

Target Price: RM1.16

RM1.00

Main / Construction 730m RM730.00m

Benalec Holdings Berhad (BH) is an integrated marine construction service provider. BH operates in a niche market, focusing mainly on land reclamation and coastal construction works.

Highlights
11F 189.7 103.7 92.93 83.58 62.69 0.013 8.59 11.64 49.00 44.07 33.05 15.57 12F 177.9 97.50 87.15 78.63 58.97 0.024 8.08 12.38 49.00 44.21 33.16 12.85

Pioneer in marine and civil engineering BH has been in the marine construction industry since 1978. It is based in Alor Setar, Kedah. Integrated operations - Added advantages with its vertical integration, creating a highly scalable industry value chain. Wide range of vessels The group owns more than 90 vessels of various usage for more efficient and cost effective operations. Favourable order book With projects completion date ranging from year 2011 to 2016, BH has a total unbilled amount of more than RM670 million. Targeted dividend BH plans to distribute 15% and 30% of its net profit for financial year ending 30 June 2011 and 2012 respectively. Our dividend payout forecast is approximately 1.3 sen for FY2011 and 2.4 sen for FY2012.

Important Balance Sheet Items (as at 30 June 10) NA / share (RM)* 0.22 Total Receivables (RM) 2.94m Total Payables (RM) 3.55m Net Assets (RM) 151.18m Current Ratio (times) 0.94 Gearing (times) 0.44 * based on IPO offering price of RM1.00 and assumption that all shares offered are fully subscribed. ** 15% for FYE 30 June 2011 and 30% for FYE 30 June 2012 of net profit

Recommendation Fully valued with target price of RM1.16. This translate

into an upside potential of 16.0% as compared to its listing price of RM1.00.

Important dates (tentative)

Events Opening of retail offering Closing of retail offering Listing

Date 28 December 2010 6 January 2011 17 January 2011

The value of RM1.16 was derived based on the comparable

P/E (price earning) ratio of similar group in the industry of 13.5 times and FY2011 EPS of 8.59.

(Source: Company prospectus)

Please read carefully the important disclosures at end of this publication

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Company background
Over 30 years of operations
Benalec Holdings Bhd (BH) has been operating in the construction sector since 1978. It is based in Alor Setar, Kedah and provided civil engineering services. All of BHs subsidiaries (Oceanliner, Benship and Benalec Sdn Bhd) are wholly-owned. Under Benalec Sdn Bhd, it has another 24 fully-owned subsidiaries.

Corporate structure

Source: Groups Prospectus

Wide range of services

The Group is involved in various services which form an integrated vertical workflow. The services provided include: i) Land reclamation, dredging and beach nourishment. ii) Rock revetment works, shore protection works and breakwater construction. iii) Pre-bore and marine piling. iv) Construction of marine structures, bridges, jetties, ports and other offshore and ancillary structures. v) In-house marine construction (shipbuilding, repair, maintenance, fabrication and refurbishment) vi) Vessel chartering and towage services.

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Achievement of ISO and OHSAS certifications

The Group has obtained ISO 9001:2000 for the provision of marine engineering and construction works and provision of marine vessel and equipment chartering services. Certification was upgraded to ISO 9001:2008 in year 2000. In Singapore, the Group has been certified by ISO 9001:2008 and OHSAS 18001:2007 for civil engineering works in land reclamation (including supply and delivery).

Financial Highlights, FYE 30 June 2010

Significant growth
BH recorded 25% of Compounded annual growth (CAGR) for revenue, for the period of 2008 to 2010. Net profit rose to RM58.38 million in FY2010, more than double the net profit in FY2009. This was largely due to the gains on disposal of land, representing approximately 48.39% of other operating income as recognised in FYE 30 June 2010.

Lower cost

In addition to the gains on disposal land, we take note of the cost of sales has dropped 35% to RM59.83 million from RM91.82 million in FY2009. The lower actual cost of sales being recorded was due to awaiting of soil settlement and consolidation to take place before completion of the projects. Chart 1: Revenue & Revenue Annual Growth
200.0 150.0 100.0 50.0 0.0 2009 2010 2011F 2012F 0.8 0.6 0.4 0.2 0.0 -0.2

Revenue (RM'm,LHS)
Source: JF Apex Securities Compilation

Annual Growth(%,RHS)

Chart 2: Net Profit & Annual Growth

80.0 60.0 40.0 20.0 0.0 2009 2010 2011F 2012F 3.0 2.0 1.0 0.0 -1.0

Net Profit (RM'm,LHS)

Source: JF Apex Securities Compilation

Annual Growth (%,RHS)

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Key Prospects
Integrated workflow of operations
With a wide range of equipments, expertise and specialisation from its subsidiaries, the group is able to generate an efficient and cost effective vertical integration.

Vessels*

Upstream Equipment* Raw materials Midstream

Fuel

Dredging*

Marine piling*

Land reclamation*

Downstream Shore & beach Construction of coastal erosion structures* protection works*

Construction of Off-Coast Structures*

End users Property developer, local authorities, government department & agencies, ports & maritime, airports, oil & gas, energy sector Note:

* Benalecs activities

Cost-effective operations

BH currently owns over 90 vessels of various kind and functionality. This enables the group to lower their cost by reducing dependency on third party facilities and services. Furthermore with the groups integrated facilities, in-house operations such as repair, maintenance, shipbuilding, fabrication and refurbishment can be used to reduce time-lag and uprising cost from outsourcing to third parties.

Niche market

FYE 30 June 2010, 89% of Groups revenue was derived from marine construction services whereas the remaining 11% was from ship chartering in Singapore. This shows the Groups primary focus of services is centred at a specific area within the construction sector.

Industry barriers for newcomers

BH has been able to establish itself in the marine construction services business and gained the following key points: i) Capital intensive ii) Strong financial position iii) Availability of facilities, vessels, equipments, and experienced staffs iv) Vertical integration of the industry value chain Hence, newcomers of the industry will face challenges upon competing with established players.

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Table 2: Current Order Book

Favourable order book

Current order book todate HUSB Project, Klebang Besar Oriental Project, Kuala Sungai Melaka ABS Maju Project, Daerah Melaka Tengah SOSB Project, Daerah Melaka Tengah Maintenance dredging, Kapar Reclamation & shore protection, Port Klang Coastal reclamation, Sungai Melaka Reclamation & shore protection, Melaka Tengah Total

Total contract value (RMm) 71.3 123.2 3.9 77.2 9.5 75.0 27.6 468.0 855.7

Unbilled amount (RMm) 17.8 20.7 2.3 52.4 9.5 75.0 27.6 468.0 673.3

Estimation of period 2007-2011 2008-2011 2008-2010 2009-2011 2010-2010 2010-2013 2010-2011 2011-2016

Source: Groups presentation slide

Utilisation of IPO Proceeds

Table 3: Utilisation of IPO Proceeds Description Finance on-going projects Working capital Estimated listing cost Total Estimated timeframe upon listing Within 24 months Within 24 months Immediate Amount (RMm) 90 3.5 6.5 100.0 % of total gross proceeds 90.0 3.5 6.5 100.0

Source: Groups prospectus

Key Risks
Project based business
Marine construction contracts are typically done on a tender basis and per project. Hence, there will be no guarantee for securing long term contracts, including the continuation of using the same service provider by the project owner/client. The ability to replenish contracts are dependable on various changes of factors like the economy, policies and regulations, competitions and prices of raw materials, to name a few.

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Fluctuating market prices and disposal of Land Portion

Settlement for land reclamation projects can be in the form of a portion of the reclaimed land (settlement in-kind). The Land Portion would be subjected to land alienation process (issuance of documents) and such process usually takes up between 7 to 12 months to be completed. Disposal of Land Portion can only be done upon the process completion. During the waiting period, property market prices will fluctuate and cause risks in terms of the consideration receivable on disposal and/or in terms of saleability.

Supply of diesel, sand and rocks

In the FYE 30 June 2010, the Group has recorded approximately 21.5% of the operating cost was derived from diesel usage. Diesel are constantly exposed to price fluctuations. With the usage of sea sand instead of construction sand, the Group has not been experiencing any significant changes to the sand supplies and its prices. However, sand and rocks have been the core of raw material costs, therefore there will be a risk of supplies shortage if changes in Government policies and prices for the materials were to be made.

Future Plans
Potential order book
Table 4: Potential job bids Potential job bids (Malaysia) 1. Melaka 2. Penang 3. Selangor 4. Johor Potential job bids (Singapore) 1. Jurong Town Council 2. Housing & Development Board 3. Maritime & Port Authority
Source: Groups presentation slide

Total contract value (RMm) 5710 Contract value (SGDb)

Expected date of contract to be awarded Within 1-2 years

1-5 (each)

Within 1-2 years

Expansion

Apart from the current on-going projects and services in Selangor, Melaka and Singapore, the Group intend to bid for more large contracts in other states like Penang. The Group also plan to expand their marine transportation segment from Vietnam and/or to Singapore.

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Competitors
Table 5: Competitors Market cap (RMm) 6908.9 6039.2 2407.9 977.5 875.0 Current estimated price-earning (PE) ratio* (times) 20.97 20.37 18.21 13.04 8.33

Local construction peers IJM Gamuda WCT HSL Naim

Source: Groups presentation slide Note: *As of 30th December 2010

Valuation and Recommendation

Fair value of RM1.16 with EPS of 8.59 sen
We estimated BHs FY2011 EPS to be 8.59 sen. As at 30 November 2010, BHs comparable key companies (local and foreign) produced an industrys average price-earning (P/E) ratio of 13.51. Revenue for FY2011 was estimated with an y-o-y increase of more than 60% based on the valuation of unbilled amount from the current order book. This produced an estimated increase of 7% net profit for FYE 30 June 2011 Based on FYE 30 June 2011s EPS and current forward P/E ratio, this translates into a fair value of RM1.16 with an upside potential of 16.0%. Hence, we have a rating of fully-valued for this stock.

Table 6: BHs PER Valuation Market Cap (RM'm) 14585.09 8416.93 7857.45 2565.22 1013.86 845.00

Company BOSKALIS WESTMINSTER IJM CORP BHD GAMUDA BHD WCT BHD HOCK SENG LEE BERHAD NAIM HOLDINGS BERHAD Average BENALEC HOLDINGS BERHAD Valuation Average Industry P/E atio EPS, FY2011 Fair Value Upside Potential

P/E Ratio (Times) 13.61 18.11 16.95 14.36 10.42 7.61 13.51 11.64*

730.00

13.51 8.59 RM1.16 16.0%

Source: Bloomberg & JF Apex Securities Research Note: * Based on Rm1.00 per share with EPS FY2011 of 8.59 sen

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

Table 7: Financial Information (RM million) Revenue Cost of sales Gross profit Other operating income Operating expenses Operating profits Financing costs PBT Taxation PAT Attributable to (RM million): Equity holders Minority interest Number of shares (million) Dividend per share (sen) Net EPS (sen) Fully diluted EPS (sen) P/E ratio (times)* Gross profit margin (%) PBT margin (%) PAT margin (%) Effective tax rate (%) 2008 74.06 (53.39) 20.67 2.74 (5.35) 18.06 (1.19) 16.87 (3.43) 13.44 2009 120.94 (91.82) 29.12 6.56 (8.30) 27.38 (3.50) 23.88 (6.61) 17.27 2010 116.48 (59.83) 56.65 23.09 (8.18) 71.56 (2.93) 68.63 (10.25) 58.38 2011F 189.65 (96.72) 92.93 7.00 (13.34) 86.58 (3.00) 83.58 (20.90) 62.69 2012F 177.85 (90.70) 87.15 7.00 (12.51) 81.63 (3.00) 78.63 (19.66) 58.97

13.44

17.27

58.38

62.69

58.97

630

630

630

730 0.013 8.59 8.59 11.64 49.00 44.07 33.05 15.57

730 0.024 8.08 8.08 12.38 49.00 44.21 33.16 12.85

2.13 1.84 46.88 27.91 22.78 18.15 20.36

2.74 2.37 36.48 24.08 19.75 14.28 27.70

9.27 8.00 10.79 48.63 58.92 50.12 14.93

Source: Company prospectus & JF Apex Securities Research Note: * Based on Rm1.00 per share

3 January 2011

IPO Benalec Holdings Bhd

JF APEX SECURITIES

JF APEX SECURITIES BERHAD CONTACT LIST

JF APEX SECURITIES BHD Head Office: 6th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah 43000 Kajang Selangor Darul Ehsan Malaysia General Line: (603) 8736 1118 Facsimile: (603) 8737 4532 PJ Office: 15th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin 46050 Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) 7620 1118 Facsimile: (603) 7620 6388 DEALING TEAM Head Office: Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Derrick Ng Wei Yee (ext 3239) Edwin Loh Ming Hon (ext 3236) Wong Wing Haur, Alvin (ext 3226) Gan Huai Hsia (ext 3214) Yap Maow Jun, David (ext 3228) Lim Soo Yee, Chloe (ext 3235) Institutional Dealing Team: Lim Teck Seng Sanusi Manso (ext 740) Edy Sukasma (ext 745) Fathul Rahman Buyong (ext 741) Ramlee Sulaiman (ext 742) Ahmad Mansor (ext 744) Lum Meng Chan (ext 743) PJ Office: Mervyn Wong (ext 363) Mohd Hanif Wan Said (ext 111) RESEARCH TEAM Head Office: Ng Keat Yung (ext 759) Phoon Thai Yoon (ext 755) Lee Cherng Wee (ext 756) Wong Miu Kee (ext 752)

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