KUALA LUMPUR (June 11): Straits Inter Logistics Bhd's (Straits) proposed acquisition of 55% in Tumpuan Megah Development Sdn Bhd (TMD) will transform the company into one of the largest oil bunkering players in Malaysia, according to Rakuten Trade Sdn Bhd.

In a note today, the research house upgraded its target price for Straits to 38 sen, indicating a potential return of 40.7% from its current trading price of 27 sen.

"Straits currently operates two vessels for its oil bunkering business in the ports of Pasir Gudang, Johor and Labuan. The proposed acquisition of 55% stake in TMD for RM35.75 million, which is also a marine gas oil bunkering operator comes with profit guarantee of RM10 million over two years, will enhance its coverage to eight ports throughout Malaysia with a total nine vessels, all which are licensed under Petroleum Development Act 1974," Rakuten head of research Kenny Yee said in his report this morning.

According to him, the enlarged customer base will provide economies of scale for Straits to solidify its position as one of the largest marine oil gas bunkering and oil trading in Malaysia.

Yee also noted that the proposed acquisition is earnings accretive and funded via a combination of new shares issuance of 116.5 million and a private placement of 36.8 million shares at 24 sen.

"The minimum profit guarantee based on their proposed 55% stake amounts to RM2.75 million PAT (profit after tax) for Straits (in) FY19 and FY20 and valuing their acquisition of TMD at 13 times PE against their current FY17 PE of 25.4 times," he added.

Straits' balance sheet is also viewed positively as it remains healthy with no borrowings; and at current oil price level, the oil and gas sector is expected to see increased activities which will bode well for Straits.