This article first appeared in The Edge Financial Daily, on February 3, 2016.

KUALA LUMPUR: Shell Refining Co (Federation of Malaya) Bhd could succumb to selling pressure when it resumes trading today amid the news that its controlling shareholder Shell Overseas Holdings Ltd is selling 51% stake at RM1.80 per share, a steep 64% discount over the last traded price of RM4.94.

“I do expect the investing public would take the transaction price (of RM1.80) as a reference, which may put selling pressure on Shell Refining,” said Inter-Pacific Securities head of research Pong Teng Siew.

Pong noted that there were several reasons why the valuation of Shell Refining was substantially lower than the market price. One is that the buyer needed to pump in capital expenditure and the deal excluded retail business.

“You can value it either in replacement cost, or present value of the expected future cash flow. The valuation implies that the group’s (Shell Refining) cash flow remains very weak for a long time,” he told The Edge Financial Daily.

Besides, Shell Refining is a highly geared company with short-term borrowing of RM1.5 billion, including a foreign currency debt of US$240 million, as at Sept 30.

Shell Refining chairman Datuk Iain Lo revealed yesterday that although it reported positive financial results for the nine months ended Sept 30, 2015 after four years of consecutive losses, the company “continues to be pressured by its debt load and the significant investments required to meet Euro IV and V compliance requirements”.

In a statement yesterday, Shell Refining said its major shareholder Shell Overseas Holdings Ltd was selling its 51% stake in the company to Malaysian Hengyuan International Ltd (MHIL) for US$66.3 million (RM278.46 million) or 43 US cent per share (RM1.80 per share). A mandatory general offer would be launched by MHIL at RM1.80 per share.

The deal has drawn the attention of The Malay Businessmen and Industrialist Association of Malaysia (Perdasama). The association is opposing the sale of Shell Refining to a foreign company for such a low price.

“Perdasama is aware of another offer by a local buyer which is priced between RM4 and RM4.20, that would value the sale of the company at RM612 million to RM650 million. 

“The difference is huge, a total of RM375 million in price difference [so] why would Shell sell at this price to a foreign company and incur massive losses,” Perdasama president Datuk Moehamad Izat Emir said in a statement.

Other substantial shareholders in Shell Refining are the Employees Provident Fund, the second largest shareholder holding 14% stake, and Permodalan Nasional Bhd (11%).

“The last time a refinery changed hands in Malaysia was when ExxonMobil sold [a] 80,000-barrels per day refinery to Petron for US$2 billion, although this comes along with 500 retail stations,” said an analyst.

The Philippine conglomerate San Miguel acquired ExxonMobil’s Malaysian assets for RM610 million in 2012. The RM3.50 per share price paid by San Miguel for Esso Malaysia then, was a steep 29% discount to its closing price of RM4.95.