Integrax Bhd
(Feb 18, RM2.81)
Downgraded to take profit with a lower target price (TP) of RM2.46. As earnings should be unexciting until there is a major breakthrough to secure a sizeable customer (an uphill task), we advise minority shareholders to take profit as the share price is currently above the offer price of RM2.75. 

This is to avoid the risk of the deal collapsing, as it is unlikely that the offer price will be raised to a level that guarantees a successful takeover. 

As such we change our call to “take profit” (from buy/accept offer) with our TP at RM2.46.

Financial year ended Dec 31, 2014 (FY14)’s RM38 million earnings (-7% year-on-year, [y-o-y]) were in line within our estimates. 

Despite volume rising 3.1% y-o-y, the lower earnings were due to higher depreciation costs and lower associate earnings contributions. A higher dividend for FY15 (7.5 sen) was also announced (FY14: 5 sen).

We revisit our earnings model, now factoring in the revenue stream expiry from the Jetty Terminal Usage Agreement 1 (JTUA1) facility payment in FY14. 

The JTUA comprises payments from fixed facility, base operating, and tonnage handling (dependant on agreed tariff per tonne). 

The fixed facility payment revenue reflects the compensation for capital expenditure (capex) incurred for the facilities divided over 13 years of equal payments annually. 

We estimate this amount to about RM36.1 million per year for JTUA1. 

This is derived by multiplying the FY12 coal volume handled, with the implied average handling charge of RM7.78 per tonne (disclosed in the JTUA2 circular for a proposed related-party transaction dated Aug 9, 2012) and subsequently deducting this amount from its total revenue. 

This amount will completely vanish in FY15, although this could partly be cushioned by the revenue contribution from JTUA2. 

This is slated to start contributing in March 2015 and we estimate it to total RM27.2 million. 

To conclude, we expect FY15 revenue/earnings to weaken 11.9%/10.1% respectively.

We do not argue that Integrax’s replacement cost of its asset reflecting revalued net assets valuation could amount to the independent advisers’ view of RM3.60-RM3.62 per share. 

We opine that the earnings outlook does not justify this. Post earnings revision, we value it at RM2.46 per share (9.8% cost of equity on its free cash flow to equity). — RHB Research, Feb 17

This article first appeared in The Edge Financial Daily, on February 23, 2015.