RM3bil reclamation deal off Johor

Tee Lin Say The Star 16 Mar 13;

OVER the week, Benalec Holdings Bhd has secured a major offtaker (a party taking up the offer) for 404.7ha of reclaimable land off Tanjung Piai, at the southern tip of Johor. Sources have estimated the value of the off-taking contract at RM2.5bil to RM3bil.

In an announcement to Bursa Malaysia, Benalec said its 70%-owned unit, Spektrum Kukuh Sdn Bhd (SKSB), had entered into a binding term sheet with the State Secretary, Johor (Inc) and 1MY Strategic Oil Terminal Sdn Bhd “to undertake the reclamation works and sale of about 404.7ha off the coast of Tanjung Piai for the purpose of constructing and operating a crude oil and petroleum storage facility together with a private jetty”.

1MY is a vehicle formed to construct, commission, operate and maintain an oil and petroleum storage facility at Tanjung Piai. A formal sales and purchase agreement (SPA) is to be executed within three months of the term sheet subject to finalisation of all the details.

“The SPA will happen within this three months. Once that takes place, and once the environmental impact assessment (EIA) is completed, typically it should take six months before physical works actually start,” says an industry observer.

Thus it would appear that any profit contributions from this will more likely take place during Benalec's financial year ending June 30, 2014 onwards.

The observer added that phase one of the reclamation works will involve reclaiming the entire 404.7ha along with the construction of a storage tanker. This would take about four years, Subsequent phases would involve the construction of supporting infrastructures such as a private jetty.

More significantly, Benalec's announcement coincided with news that the oil-rich United Arab Emirates (UAE) has committed RM39bil to two projects that will create hundreds of thousands of well-paying jobs for Malaysians.

The projects involve the setting up of a RM21bil strategic petroleum reserve that can store up to 60 million barrels of crude oil in Tanjung Piai, and a RM18bil strategic partnership in the Tun Razak Exchange (TRX) between UAE's Aabar Investments PJS and 1Malaysia Development Bhd (1MDB).

Both these signing were witnessed by Prime Minister Datuk Seri Najib Tun Razak with the Crown Prince of Abu Dhabi, Sheikh Mohammed Zayed Al Nahyan, during the his official visit to Malaysia on Tuesday.

“Benalec has been marketing their project for a long time. They have been everywhere looking for potential purchases to Europe, Middle East, apart from combing the Jurong petrochemical hub in Singapore. With Johor shaping up very nicely and fast becoming a viable hub, foreigners see the potential. They understand the Iskandar Development Region (IDR) appeal. Now Johor gives Singaporeans a choice. Benalec is similar to the IDR for the oil and gas sector,” says one observer.

“This landmark announcement vindicates our long-standing conviction of Tanjung Piai's high development potential. By extension, it addresses any doubt about Benalec's dealmaking prowess, with much more to come,” says Amresearch analyst Mak Hoy Ken.

Mak says that while salient details such as the contract price have not been revealed, the significance of the deal is clear.

“Firstly, the strategic importance of a trailblazer offtaker and associated inflow of potential foreign direct investment may see the EIA approval being fast-tracked. Secondly, the spillover from it is massive, anchored by future investments from Abu Dhabi. This will likely trigger more interest from other offtakers to invest in its land concessions at Tanjung Piai, and also Pengerang,”

“Thirdly, the sheer scale of this project will likely accelerate the maturity of Tanjung Piai as a future oil hub, located near Jurong petrochemical hub,”

The observer added that if there is a real offtaker who is investing in Tanjung Piai, there is no reason why Benalec should not get its EIA approval.

Mak says that Benalec is fast-emerging as a cheaper leverage to the oil and gas sector at 2013 and 2015 price earnings ratio of 8 times (x) to 11x versus the sector average of 17x.

If this reclamation contract comes through, Benalec still has a sizeable landbank of 1,717.9ha in south Johor. It has 1,004.8ha in Tanjung Piai and 712.2ha in Pengerang.

The 404.7ha forms part of Benalec's entitlements to reclaim 1,410.3ha off the coast of Tanjung Piai and a further 712.2ha along the shoreline of Pengerang.

Sources close to the company say that Benalec was pricing its initial reclaimable tracts off Tanjung Piai at over RM3mil per acre. This is a lot lower than the RM10mil per acre in the Jurong Industrial Estate, an oil and gas hub built on reclaimed land in Singapore.

The group, via its subsidiaries Spektrum Kukuh and Spektrum Budi Sdn Bhd, last September sealed the land concessions with the Johor government, but the EIA on the entitled area is still ongoing.

At that time, Benalec had entered into development agreements with the state government of Johor to develop reclaimed land in Tanjung Piai and Pengerang.

Benalec's role is to undertake the reclamation of land for the project, the development and construction of infrastructure works and search for potential buyers for the land.

The group hopes to develop the Tanjung Piai project into an integrated petroleum hub, similar to that of Jurong Island in Singapore. It intends to reclaim and then sell or lease the land to the offtakers, for instance, oil terminal operators.

In an earlier report, Mak had valued Benalec's first phase reclamation project in Tanjung Piai, which is about 809ha at around RM1.4bil.

“Notably, our current valuation only includes the first 809ha at Tanjung Piai. As such, a formalisation of this deal would help narrow the deep discount of 49% that Benalec is trading at versus its sum of parts value of RM2.48,” says Mak.