Investment Research Company Update

KDN PP 10551/10/2005
For Private Circulation Only
Gjgj

11 August 2005

Chris Eng
Johor Port
(603) 2162 4388 ext 372
Chris.eng@osk.com.my Your Vote, Use It or Lose It

Recommendation ¾ Circular from independent advisor to the proposed Seaport WorldWide (SWW)
acquisition advises shareholders to vote for the deal.
BUY
Price
¾ We maintain the view that the risks outweigh the rewards associated with the
RM2.02
development of SWW land near the Port of Tanjung Pelepas (PTP) as demand
12-mth target price for petrochemical and maritime land is uncertain.
RM2.60 (+38.9%)
¾ Assuming that the land can be developed and sold, the proposal could potentially
be value enhancing, raising FY07 net earnings by as much as 18.2%.
Share cap / Market cap
330m / RM594.0m ¾ Nonetheless, in determining the Discounted Cash Flow value of Johor Port, we
reasonably apply a higher WACC of 10.6% for the scenario where the deal goes
Free float
32%
ahead given the risks involved in the project. If the deal is rejected, we apply a
WACC of 10.0%.
Major shareholders
Seaport Terminal (Johore) ¾ Aside from the SWW proposal, port operations are growing strong and
SB (51.74%) throughput figures for 1H05 lead us to revise up projections for container, dry
EPF (5.9%) bulk and break bulk throughput.
LTH (5.0%)
¾ Maintain our buy call for JPB based on strong port operations. Fair value is raised
Consensus (Net profit)
to RM2.60 given higher throughput projections.
05F : RM102.5m
06F : RM111.4m
¾ However, we recommend that shareholders vote against the deal given the
added risks. If the deal is rejected, fair value raised to RM2.80.

Earnings Table
Price performance chart Year to 31 Dec 03A 04A 05F 06F 07F
Turnover (RMm) 313.4 352.3 378.6 399.0 415.9
Shar e pr ice ( lhs)
Relat ive per f ( r hs) EBITDA (RMm) 148.3 162.7 176.3 187.3 191.7
3.0 10 Pretax (RMm) 118.1 124.8 141.7 131.5 182.7
2.5
5
Net profit (RMm) 83.9 83.4 102.0 94.7 131.6
0
2.0 -5 EPS (sen) 25.4 25.3 30.9 28.7 39.9
1.5
-10 YoY change (%) 11.5 (0.5) 22.3 (7.2) 39.0
-15
1.0 -20
PER (x) 7.1 7.1 5.8 6.3 4.5
-25 GDPS (sen) 7.0 8.0 8.0 8.0 9.0
0.5
-30
Div yield (%) 3.9 4.4 4.4 4.4 5.0
0.0 -35
Aug-04 Nov-04 Mar-05 Jun-05 ROE (%) 11.5 10.4 11.7 9.9 12.6
NTA PS (RM) 2.31 2.53 2.78 3.01 3.34
P/BV (x) 0.8 0.7 0.6 0.6 0.5
.

Advice from Independent The circular from Public Merchant Bank (PMB), the independent advisor to Johor Port’s (JPB)
Advisor published non-interested shareholders with regards to the proposed Seaport Worldwide (SWW), was
published last week. In this report, we take a close look at the recommendations contained in the
circular to provide our view to JPB’s shareholders and also provide some updates on JPB.
 To recap the deal:
• On 10 November 2004, JPB announced the purchase of SWW for approximately
RM403m from Indra Cita SB (IC) which owns 100% of Seaport Terminal (SPT) which in
turn owns 51.74% of JPB.
• Payment will be incurred in 3 tranches with RM141.05m to be paid 7 days after all
conditions fulfilled, another RM141.05m after 14 days from 1st payment and RM120.9m
after 1 year

• IC shall repay SPT’s outstanding debt of RM189.8m to JPB

• SWW owns 2255.5 acres of land that has been valued at RM540m by Henry Butcher
Malaysia (Johor) SB (HBMJ) with deferred taxation of RM137m. Thus making SWW’s
net worth RM403m.
• The land is located adjacent to PTP and has been earmarked for Petrochemical and
maritime use.

Independent advisor PMB have recommended that non-interested shareholders, namely all other shareholders except
recommends shareholders for Seaport Terminal, vote for the deal. This recommendation is based on the following factors as
vote for the deal well as the report prepared by IPC Island Property Consultants (IPC) which carried out a
feasibility study on the proposed acquisition:

PMB’s view PMB’s Rationale Our comments

The salient terms of • The proposed acquisition is divided Although it is true that SPT’s debt shall be repaid in full
the subscription into 3 allocations that will allow JPB thus allowing JPB to settle its own debts that now stand
agreement between to better manage its cashflow at RM180m, we believe the net effect is actually negative
JPB, SWW and IC position for JPB. This is because for FY05, we forecast that JPB
are fair will pay finance charges of RM13.5m but will receive
• SPT shall repay its outstanding
interest income of approximately RM20.5m from its loan
RM189.8m debt in full to JPB
to SPT. Thus the repayment of SPT’s debt will mean a
• A feasibility study has been done net loss of RM7m interest income at the PBT level.
JPB’s forecasted gearing level of 19.6% for FY05 is also
• Shareholders approval at an EGM is
well manageable.
required

The land has • JPB has the experience to develop, The suitability of the land as a potential petrochemical
potential to be turned improve and maintain maritime and maritime hub would be difficult to dispute. However,
into a petrochemical infrastructure given the infrastructure already in place in Gebeng and
and maritime hub Kertih, not to mention Petronas’ continued role as the
• Given the lack of space at JPB’s
driver for these two east coast hubs, it would be difficult
current premises, the land will allow
to see why any new participant would choose to set up
future expansion in the maritime
base adjacent to PTP instead of at Gebeng and Kertih.
industry and provide an earnings
The outlook for both the petrochemical and maritime
stream via the provision of logistic
industries are also not exactly rosy as discussed in
services
the following section.
• There are various advantages to the
land given certain limitations at
competing sites as compiled by IPC

By transforming the • IPC has forecasted an IRR of 12% We have taken the assumption that JPB will first sell a
land into saleable after tax for the development project certain portion of the land and utilise the proceeds to
parcels of industrial of the SWW land develop the other portions of the land. We have
land, the future assumed a selling price of undeveloped land at RM10
• The selling price of RM205 per sq m
earnings of JPB as a st th per sq ft (RM107.6 per sq m) and for developed land at
for the land between the 1 to 4
whole may be RM19 per sq ft (RM204.5 per sq m) which is close to
year and subsequent selling price of
enhanced IPC’s assumptions of RM105 per sq m for undeveloped
RM215.25 per sq m as assumed by
and RM205-215 per sq m for developed land. Our own
IPC is not unreasonable when
projections, detailed in Figure 6 of the possible land
compared to the selling price of
development schedule, indicate an IRR of 12.5%. We do
other pieces of land nearby
not dispute that the deal is earnings enhancing if all
• The take up rate for the land to be assumptions are achieved as expected. Nonetheless, we
completely sold in 7 years is not believe that there is a substantial risk that the
unreasonable assumptions may not be achieved.

2
 PMB’s view PMB’s Rationale Our comments

The subscription • Independent valuation by HBMJ has None

consideration of indicated that the land value is
RM403m is RM540m
reasonable
• Deferred taxation attributable to the
land is RM137m
• The price was determined based on
comparison with nearby pieces of
land.

The proposal is • Given that interest income from SPT We do agree that the proposal (if everything goes
earnings enhancing amounted to RM8.3m at the net level according to plan) is earnings enhancing. Our forecast
and would have for FY04 for FY07 net profit if the deal goes ahead is higher by
boosted FY04 18.2% as compared to if the deal does not proceed.
• Assuming that interest income from
earnings by 28% if it However, we again highlight that the rewards do not
the net outlay for the SWW
had been justify the risks involved.
acquisition less SPT loan repayment
implemented at that
is RM5.2m
time.
• Estimated net profit from sale of land
at RM36.8m.

However, we think that We maintain our view that although the proposal could potentially be earnings enhancing, the
demand for petrochemical risks involved are substantial given that the outlook for the petrochemical industry is not
and maritime hubs is particularly rosy. We have attached the following charts, extracted from the prospectus of Titan
uncertain Chemicals Corp. that show that although both demand and capacity for petrochemicals is
expected to rise, demand as a % of capacity is expected to taper off. This is likely to lead to flat
or declining prices in the future and therefore there will be less incentive to set up new
petrochemical plants at the SWW land.
Figure 1 : Historical and forecasted Figure 2 : Historical and forecasted
growth in polyethylene growth in polypropylene demand
demand & capacity & capacity
90 88.0% 50 94.0%
80 87.0% 45
92.0%
70 86.0% 40
85.0% Capacity (mMT) 35 90.0% Capacity (mMT)
60
84.0% 30
50 Demand (mMT) 88.0%
83.0% Demand (mMT)
25
40
82.0% 86.0%
20
30 Demand / Demand /
81.0% Capacity (%) 15 84.0% Capacity (%)
20 80.0% 10
10 79.0% 82.0%
5
0 78.0%
0 80.0%
2001 2002 2003 2004 2005e 2006e
2001 2002 2003 2004 2005e 2006e

Source: Chemical Market Associates Inc.

Similarly for the maritime industry, although the prices for ships has remained firm, the drop in
freight rates for both tankers and dry bulk ships means that demand for new ships will likely
slacken starting next year. As such, demand for shipyards at the SWW land will also drop.
Figure 3 : New ship prices Figure 4 : Drop in dry bulk rates (Baltic
Dry Index) likely leading to drop
in demand for new ships
7000

6000

5000

4000

3000

2000

1000

0
Jun-04 Sep-04 Dec-04 Mar-05 Jun-05

Source: RS Platou., Bloomberg

3
 Outlook for Port
Operations remain rosy
Aside from the proposed SWW acquisition, the throughput figures for the port are actually quite
promising. A recent information release from Johor Port for throughput figures for January to
June 2005 is captured in Figure 5 and has led us to revise up our throughput projections for
containers, dry bulk and break bulk cargo. This is due to increased throughput related to the
London Metal Exchange (LME) certification. Although the projection for liquid cargo has been
revised down due to the high crude oil prices dampening bunker trading demand from FEOTO,
the higher tariffs from containers, dry and break bulk cargo means that the net effect is
actually positive to our revenue projections. Revenue for FY05 is revised up by 1% while net
earnings forecast is revised up by 3.3%.

Figure 5: January – June throughput figures and our revised projections for FY05
January - June OSK revised OSK previous
Throughput forecast (FY05) forecast (FY05)
Liquid cargo (m mt) 6.2 12.76 13.4
Dry bulk cargo (m mt) 2.2 4.24 4.16
Break bulk cargo (m mt) 1.1 2.21 2.09
Containers (TEUs) 413,303 854,030 845,973
Total Cargo (m mt) 14.4 29.19 29.53

Source: JPB, OSK Research

In advising JPB’s shareholders whether to vote for or against the deal, we make a comparison
Earnings Comparison
between the earnings and cash flow projections for the two scenarios where the deal is voted in
between 2 scenarios
and where it is rejected. For these scenarios, we incorporate the new throughput projections in
Figure 5 and also our projections for cash flow from the SWW developments as laid out in Figure
6.

Figure 6: Our assumptions with regards to the development of SWW’s land

Land Size 2255.5 acres 98,250,031.1 sq ft
Price of land per sq ft 4.1 RM
Development cost per sq ft 7.9 RM
Selling price (undeveloped land) 10.0 RM
Selling price (developed land) 19.0 RM
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
t 0 1 2 3 4 5 6 7 8 9 10
Investment Amount -282.1 -120.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Land Development cost 0.0 0.0 -77.6 -116.4 -116.4 -116.4 -77.6 -77.6 -38.8 -620.8
Returns from sale 98.3 98.3 186.7 186.7 280.0 280.0 280.0 280.0 0.0 0.0 1689.9
Less:
Marketing & Mgt costs -9.8 -9.8 -18.7 -18.7 -14.0 -14.0 -14.0 -14.0 -113.0
Taxation 0.0 -16.2 -16.2 -19.3 -19.3 -28.9 -28.9 -28.9 -28.9 0.0 0.0
Free Cash Flow -282.1 -48.7 -5.4 32.4 32.4 120.7 159.5 159.5 198.3 0.0 0.0
Discount Rate 1.000 0.889 0.790 0.703 0.625 0.555 0.494 0.439 0.390 0.347 0.308
Discounted CFs -282.1 -48.7 -5.4 22.7 20.2 67.1 78.8 70.0 77.4 0.0 0.0

IRR 12.5%

Source: OSK Research

In comparing the forecasted earnings for JPB between the 2 scenarios (Figure 7), the following
points should be noted :

• For FY06 & FY07, if the deal is voted through, there will be a loss of some RM20.5m of
interest income
• For FY07, if the deal is voted through, there may be an additional income of RM48.1m
from disposal of undeveloped SWW land
• If the deal is voted through, net earnings forecast for FY06 is lower by 13.2% but for
FY07, it is higher by 18.2%.

4
 Figure 7: Earnings comparison between 2 scenarios if the deal is voted through and if it is rejected
DEAL VOTED THROUGH DEAL VOTED OUT
FY04 FY05f FY06f FY07f FY04 FY05f FY06f FY07f
Revenue 352.3 378.6 399.0 415.9 352.3 378.6 399.0 415.9
Operating Costs (113.7) (123.4) (130.5) (141.3) (113.7) (123.4) (130.5) (141.3)
Administrative expenses (73.0) (75.9) (78.2) (79.8) (73.0) (75.9) (78.2) (79.8)
Selling and distribution expenses (0.7) (0.8) (0.8) (0.8) (0.7) (0.8) (0.8) (0.8)
Other operating expenses (2.1) (2.2) (2.3) (2.3) (2.1) (2.2) (2.3) (2.3)
EBITDA 162.7 176.3 187.3 191.7 162.7 176.3 187.3 191.7
Depreciation (39.9) (41.1) (42.3) (43.6) (39.9) (41.1) (42.3) (43.6)
EBIT 122.8 135.3 145.0 148.1 122.8 135.3 145.0 148.1
Interest expense (13.5) (13.5) (13.5) (13.5) (13.5) (13.5) (13.5) (13.5)
Interest income on Inter-co 21.2 20.0 0.0 0.0 21.2 20.0 20.0 20.0
Other Income 0.0 0.0 0.0 48.1 0.0 0.0 0.0 0.0
Exceptional item (5.7) 0.0 0.0 0.0 (5.7) 0.0 0.0 0.0
Pretax profit 124.8 141.7 131.5 182.7 124.8 141.7 151.5 154.6
Tax (42.1) (39.7) (36.8) (51.2) (42.1) (39.7) (42.4) (43.3)
Minority interests 0.7 0.0 0.0 0.0 0.7 0.0 0.0 0.0
Net profit 83.4 102.0 94.7 131.6 83.4 102.0 109.1 111.3

Source: OSK Research

Comparing DCF values
shows that rejecting the
deal is the better option
In comparing our cash flow projections and our Discounted Cash Flow valuation, the following
points need to be noted:
• We have utilised a higher WACC for the scenario where the deal is accepted, 10.6%
versus 10.0% for the scenario where the deal is rejected, to account for the higher risk
associated with earnings from SWW.
• Assumed terminal rate is 3%.

• The lower WACC results in a higher FCF/share for the scenario where the deal is
rejected. The FCF/share in this case is higher by 17.6%.

Figure 8: DCF valuation table if the deal is ACCEPTED

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
t 0 1 2 3 4 5 6 7 8 9 10
EBIT (RMm) 135.3 145.0 148.1 154.3 166.3 167.2 168.1 161.0 160.0 170.6 168.3
Less:
Taxation -39.7 -36.8 -51.2 -56.7 -60.6 -60.8 -72.0 -70.1 -69.8 -72.7 -47.1
Add:
Depreciation 41.1 42.3 43.6 44.9 46.2 47.6 49.0 50.5 52.0 53.6 55.2
Impact from SWW 0.0 -282.1 -48.7 -5.4 25.9 25.9 96.6 127.6 127.6 158.7 0.0
Repayment from SPT 0.0 189.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less:
Capex -100.0 -80.0 -80.0 -80.0 -80.0 -80.0 -80.0 -80.0 -70.0 -70.0 -60.0
Free Cash Flow 38.4 -25.6 21.5 70.6 111.8 113.9 186.6 214.1 214.8 255.0 96.4
Discount Rate 1.00 0.90 0.82 0.74 0.67 0.61 0.55 0.50 0.45 0.41 0.37
Discounted CFs 38.4 -25.6 17.6 52.2 74.8 68.9 102.2 106.0 96.2 103.3 35.3

Terminal Value 403.9

Total DCF 1008.1
Add:
Net Cash / (Liabilities) 62.2
Net DCF 1070.3
Share Capital 330
FCF to Firm/Share 3.24
Source: OSK Research

5
 Figure 9: DCF valuation table if the deal is REJECTED
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
t 0 1 2 3 4 5 6 7 8 9 10
EBIT (RMm) 135.3 145.0 148.1 154.3 166.3 167.2 168.1 161.0 160.0 170.6 168.3
Less:
Taxation -39.7 -42.4 -43.3 -45.0 -48.4 -48.6 -48.9 -46.9 -46.6 -49.6 -48.9
Add:
Depreciation 41.1 42.3 43.6 44.9 46.2 47.6 49.0 50.5 52.0 53.6 55.2
Less:
Capex -100.0 -80.0 -80.0 -80.0 -80.0 -80.0 -80.0 -80.0 -70.0 -70.0 -60.0
Free Cash Flow 38.4 66.7 70.2 76.0 85.9 88.0 90.1 86.5 87.2 96.4 96.4
Discount Rate 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39
Discounted CFs 38.4 60.6 58.0 57.1 58.7 54.6 50.8 44.3 40.7 40.9 37.1

Terminal Value 441.1

Total DCF 1193.8
Add:
Net Cash / (Liabilities) 62.2
Net DCF 1256.0
Share Capital 330
FCF to Firm/Share 3.81
Source: OSK Research

Fair Value raised to RM2.60
As before, we value JPB based on the scenario where the deal goes through. Applying a
20% discount to the FCF/share, our fair value is raised from RM2.50 to RM2.60 given the
upward revision in throughput numbers for containers, dry and break bulk figures. The fair value
if the deal was rejected would be RM3.00. Either way, we maintain our Buy call on the company
given the strong port operations.

Maintain recommendation We maintain our recommendation that the deal should be rejected as:
to reject deal
• The outlook for the petrochemical and maritime industry remains uncertain and
therefore similarly the demand for SWW land.

• Investors would likely require a higher rate of return if the deal goes ahead given the
uncertainty surrounding the land development. This would impact valuation of the
company.
If the deal goes through, it is akin to swapping a stable cash source in the form of interest
income with a risky business proposition that may take years to materialise. We would prefer if
JPB continues to focus on its port operations. Given the recent LME certification and growing
trade numbers, there should still be sufficient growth going forward. Any excess cash could
perhaps be returned in the forms of dividend instead.

Privatisation rumours With regards to the recent rumours on privatisation and container business transfer, JPB have
th
refuted issued an announcement rejecting these rumours (See our note on 9 August 2005). We agree
with management that a transfer of JPB’s container business to PTP would be difficult and not
make business sense. Nonetheless, in our recent meeting with MMC, we noted that although no
plans to acquire JPB are in the cards, it cannot be discounted that such a future acquisition will
not occur. However, for now, we have not factored this into our forecasts.

The information in this report has been obtained from sources believed by OSK Research Sdn Bhd (OSK) to be reliable but its accuracy or completeness
is not guaranteed. Opinions contained herein are subject to change without notice. This report is for informational purposes only and is not to be
construed as an offer or solicitation for the purchase or sale of any financial instrument. This report does not have regard to the specific investment
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