UniFiber System   

Going to be hot soon

UNITED  FIBER  SYSTEM  (UFS:  S$0.225)                                  BUY
(Initial)
Know what you get

An  investment in UFS gives investor a forestry concession, a soon-to-start
wood  chip  mill,  a  yet-to-build pulp mill, and construction business. We
value these businesses at 74 cents per share. There is also a chance to own
a  functional pulp mill at a discount which would add 47 to each UFS share.
BUY  for  a narrowing of discount to fair value and the CHANCE to own Kiani
Kertas  at a discount. Our price target is 44 cents should the Kiani Kertas
deal  fall  through,  and  72  cents if the deal is successfully concluded.
Implicit  in  our  price  target  is  a  40%  discount for excessive market
speculation  and  unrealistic  market  expectation in the past. This legacy
discount  (or  problem)  may  erode  when the mills start operating and the
purchase  of  Kiani  Kertas is more definitive. We initiate coverage with a
BUY recommendation and 12-month price target of 44 cents.

(I)   These are what you get

·     Too much negative publicity and speculative press coverage have
clouded investors? perception. It?s time for a recap. Investment in UFS
nets you the following:-


(A) Forest concession ? PT HRB (Hutan Rindang Banua)

·     This concession covers 268,585 hectares in South Kalimantan,
Indonesia. Total area suitable for plantation is 130,000 hectares. Between
1994 and 1998, 76,000 hectares were planted with fast growing Acacia
Mangium. This forest asset is valued at US$204m (or US 9.6 cents per share)
at end 2005.

(B) Wood Chip Mill - PT MAL (Mangium Anugerah Lestari)

·     This wood chip mill has an annual capacity for 700,000 tonnes
bone-dry wood and is expected to start production in November 2006.
Construction cost of US$45m is fully financed by loans from China National
Machinery & Equipment Import and Export Corporation (US$18m) and Raiffeisen
Zentralbank (US$21m). Output from the mill is worth US$80m ? US$90m per
annum. 80% of the output will be taken up by China National Machinery &
Equipment Import and Export Corporation at prevailing market price.

(C) Pulp Mill ? PT MBBM (Marga Buana Bumi Mulia)

·     This proposed pulp mill has an annual capacity of 600,000 tonnes
Bleached Hardwood Kraft Pulp. Construction is expected to start in 1Q07
with completion in 2009. Development cost of US$863m is 80% financed
(US$690.4m) by the turnkey contractor, China National Machinery & Equipment
Import and Export Corporation. The raw material, logged wood, will be
supplied from United Fiber?s forest concession.

·     Annual revenue is estimated at US$310m to US$330m. 90% of the output
will be bought by CellMark at prevailing market price. CellMark has an
option for the remaining 10%.

(D) Construction

·     This legacy business is not to sneer at. Order book in the past 1
year has increased from S$150m to S$220m while projects are being
completed. Poh Lian Construction is an A1 class contractor and can tender
for public sector projects of unlimited value.

·     Net profit margins have recovered from negative territory. Current
range of 2% ? 5% is boosted by private sector projects which typically
carry net profit margin of 5% ? 10%. But interest and valuation will rise
with the construction up-cycle, spurred by 2 Integrated Resorts, the
Business and Financial Centre and three mega malls along Orchard Road.

(II)  This is what you hope to get

·     Since mid-2005, UFS has been eyeing to buy PT Kiani Kertas. The
latter is an operationally-ready Bleached Hardwood Kraft Pulp mill with an
annual capacity of 525,000 tonnes in Mangkajang, Berau, East Kalimantan,
Indonesia. This mill has a 126 MW cogeneration power plant, airstrip,
deepwater harbour, water treatment plant, an effluent treatment plant and
townsite for 800 workers. Commercial production began in November 1999 but
was subsequently hampered by the lack of operation funds.

·     In July 2005, UFS entered into an Operation Management Arrangement
(OMA) to manage Kiani Kertas mill. UFS will provide operating capital and
take delivery of the produced pulp in lieu of payment. Production resumed
in September on an ad hoc basis.

·     In the meantime, UFS began preparatory work to acquire Kiani Kertas,
including appointment of financial adviser and arranger, lawyers,
accountants and technical surveyors. An intermediary entered into
preliminary agreement with the vendors of Kiani Kertas in December 2005.

·     Bank Mandiri has started to push the vendor to close a deal as soon
as possible as the bank is under pressure to resolve its non-performing
loans problems. Recent statements from UFS and Bank Mandiri, which is owed
money by Kiani Kertas, suggest that an agreement is imminent. BUT nothing
is heard from the vendor.

·     Investors should note that there had been many false starts. UFS
similarly implied that it was closed to an agreement in June 2006 when it
secured the pre-closing financing. Similarly, UFS announced in February
2006 details of its June 2005 agreement with the intermediary to buy Kiani
Kertas. This was preceded in December 2005 by UFS? announcement that its
intermediary had entered into an exclusive sales and purchase agreement
with Kiani Kertas? shareholders.

·     Investors must understand that this could be a case of cultural
clashes. The UFS-Kiani Kertas saga smacks of Indonesian wayang kulit ?
shadow dancing ? where the innuendoes are as important, if not more
important, than the story. Singapore investors have to appreciate
Indonesian undertones, evident in the form of an Indonesian major
shareholder, an Indonesian CEO, Indonesian forestry concession, pulp mill,
wood chip mill, and now a potential acquisition of a big-scale Indonesian
pulp mill, Kiani Kertas.

(III) This is what you stand to gain (or lose)

·     We believe that investors are getting a 70% discount for the existing
businesses of a forestry concession, wood chip mill, a yet-to-build pulp
mill and construction business. Investors are given a FREE OPTION for the
CHANCE to own Kiani Kertas at a discounted price. A successful purchase
could boost UFS fair value by 47 cents per share.

·     We initiate coverage of UFS with a BUY recommendation. Our fair
valuation of existing businesses is 74 cents per share. This will rise by
47 cents per share should UFS succeed in buying Kiani Kertas at its target
price.

·     We are applying a 40% discount to fair valuation for our target
pricing. This translates to S$0.44 without Kiani Kertas and S$0.72 with
Kiani Kertas at UFS? pricing. The implicit 40% discount is for excessive
market speculation and unrealistic market expectation in the past. This
legacy discount (or problem) may erode when the mills start operating and
the purchase of Kiani Kertas is more definitive.

 

 

Any comments on this counter??? Notice high volume on last Fri (Afternnon trade) and today. Thank you.

 

Wow, start moving liao. Hope it will cheong

 

Perhaps with the search for future alternative building materials arising out of the sand lesson, it will benefit this counter somewhat...

Anyway,the technicals are extremely bullish. 

 

Oops, press the wrong button, OK the factors are :

Their wood chip mill has commenced operations in Nov 2006.

A new investor from HK, Stark Ivestment recently purchased 180m shares at 0.27 cents, becoming a substantial shareholder (5.2 %)

Their construction arm (formerly called Poh Lian) is doing fine.

They have apponted a new CEO (an indonesian) - who better to deal with the wood pulp KT Kiani, purchase trn, than an Indonesian. There may be a feeling on the groung that the long delayed trn is finally going to find closure.

Glowing reports from DMG and Westcomb with targets price from 0.44 to 0.74, etc

 

Volume was extremely last fri - technicals looks good. Could be due to a number of positive factors, namely :



1)

 

Me, ZhouYu just need 36,420,000 arrows but Zhuge liang managed to get 82,351,000 arrows from Cao Cao on friday Chi bi battlefield :)

 

With the dong fong from Zhuge_liang will you get  your arrows?..... Just wondering

 

Rose on Westcomb's coverage with tp of $0.68.

 

Now blow my 'Dong Fong' :)

 

Any news regarding this counter? What is causing the price and volume to go up today when all the other shares are going the other way? Any inputs would be appreciated.

 

$0.295c coming ,but do take care..

 

Volume building up :)

Hope this is the 'dong fong' I waiting for :)

Wait to breakout at 0.295

 

Many small counters running up these few weeks but not this particular one :)

With price above 55 EMA, double top formed @ 0.295(21-11-06 & 9-1-07), price dropped and rebound from trend line.

A very well supported level @ 0.245 from the Rising Window(candlestick) aka Gapping up.

With all the positive TA available, now only waiting for borrowing 'Dong Fong'.......from zhuge liang  :)

 

UFS' Board of Directors update that the Company continues to review the various alternatives to move forward with the acquisition and that the funding for the proposed acquisition remains in place.



The Board of Directors also advise that UFS continues to manage the operations of PT KK pursuant to Operations Management Arrangement ("OMA") entered into with PT KK on 25 July 2005. Under the OMA, UFS has been injecting working capital funding into the pulp mill and the total amount of working capital injected to date is US$66 million of which US$32 million is currently outstanding.



Pursuant to the terms of OMA and the Share Purchase Agreement with the vendors of PT KK, all amounts injected by UFS into PT KK are recoverable from PT KK and if the Share Purchase Agreement is terminated for any reason, the vendors under the Agreement are required to procure PT KK to refund the amounts injected into PT KK net of recoveries, and failure by PT KK attaches a liability on the vendors to make the refund.



As with any commercial arrangement of this type a collection risk does exist in connection with these amounts. However, the Company believes that such risk has been sufficiently mitigated in the OMA and Share Purchase Agreement.

 

The chart tells no secrets (...)
These few days vol. picking up.
wondering if talks in good progress..
any updates on this one?

 

It is in talks with Chinese firms to export to China pulpwood from its plantation in Southern Kalimantan in Indonesia.



"We've received a lot of inquiries from Chinese players as there is not enough supply of pulp in China," CEO Jaka Prasetya said in an interview last week.



He estimates that China imports 7-8 mln tons of pulp every year. However, UFS needs to complete the acquisition of PT Kiani Kertas and/or accelerate the completion of its own pulp mill before it could start supplying pulp to China and other prospective customers.



Prasetya said a target date for the completion of the Kiani Kertas acquisition has not been finalized but negotiations are ongoing with Kiani Kertas' owner, PT Fayola Investment Ltd, and creditor Bank Mandiri. UFS has been negotiating to buy Kiani Kertas since mid-2005.



"We're waiting for the seller to give us the green light to move forward. My understanding is that Bank Mandiri is intending to take a more active role in the sale process and we hope that this will result in more certainty in the timetable," Prasetya said.



Buying into Kiani Kertas will enable UFS to speed the harvesting and processing of its mature forest plantation in Southern Kalimantan.



 "We had already planned to build our own pulp mill by 2009. The Kiani Kertas (acquisition) gives us an opportunity to own a pulp mill earlier (than that date)," Prasetya said. Should the Kiani Kertas deal be completed next year, UFS can start harvesting and processing its mature forest covering 76,000 hectares out of its 268,000-hectare forestry concession in South Kalimantan.



UFS is seeking to buy Kiani Kertas from Fayola for US$200 mln, and assume Kiani Kertas' debt of US$500 mln. Prasetya estimates UFS will need to pump in another US$80-100 mln in capital expenditure to make Kiani Kertas fully operational.



Kiani Kertas has the capacity to mill 525,000 tons of pulpwood annually, while the new pulp mill which UFS is building at a cost of US$863 mln will have an annual capacity of 600,000 tons.



This is the best time to export pulp from Indonesia given soaring prices, Prasetya said. Pulp is currently selling at US$620 per ton and prices could possibly rise to US$750 per ton by next year, Prasetya said.



UFS is planning to further develop its forestry concession area, and is already planning to plant new seeds even before it could start harvesting its matured forest.



Prasetya said the $48.58 mln that UFS raised from the placement of 180 mln new shares at $0.27 each to investment funds Stark Master Fund Ltd, Stark Asia Master Fund Ltd, Centar Investments (Asia) Ltd and Polygon Global Opportunities Master Fund will be used to plant new trees. While its forestry plantation and palm mill business will be the future growth driver for UFS, Prasetya said UFS intends to keep the construction business it took over from Poh Lian.



"In the short to medium term, we do not have any plan to divest our construction business. It has been profitable and we believe we can still take the company to the next level," he said.

 

Don't mention...   :)

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iPunter,

thanx for the advice pal ;)