Business News

Saturday, 5 August 2017

Short Position

Message from MMHE

MALAYSIA Marine and Heavy Engineering Holdings Bhd (MMHE) has posted a loss for eight consecutive quarters.

That is two years and with no end in sight whether things are going to improve. Going by the company’s latest statement, conditions are set to remain tough for the foreseeable future.

In its latest quarter, the company that has Petroliam Nasional Bhd (Petronas) as a major shareholder posted a loss of RM13.7mil. The big fabrication company, which builds equipment for the oil and gas (O&G) industry and repairs ships, tends to lean heavily on jobs provided by its parent company.

It says that with the price of crude oil not benefiting from cuts by the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec countries, as shale oil producers are still aggressive in their output, a lid will probably be placed on the price of crude oil this and next year.

With the price of crude oil struggling, MMHE does not think upstream projects are going strong and O&G companies will seek to be lean and cost-cutting will continue. But for the engineering company, its clearest statement made after the release of its latest financial statement is that it is going to diversify its income stream.

That means less reliance on big lumpy projects and one that is going to provide the company with a steady revenue and income stream. How will it do so and it what areas MMHE is looking to generate a steady income stream is what the market will watch out for.

MMHE has made it clear, though, that it is not going to abandon its core business. However, realising that something needs to be done in securing a steady income, it is wisely seeking to tide things over while it pursues its own programmes to win contracts and improve operational efficiency in its core businesses.

If MMHE, a Petronas-controlled company, concedes ground in the less lucrative O&G business, the other players should also follow suit.

Will MNRB be next?

RESTRUCTURING has been the buzzword for Permodalan Nasional Bhd (PNB) in the past one year.

It has charted plans to break up Sime Darby Bhd, de-merge UMW Holdings Bhd from its oil and gas arm and de-consolidate Chemical Company of Malaysia Bhd from its pharmaceutical arm CCM Duopharma Biotech Bhd.

PNB has also streamlined its own property business with SP Setia Bhd taking over Island and Peninsular Group Sdn Bhd to form a property company that is probably holding strategic parcels of land at cheap cost.

However, it has smaller entities within the financial space that could be consolidated for shareholders to gain value.

Leading the pack is MNRB Holdings Bhd, Malaysia’sole reinsurance company that has lost its lustre in recent years after regulations in the industry were loosened.

MNRB is trading at far below its book value and its business is not growing as expected. The share price is hovering at RM2.50, while the book value is stated at RM4.44 per share.

For any value investor, MNRB is an obvious choice for a privatisation or restructuring. Apart from MNRB, the PNB group also owns MIDF, which is an investment bank fighting for a share of the pie in a crowded market.

There is not much value that can be derived from restructuring MNRB and MIDF on its own. However, if the assets of both these companies can be matched, then there is probably something that the shareholders of both companies can gain.

Tan Sri Abdul Wahid Omar will be completing his first year at the helm of PNB next month. His de-facto second person, Datuk Abdul Rahman Ahmad, will also be completing his first year in two months’ time.

The duo have brought about major changes in sweating the assets of the PNB group of companies.

However, MNRB is something that sticks out like a sore thumb. Going by the track record, it would probably be a matter of time before MNRB is a target for a corporate restructuring.

 Malakoff Corp Bhd Tanjung Bin Power Plant (coal-fired) in Johor

Some relief for Malakoff 

FINALLY, some good news from Malakoff Corp Bhd.

On Friday, the independent power producer said its 90%-owned Tanjung Bin Power Sdn Bhd had inked an agreement to resolve a long-standing dispute related to the operations of its power plant.

This, in turn, would translate into a settlement payment to Tanjung Bin, which would contribute positively to the earnings and net assets of Malakoff for the financial year ending Dec 31, 2017 (FY17). This is clearly a boost for a stock which has performed poorly since its listing two years ago at an initial public offering price of RM1.80.The stock is down some 40% since then to hover at a low of RM1.02 at last look. Investors are said to have sold down its shares because of uncertainty and its weak earnings prospects in the second half of FY17.

One of Malakoff’s biggest woes is related to the settlement that was just announced.

Friday’s stock-exchange filing stated that Malakoff had signed an agreement with a consortium of three companies and three other Japanese boiler manufacturers to settle the lawsuits it had brought against them for an alleged breach of contract at its Tanjung Bin power plant.

The disputes between the parties were the 22 boiler tube failure incidents at the power station consisting of three 700 megawatts coal-fired units owned and operated by Tanjung Bin, and the inability of the plant to meet certain required output conditions. It was seeking RM780mil in December 2015.

Malakoff now says that the parties have agreed to resolve and settle the disputes in accordance with the terms and conditions of the agreement.

Following the agreement, it said a consent judgement will be entered in the litigation action on a strictly without admission of liability basis. Tanjung Bin as the claimant will withdraw and discontinue the arbitration proceedings on the terms and conditions set out in the agreement.

Public Investment Bank notes that Tanjung Bin has experienced several operational issues since the beginning of its commercial operation date in March 2016.

The research firm says due to the extended unscheduled outages in second-quarter 2017, it estimates a reduction in capacity payment at the power plant of around RM60mil for that quarter, impacting its second-quarter earnings.

So, the settlement is surely a welcome relief for investors holding the stock.

Tags / Keywords: short position

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