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Monday March 22, 2010

Scomi Engineering’s transformation

Disposal of machine shop business in line with strategy to focus on urban transportation solutions

sharidan@thestar.com.my

SCOMI Engineering Bhd’s (SEB) recent sale of its machine shop business for US$110mil may come as a surprise, but it just shows the speed in which it has changed its core business in line with recent developments.

SEB announced last Wednesday it would sell its machine shop business, once the company’s key earnings driver, to an unnamed foreign-listed multinational corporation.

Started in early 2006, SEB’s machine shop business is operated by subsidiaries Scomi OMS Oilfield Services Pte Ltd and Scomi OMS Holdings Sdn Bhd, which provide oil country tubular goods machine shop services with 10 machine shop facilities spread over Malaysia, Singapore, Indonesia, Australia, Brunei, Thailand and Saudi Arabia.

The machine shop business has been the main revenue contributor to SEB until it was overtaken recently by urban transportation engineering. Demand for machine shop products and services has also dropped due to falling worldwide oil drilling activities, apparent in SEB’s fourth quarter results ended Dec 31.

Energy engineering revenue declined by 55.5% to RM32.1mil in the last quarter from a year ago. In contrast, logistics engineering revenue ballooned by 151% to RM105.4mil for the period under review. Similar trends are also reflected in SEB’s full year results in 2009.

Syahrunizam Samsudin says the company’s strategy is to position itself as an urban transportation solutions provider.

According to SEB president Syahrunizam Samsudin, the corporate exercise was in line with the company’s strategy to position itself as an urban transportation solutions provider with focus on the monorail sector.

“SEB will intensify its focus on core engineering activities (urban transportation), strengthen its research and development (R&D) initiatives and invest in new technologies,” he said in recent statement.

A company spokesman told StarBiz the proceeds from the machine shop business disposal would be used in building value and R&D projects for the urban transportation business that was taking off quite well currently.

“Urban transportation business is all about technology and we need to do research that needs investment,” he said. Furthermore, he said the new owner of the machine shop business would be able to take it to the next level.

“This exercise is not part of the Scomi Group Bhd restructuring process, but is a business decision to enhance the value of SEB’s urban transportation division. Additionally, the US$110mil is recognised as the full valuation of the machine shop business,” he said. Scomi Group holds a 70% stake in SEB.

AmResearch viewed the divestment as a good move for Scomi to focus on its monorail business and believed there would be further news flow on the restructuring of the company.

“SEB’s machine shop business saw its revenue drop by more than half in the fourth quarter versus a year ago mostly due to a worldwide drop in drilling activities.

“Usually machine shop accounts for more than 50% of SEB’s revenue but monorail has overtaken it in terms of contribution especially due to the Mumbai monorail job with consortium partner Larsen & Toubro (L&T),” it said.

SEB, Scomi and L&T secured the US$545.02mil (RM1.846bil) Mumbai monorail project in November 2008, where SEB will deliver a total of 60 cars to make up 15 sets of four-car trains.

SEB together with its partner, were also recently shortlisted as one of two consortia to undertake a US$1.7bil (RM5.6bil) monorail project in Sao Paolo, Brazil.

“We foresee this trend continuing as the group is actively bidding for more jobs in Brazil, Saudi Arabia and India,” said AmResearch.

SEB’s move to sell the machine shop business and the proposal by sister company Scomi Marine Bhd’s (40%-owned by Scomi Group) to sell its 29% stake in CH Offshore Ltd for S$143.5mil are good decisions due to the slipping earnings of these businesses.

Despite this, the group would still have a major exposure to the oil and gas industry as Scomi Marine, besides having its own offshore vessels, also holds an 80% equity interest in Indonesia-listed PT Rig Tenders Tbk that has 65 offshore vessels consisting of supply vessels, tug boats, accommodation and work barges.

Scomi Group also still has its subsidiary, Scomi Oiltools, a leading provider of drilling fluids solutions and drilling waste management services.

According to the company spokesman, divestment or investment by Scomi as a group was driven by the target of 25% return on capital employed from 2011 onwards.

“We may be divesting in certain areas but at the same time we will look into other businesses that are in line with our target,” he said.

 
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