Sumatec Resources Bhd, a contractor for the oil and gas industry, has set in motion its vision for a recurring base of earnings. Hence its recent proposal to purchase a fleet of coastal oil tankers leased on long-term contracts to oil majors.
Sumatec has to come up with RM50mil cash to buy the four companies that own these tankers. It will be partly funded with new capital to be raised in the form of a rights issue of two shares and one warrant for every eight shares held.
The vendors for the tankers have guaranteed the shipping business would earn a net profit of RM9mil this year. That would make the fleet a relatively cheap acquisition at about 5.5 times this year's earnings.
Sumatec executive director James Chan said he had insisted on a profit guarantee of one year, but not beyond that.
“It's not necessary,” he said. The earnings are based on long-term contracts. “This is not construction,” he added.
“If you can make RM9mil in one year, it'll be the same in subsequent years,” he continued. Furthermore, it's a conservative forecast. The tankers are leased to the Shell and Esso groups for up to 10 years.
Sumatec intends to expand on the fleet of tankers, as it will tender for contracts from Petronas, the national oil corporation, as well. It will, however, only acquire new ships after it obtains a long-term contract from any of the oil companies.
As for tenders to Petronas, Sumatec can make the bids as it has the required bumiputra participation in its ownership and staffing.
There are three substantial bumiputra shareholders in Sumatec, all of whom are executive directors, including vice-chairman Wan Kamaruddin Wan Abdullah.
Chan said the tankers transports refined oil products by sea from the refineries to the ports. From there, the oil is transported by trucks to petrol stations.
“There is a constant demand for oil and the demand grows with the population,” he told StarBiz. The demand for transporting the oil will increase in tandem.
The marine transport business that Sumatec is acquiring is unlike that of other players in the oil and gas (O&G) sector.
Some of the O&G companies have also diversified into marine transport services but these are in other segments of the industry. Their supply vessels transport equipment to oil platforms.
This segment of the business is more cyclical than that in the transport of oil. The supply vessel business is dependent on the level of development of new oil fields. Although the current high level of activity is likely to be sustained over the next several years on the strength of current oil prices, there may be a slowdown at a later period.
Sumatec has mapped out a five-year plan of diversification for the group to have a recurring income base.
“The purchase of the ships is the first phase in this plan,” Chan said.
He had told the press in June the group is keen on four new business sectors - shipping, industrial waste management, biomass power generation, and oil storage facilities.
There are two common features in all these businesses. They would involve ownership of facilities and generation of recurring income. Biomass power generation, for instance, is usually contracted for the supply of the power for 21 years; that's a long period of stable earnings.
As Sumatec enters these businesses, it will leverage on either its multi-disciplined expertise in engineering or its contacts in the O&G sector.
Biomass power generation, for instance, is not related to the O&G sector, but Sumatec has the expertise to construct the facilities and operate them efficiently.
Biomass involves burning agricultural waste products. The process is broadly similar to that of the industrial waste treatment plant that Sumatec was contracted to build in Bukit Nanas, Negri Sembilan. That plant will incinerate industrial waste.
In addition to that construction, the group plans to own and operate similar incineration plants for recurring revenue.
Chan pointed out that as the group progressively rolled out its diversification programme, it would not lose focus of its original core business of specialised construction in the O&G industry.
The prospects for construction contracts in the industry continue to be firm.
There are a number of sizeable contracts that are open for bidding, and Sumatec is pursuing these, he said.
Sumatec's debut on Bursa Malaysia in September last year was warmly received, and its share price soon moved up to above RM3. That was when O&G was a bullish theme. Since then, the share price has drifted much lower. It closed at RM1.30 last Friday.
There was considerable sell-down in the stock as fund managers grew impatient with a lack of large new contracts and acquisitions.
Chan countered that the group was bidding for new contracts, and was exploring and negotiating for acquisitions, but negotiations would take time.
The acquisition of the tanker fleet showed that progress was being made in the group's plans, he added.
After a significant part of the diversification plan is realised, Sumatec would go on a road show to re-introduce the group to fund managers, he said.
The group aims to become a diversified engineering group with a particular focus on the O&G sector.
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