Crude slump halts THHE turnaround

Nor Badli: ‘The FPSO leasing business is less cyclical and offers stable earnings.’

Nor Badli: ‘The FPSO leasing business is less cyclical and offers stable earnings.’

Company to bank on FPSO business

TH HEAVY Engineering Bhd (THHE), once touted as an oil and gas (O&G) turnaround story, has seen its fortunes plummet following the slump in oil prices.

In the last seven months, the company has seen close to two-thirds of its market value being wiped out. It posted a loss to the tune of RM64mil for its financial year 2014 (FY14), as expenses for lost contracts and a staff retrenchment exercise weighed heavily on the bottomline. The losses were wider than an RM16mil-net loss analyst consensus.

Even so, THHE’s head honcho Datuk Nor Badli Munawir, who has been seeking to make a profitable business out of its floating production, storage and offloading (FPSO) unit, reckons that there is still hope. He says that since November last year, the company has been looking into new areas unaffected by cutbacks in spending to reduce THHE’s dependence on fabrication contracts. The immediate priority, he says, is to keep a lid on costs to match the current level of operations.

“We have to react to survive this tough period, especially if it is expected to take more than a year before one can expect to see a rebound. As much as we would like to, we cannot totally isolate ourselves from this sector, but rather look into new areas unaffected by cutbacks,” Badli says via email.

To elaborate, Badli says that THHE is in the midst of converting its first FPSO unit under a long-term charter contract which it had won in May 2014 with Japan’s JX Nippon Oil & Gas. The contract entails THHE providing its FPSO facility to JX Nippon for the Layang O&G field, located off the coast of Sarawak, where earnings would start to contribute in the third quarter of 2016.

The company is also currently bidding for its second FPSO unit, and evaluating another FPSO project in the region. “The FPSO leasing business is less cyclical and offers stable long-term earnings visibility, but is capital-intensive,” says Badli.

It also sees good opportunities from brownfield maintenance works, where margins are better. “There is also less competition in this field and being a new player, it is easier to come from behind and gain some market share from the current leaders.”

In the onshore fabrication segment, THHE is seeking opportunities in the maritme and defence sector. According to Badli, it is also pursuing several steel and piping fabrication sub-contract opportunities for the Refinery and Petrochemicals Integrated Development project in Pengerang, Johor, and venturing into engineering, procurement and construction plant construction for the renewable energy sector, where it has experience building a bio-mass power plant in 2008.

Lastly, Badli says that THHE would be seeking more infrastructure construction projects, an area less impacted by the decline in the O&G market.

Mindful of the weak outlook for the O&G sector in 2015, Badli says how THHE fares this year would depend on how much new work it is able to secure for these new initiatives. “We are optimistic and hopeful there’s light at the end of the tunnel,” he says.

CIMB Research said in a recent report that THHE would still likely end the first quarter of FY15 with a loss before turning the corner in the second quarter. “The outlook is far from exciting, as a contract for the Sepat central-processing platform (CPP) worth US$1.6bil (RM5.98bil) has been deferred to 2017 at the earliest,” says the research firm, noting that another O&G vendor, Malaysia Marine and Heavy Engineering Holdings Bhd , which also had its hopes on Sepat, is in the same predicament.

In 2014, THHE expensed the bidding and engineering costs in full for two large CPP fabrication projects – Bergading and Baronia – each worth US$1bil. It was expected to secure these projects with its strategic partnership with McDermott International Inc, but they were instead awarded to a foreign competitor. The failure to secure these contracts led to a lower yard utilisation, forcing the company to downsize its workforce in the fourth quarter of FY14.

THHE has only one sizeable fabrication contract in hand currently, which is the RM250mil Kinabalu topside project slated for completion in August this year after completing the Bertam and Permas projects last year.

Badli says THHE’s current order book stands at RM1.5bil, the bulk contributed by its FPSO unit that has a charter contract secured for an eight-year period.

Ironically, 2014 was supposed to have been the year THHE started on a clean slate after it turned around with a net profit of RM1.6mil for FY13. Formerly known as Ramunia Holdings Bhd, the stock slipped into Practice Note 17 (PN17) status in 2010, and only exited the category two years later. Its regularisation plan involved the purchase of the FPSO vessel called the Deep Producer 1 (DP1) and a 57-acre fabrication yard in Pulau Indah with money raised from a rights issue. These are THHE’s key assets, including a 30% stake in a derrick pipe lay barge.

THHE’s transformation process attracted tycoon Tan Sri Quek Leng Chan, who emerged as a shareholder with a 9.1% stake via GuoLine Capital Ltd in 2012. The single-largest shareholder is Lembaga Tabung Haji (LTH) with 30.1%. The pilgrim fund’s entry in 2008 had caught the market by surprise.

“It was a year that was not to be. We had that ‘window’ of opportunity in 2014 to win our maiden CPP project and we knew we had to be ready. We went aggressively into investment mode, building new facilities and recruiting skilled manpower to prepare us for the more complex fabrication contracts based on ‘design competition’, limited to just a handful of local players,” says Badli, who came on board in 2010.

In December last year, THHE had to swallow the bitter pill and implement a retrenchment exercise. “We had 650 personnel at our peak in mid-2014, and we are now down to below 400. We have plans to relocate more support divisions to be based at our yard in Klang to allow for seamless coordination and better communication with our yard personnel. By June, our head office will be downsized. These initiatives are expected to trim down our fixed overheads further.”

While the timing was unfortunate, Badli says the company is in the business for the long term and will wait for the next cycle of contract awards. “We will not allow a downturn to set us back permanently. We are being tested, and we have to reinvent ourselves to be more robust and agile to survive … And it is comforting to have both LTH and Quek as our major shareholders, who can be with us through thick and thin.”

On concerns over its ability to service its debts, Badli assures that the company’s gearing is still at manageable levels and it hasn’t breached any banking covenants. “The bulk of our loan is tied to the FPSO project-financing, which will be self-servicing once the charter contract comes onstream in mid-2016.

“In February, we announced a rights issue, which we hope to complete in June this year. With the new equity in place and planned part settlement of debts, our gearing levels will come down significantly and will be more manageable,” he says. For its FY14 ended Dec 31, THHE’s gearing stood at 58.4%, up from 32.8% a year ago. It has short-term debts of RM74mil, while long-term debts totalled RM271.1mil.

The counter closed at 33 sen, giving it a market cap of RM366.7mil. It had a hit a high of RM1.03 in mid-February last year and then fallen to a low of 28.5 sen before the close of 2014. The price of Brent oil, meanwhile, has since plunged from about US$100 per barrel in July last year to below US$53 at the time of writing.

Economy , Oil & Gas , Property , thhe , oil gas , fpso