Can THHE make it the second time around?

by **Cals** Sun 13 Sep 2015, 19:26

Can THHE make it the second time around?

Saturday, 12 September 2015
By: NADYA NGUI, INTAN FARHANA ZAINUL

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Nusral: ‘An area we are looking at is the operation and maintenance business, as well as the downstream sector.’

Oil and gas company’s new management embarks on new plan to get out of trouble

TH Heavy Engineering Bhd (THHE), which was once seen as a turnaround play, is near or at its weakest point today although the company insists that it is embarking on a new plan to set things right.
As it stands now, THHE’s market capitalisation has shrunk to a mere RM235mil from its peak of RM1.1bil in February last year, when its share price hit RM1.03.
THHE has been bleeding for the past five consecutive quarters. The company has been posting losses since the second quarter ended June 30 last year.
THHE was in the midst of turning around in mid-2014, but those plans were derailed due to lack of jobs coupled with the slump in crude oil price.
THHE was formerly known as Ramunia Holdings Bhd, and had slipped into Practice Note 17 (PN17) status in 2010 despite Tabung Haji’s entrance into the group in 2008.
After THHE came out of PN17 status, the group saw the entry of a new new chief executive in form of Datuk Nor Badli Mohd Alias, who was then touted as the person to steer the company back to health.
THHE’s transformation plans even attracted tycoon Tan Sri Quek Leng Chan, who emerged as a shareholder with a 9.1% stake via GuoLine Capital Ltd in 2012.
However, since March last year, THHE’s share price started to fall, prompting Quek to sell his shares.
Soon after, Nor Badli resigned after serving since 2010.
Second attempt to turn around
However, the new management of THHE, headed by Petronas’ veteran Nusral Danir, is hoping to change the company’s fortunes by looking beyond its main offshore fabrication business.
“This is necessary (for THHE) to be insulated from the cyclical nature of the oil price that has had a big impact for service providers like us, especially on the upstream side of the industry.
“An area we are looking at is the operation and maintenance business, as well as the downstream sector,” he tells StarBizWeek.

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Nusral took over the helm at THHE on Thursday, following the resignation of Nor Badli on June 19.
Nusral, who had served as the acting CEO of THHE since June 19, has held senior positions in Petronas including playing important roles in the national oil company’s upstream business. This included stints as the operations head at Petronas Carigali (the exploration and production arm of Petronas) and country chairman of the oil giant’s operations in Sudan.
However, Nusral faces the challenge of meeting shareholders’ expectation especially that of the pilgrim fund Tabung Haji, which owns 29.81% in THHE.
“It is no doubt a difficult time now to be at the helm of a company in the oil and gas industry but I am excited to meet the challenges as we take THHE on a journey of transformation,” Nusral says.
“The group has new priorities now, where it would identify quick wins and undertake aggressive cost optimization measures,” he adds.
But, the main concerns with THHE’s latest turn around plan is that the company’s capital spending is about to increase, especially in the company’s floating, production, storage and offloading (FPSO) project for Japan’s JX Nippon Oil & Gas Exploration.
In May last year, THHE had won its first FPSO contract with JX Nippon in a deal worth US$900mil.
The FPSO was one of the main assets of THHE under Nor Badli and the win was a significant milestone in THHE.
It was estimated that the total cost of the FPSO conversion is US$230mil or RM875mil.
THHE has total outstanding borrowings of about RM527mil, out of which RM281mil are short term in nature. The company has cash and cash equivalents of RM106.4mil.
THHE’s gearing level is 1.4 times.
Nusral says that the group is comfortable with a slightly higher gearing level of more than 1.7 times equity.
“The majority of these short and long term borrowings relate to our JX Nippon’s FPSO Layang project to part finance the acquisition and conversion of the FPSO asset.
“In the short term, these FPSO related borrowings will be partly refinanced via syndicated term loans and partly repaid via fresh equity injection from the rights issue of Islamic irredeemable convertible preference (ICPS-I). The remaining borrowings comprise revolving credit facilities, term loan and project trade facilities for our fabrication business,” he says.
Tabung Haji intervention
He adds that the long-term FPSO related borrowings would ultimately be self-funded once the FPSO Layang project is fully operational in the third quarter next year.
“Our FPSO project is a long-term contract and this should bring in a steady stream of revenue for the group by the third quarter of 2016,” he says.
Notably, THHE’s parent company Tabung Haji is taking a longer term view of the industry, and is possibly the only investor who still believes the company would be able to pull through the task of its turnaround.
The cash rich pilgrim fund is supporting the move by injecting RM275mil into the former through a ICPS-i rights issue exercise, which will be used partly for the group’s FPSO vessel.
On Tuesday, Tabung Haji injected that amount of money into THHE via a rights issue exercise that was overwhelmingly undersubscribed by other investors in the company.
Proceeds from the rights issue exercise will be used to pay for the conversion of the FPSO for Layang O&G field project located offshore Sarawak, as well as the upgrading of the company’s fabrication yard.
According to the rights prospectus, THHE intends to payout dividends to the ICPS-I holders of between 3% to 5% annually for the next five years, depending on the availability of distributable profits.
As part of its turnaround plan, Nusral said the focus is now on completing and delivering on schedule the Layang FPSO for JX Nippon and the Petronas Carigali Kinabalu NAG Phase 11 Project.
Including its Layang FPSO anchor piles (part of JX Nippon’s project), he said all jobs are valued at RM320mil.
To cut cost, Nusral says THHE will fabricate its Layang FPSO topside at its Pulau Indah yard instead of constructing it in Dubai, where it will increase THHE’s yard utilisation rate to 30% starting December this year from the current 25%.
Nusral said potential savings of about RM30mil is also expected to be realised through out-sourcing of hook-up and commissioning works.
With an orderbook of RM1.66bil, the company has also submitted oil and gas projects bids worth RM881mil while an estimated RM1bil of tenders were being planned for submission.
Nusral says that THHE has been embarking on a transformation exercise since March this year.
“We are also still evaluating the biofuel plant idea,” he adds.
“The first strategy is related to improving shareholder and capital returns while the second is secure quick-win jobs and cut losses.
“Other initiatives are to identify business segments and geographies, while enhancing internal capabilities and improving the company’s revenue streams,” he explains.