Smooth sailing in rough seas for EA Technique

by **Cals** Tue 22 Mar 2016, 01:33

Smooth sailing in rough seas for EA Technique

By Kathy Fong / The Edge Financial Daily | March 21, 2016 : 10:16 AM MYT

This article first appeared in The Edge Financial Daily, on March 21, 2016.

[size=12][You must be registered and logged in to see this image.]Abdul Hak: Our vessel utilisation rate is 90% to 95%. Any rate above 65% is considered good in the shipping industry, especially now. Photo by Patrick Goh

KUALA LUMPUR: In the current oil rout, being profitable is considered an achievement for many oil and gas (O&G) companies, even when earnings are lower. Double-digit earnings growth, needless to say, is now considered a luxury in the industry.

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As such, EA Technique (M) Bhd (EA Tech) is probably more than just an achiever for a company that has relatively large exposure to the O&G industry. Its net profit swelled more than four times to RM11.15 million for the fourth quarter ended Dec 31, 2015, against RM2.67 million in the previous corresponding quarter. Quarterly revenue ballooned to RM147.8 million from RM41.13 million a year ago.

The big leap in quarterly earnings bumped up EA Tech’s annual net profit to RM37.34 million for the financial year ended Dec 31, 2015 (FY15), more than double the RM14.23 million posted in the year before, while earnings per share jumped to 7.41 sen from 3.59 sen in FY14.

This impressive earnings growth is sustainable even if crude prices stay low at the present level, said its managing director Datuk Abdul Hak Md Amin, who founded the company in 1995.

“Our earnings visibility is good. Our vessel utilisation rate is 90% to 95%. Any rate above 65% is considered good in the shipping industry, especially now,” Abdul Hak told The Edge Financial Daily in an interview.

EA Tech’s strong earnings income also helped mitigate Kulim (M) Bhd’s shrinking plantation earnings. Kulim is the single largest shareholder owning a 50.6% stake in EA Tech. For FY15, EA Tech generated 30% of Kulim’s pre-tax profit of RM162.5 million.

While jobs are scarce and contract termination is rising, particularly in the upstream O&G industry, it is business as usual for EA Tech.

The company recently bought three vessels from distressed asset sale.

“We are less affected by the downturn in the O&G industry because our clients are mainly in the mid and downstream segments, such as petrochemical companies and refineries.

“Our vessels are shipping products, like gasoline, liquefied petroleum gas and methanol, around [the] Asean region,” said Abdul Hak.

In the upstream segment, EA Tech is serving producing oilfields. Its services, for instance, crew boats and tugboats, are essential despite a halt in exploration and development activities, according to him. “The oil majors, like Petronas (Petroliam Nasional Bhd), are cutting capital and operating expenditures, but they would still need to spend on operating expenditure to sustain current production to generate revenue,” Abdul Hak explained.

EA Tech has an order book of about RM1.6 billion, which will last it until 2025. Since the start of the year, the company has bagged five contracts, including four contracts for the provision of tugboats from Sg Udang Sdn Bhd. Abdul Hak believes the contract flow would continue.

“We secured a number of contracts last year. The full-year impact of these contracts will be captured this year. That alone will help boost our profit. Also, there are more vessels coming on stream ... they all have secured charted contracts,” replied Abdul Hak when asked about factors that sustain the company’s growth.

But he pointed out that revenue growth next year is expected to slow down when its US$191.8 million (RM776.79 million) engineering, procurement, construction, installation and commissioning (EPCIC) contract completes in August this year. The contract is for the provision of EPCIC of a floating storage and offloading facility for the Full Field Development project in North Malay Basin.

Upon completion of the EPCIC contract, Abdul Hak said, the company’s borrowings would come down. A significant portion of EA Tech’s debts would be repaid, and as a result its gearing would drop from 1.68 times to 1.12 times, which is used to finance its fleet of vessels that are all backed by long-term charter contracts. As at end-2015, EA Tech’s net debt was at RM496.08 million.

Apart from marine transportation services, EA Tech is expanding its shipyard, called Johor Shipyard, in Hutan Melintang, Perak, to cultivate a new income stream in ship maintenance and repairs.

“We are in the midst of getting approval from [the] relevant authorities to build a dry dock and a slipway. With that, we would be able to provide maintenance and repair for ships that ply along the Strait of Malacca,” said Abdul Hak, whose first job was a sailor at age 17. He was also once a surveyor in the shipbuilding industry.

“[The] Strait of Malacca is the busiest shipping route in the world. This tells you the potential of the ship maintenance and repair business here,” he said, expecting the dry dock to be EA Tech’s next growth catalyst.

Abdul Hak, a hands-on manager, knows that steady earnings growth can’t be achieved by just luck. EA Tech’s risk-averse strategy pays off well, especially in a downturn.

“Our philosophy is that we don’t jump on the bandwagon. We will only buy an asset when we have secured a chartered contract of at least three years [for it]. We don’t buy assets to bid for contracts.

“Why three years? [It’s] simple: By the end of three years, almost 80% of the loan to finance the asset would have been paid off,” said Abdul Hak.

He recalled that in the heydays, when crude prices were above US$100 per barrel, the spot charter rate for a tanker with a long ton dead weight of 10,000 was in the range of US$16,000 to US$18,000 a day.

Many industry peers were expanding their fleet size to charter vessels then on short-term contracts. “The rate for my long-term charter contracts was only US$12,000. Honestly, there were moments [when] I doubted if [I was] being too conservative; we only chartered assets on long-term contracts,” said Abdul Hak.

Now, the spot rate has slid to US$6,000 to US$8,000 a day. “With hindsight, I think I sudah untung (have already profited),” he quipped
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