This article first appeared in The Edge Financial Daily on July 27, 2018

KUALA LUMPUR: Handal Resources Bhd has attracted a number of private investors to take up stakes in the offshore crane manufacturing and servicing company in recent times even though it has been reporting losses annually since the financial year 2016 (FY16) ended Dec 31, 2016.

On July 3, privately held Borneo Seaoffshore Sdn Bhd emerged as a substantial shareholder of Handal after buying a 7.314% stake via the open market. As of July 16, Borneo Seaoffshore owned a 7.357% stake. Bursa Malaysia filings also showed Wah Seong Corp Bhd managing director and group chief executive officer Chan Cheu Leong had raised his stake in Handal to 10.946% from 7.549% on May 16.

Handal group managing director and chief executive officer Mallek Rizal Mohsin and chief operating officer and executive director Zahari Hamzah have also been accumulating Handal shares in the open market over the course of the year, with their shareholdings now totalling 20.58% and 9.676% respectively.

What makes Handal appealing? According to Borneo Seaoffshore co-founder and executive chairman Mohamad Ismail, the investment in Handal is an opportunity to give Borneo Seaoffshore access to the offshore crane service market in Southeast Asia.

“We believe that Handal, despite recording losses in the past two years (FY16 and FY17), still has tremendous growth potential. It is one of the few offshore crane manufacturers in this region and it has a long operating track record,” Mohamad told The Edge Financial Daily in an interview.

“We see the potential to help the group grow faster with our experience and network in the business,” he added. Handal, via its wholly-owned subsidiary Handal Offshore Services Sdn Bhd, has an American Petroleum Institute 2C accredited fabrication yard in Malaysia, which is among the 38 accredited yards worldwide to date.

Mohamad said he is unaware of Chan’s investment in Handal, adding that it is not related to Borneo Seaoffshore.

On whether Borneo Seaoffshore would look to increase its holding in Handal in the future, Mohamad said it has no immediate plans to do so or to inject its assets or businesses into Handal.

The 67-year-old Mohamad, who has been in the oil and gas (O&G) industry for over 40 years, of which 30 years were with Petroliam Nasional Bhd (Petronas), believes that oil prices may have finally hit bottom, adding that crude prices have stabilised around US$60 (RM243.60)-US$70 per barrel.

He foresees oil prices will remain at current levels this year, which bodes well for O&G companies as it enables better planning.

Mohamad noted that Petronas is dishing out more exploration and development jobs amid stabilising oil prices.

Still, he cautioned that while there has been some recent stabilisation in the oil market, today’s oil prices are determined more by politics than by supply and demand. “US President Donald Trump’s criticism of Opec is helping drive the volatility in the global oil market,” he said.

Oil prices have plummeted 70% since June 2014, falling to as low as US$27 per barrel in 2016. Many of the major oil firms have reported dramatic falls in profits and cut back their investments in exploration. In 2016, Petronas announced that it was cutting spending by up to RM50 billion over the next four years.

This has hurt O&G service providers like Borneo Seaoffshore Group of Companies, which has over time diversified away from the charter hire of platform support vessels business due to falling offshore drilling and exploration activities.

In January, the company’s subsidiary Borneo Seaoffshore Engineering Sdn Bhd, in a joint venture with Sapura Fabrication Sdn Bhd, was one of the five local contractors awarded a contract for the provision of maintenance, construction and modification (MCM) services at Petronas’ subsidiary Petronas Carigali Sdn Bhd’s offshore facilities in Peninsular Malaysia, Sabah and Sarawak.

These five local contractors were selected for the five-year contract worth RM6 billion which took effect in September last year, with an option to extend for an additional year. Under the terms of the contract, the engineering and maintenance services will include topside major maintenance and facilities improvement projects.

Mohamad said Borneo Seaoffshore Engineering has an order book of RM1.1 billion, which will keep it busy until 2022 and a tender book of “a few hundred million” at any one time.

For its FY18 ended June 30, 2018, Borneo Seaoffshore Group posted a net profit of RM7.2 million on a revenue of RM74.8 million. This compared to a net profit of RM1.8 million on a revenue of RM39 million in FY17.

Mohamad expects revenue to grow 30% on a year-on-year basis in FY19, with net profit experiencing higher growth thanks to contribution from Petronas Carigali’s MCM contract, which is Borneo Seaoffshore Group’s largest contract to date, valued at RM850 million.

The diversification has worked well for the privately held group, said Mohamad, who along with executive directors Sunildeep Singh Dhaliwal and Tengku Munawir Islahuddin co-founded Borneo Seaoffshore in 2005 and has a 25% stake. Sunildeep holds another 45% of the group, while Tengku Munawir has the remaining 30%.

Mohamad said the group, through Borneo Seaoffshore Engineering, provides engineering services, steel fabrication, mechanical piping works and installation of electrical and instrumentation in the O&G industry.

Going forward, Mohamad said the group plans to ramp up its activities in the industrial gas turbine maintenance sector under its other subsidiary Seaoffshore Engineering Sdn Bhd.

“We see a big requirement for this. Most of the machines at oil gas platforms are old and need to be overhauled. We will work with independent third-party providers such as Alba Power and Chromalloy to offer cost-effective solutions to Petronas and its production sharing contractors.

“We are also partnering with a foreign company to do weather reporting via Borneo Seaoffshore Sdn Bhd. We have secured about nine to 10 contracts in Malaysia to date, but their contract values are still small,” he added, noting that the group is still on a learning curve and will undertake projects via joint ventures.