This article first appeared in The Edge Malaysia Weekly on March 5, 2018 - March 11, 2018

DESTINI Bhd, an engineering company that serves the shipbuilding and ship repair industry, had a tough 2017 as its oil and gas (O&G) segment continued to bleed due to a lack of decommissioning contracts for old oil fields.

However, observers say that over the next two years, things could look up for the group as its maintenance, repair and overhaul (MRO) business is expected to take off, providing support to its overall integrated engineering business.

While the company only undertakes minor engineering services for commercial airlines currently, a contract to supply six helicopters to the Ministry of Defence (Mindef) and 35 motor trolleys and two road-rail vehicles to Keretapi Tanah Melayu (KTM), may lead to MRO contracts with these parties.

“The company is expected to start MRO services from August 2019 onwards, after the one-year warranty expires, for the six military helicopters to be delivered to Mindef by Aug 18,” says CIMB Investment Bank analyst Nigel Foo in a Feb 28 research report.

“We estimate the helicopter MRO business with Mindef could be worth RM40 million annually to Destini. We would not be surprised if the government orders more helicopters from Destini in the near future, providing a likely boost to its MRO business,” he says.

“The company is completing a RM62 million KTM job to supply 35 motor trolleys and two road-rail vehicles by 2019F. We think Destini could potentially secure new MRO jobs with KTM in 2018F. Negotiations have been ongoing for the past year,” he adds.

To recap, in February last year, Destini acquired a 70% stake in Halaman Optima Sdn Bhd for RM5.5 million. The acquisition comes with a contract to supply the Malaysian Army with six units of light attack helicopter model MD530G for a contract value of RM321.9 million.

As the majority shareholder of Halaman Optima — the helicopter supplier — and having the technical capabilities to service the helicopters makes Destini a prime candidate for the MRO contract, industry observers say.

The group also seems to be preparing to undertake bigger and more complex MRO contracts for fixed-wing and rotary-wing aircraft by setting up a joint venture with Sapura Aero Sdn Bhd, a subsidiary of Sapura Resources Bhd.

“The two partners have ambitions of becoming a regional MRO services provider in the commercial and military aviation industry. Both have experience in the technical line of the aviation industry, and now, they are upgrading their capabilities to undertake bigger jobs,” says an industry observer.

“Destini already has facilities in Royal Malaysian Air Force (RMAF) bases across the country, so it can efficiently service the air force’s helicopters and light aircraft. The joint venture with Sapura Aero also provides it with a hangar in Subang Airport,” says an industry observer.

For commercial airline maintenance services, Destini has a 50:50 joint venture with UK-based Avia Technique Ltd, a builder of aircraft components. It also has an 80% stake in SafeAir Technical Sdn Bhd, which provides technical line maintenance — a check-up service for commercial planes in between flights.

However, it is not known whether Destini has comprehensive MRO capabilities to undertake bigger MRO jobs for commercial airlines.

The company, which had a market capitalisation of RM681.6 million as at last Friday, declined to comment for this story.

Previously, there had been talk that it was setting up a joint venture with AirAsia Bhd to acquire Sepang Aircraft Engineering Sdn Bhd to provide a complete range of MRO services and bid for a slice of the US$1 billion market. However, this did not pan out.

In 2015, Destini and AirAsia signed a collaborative agreement, allowing them to negotiate and implement a plan to outsource MRO-related services. However, almost three years after the signing, there is no sign of the proposed collaboration.

Besides the aviation sector, Destini will also have opportunities to bid for MRO in the marine segment. It has contracts with Mindef to build six units of next-generation patrol craft (NGPC) and three units of offshore patrol vessels (OPV).

Destini acquired Destination Marine Services Sdn Bhd, which was awarded the NGPC contract, valued at RM381.3 million, by the government for RM90 million in July 2015. The first NGPC vessel, KM Bagan Datuk, was delivered to the Malaysian Maritime Enforcement Agency (MMEA) in March last year, while the second underwent sea trials in July.

Another two units are undergoing the last “touch-ups” before sea trials. That leaves just two NGPC units to build, and observers expect them to be completed by year-end.

After that, Destini’s shipyard in Port Klang will fulfil the OPV contract worth RM738.9 million, awarded to joint venture THHE Destini Sdn Bhd in January last year. Work on the first OPV started in December.

In FY2017, Destini reported a net profit of RM30.67 million, 7% lower than the preceding financial year, despite revenue jumping 93.4%. The group has set a dividend policy of 30% to 40% going forward.

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