This article first appeared in The Edge Financial Daily on August 18, 2017

KUALA LUMPUR: Loss-making Scomi Group Bhd, and its tightly controlled subsidiaries Scomi Energy Services Bhd and Scomi Engineering Bhd, are expected to announce a plan that may entail the consolidation and possible restructuring of their businesses, sources familiar with the matter said.

Trading in the shares of all three companies was suspended yesterday afternoon at their request pending an announcement. The counters will remain suspended until Monday.

The sources said a board meeting of the group will be held today to discuss the restructuring and reorganisation, and among the options to be considered is the possible privatisation of one or both of the subsidiaries.

“A board meeting will be convened to deliberate on this matter. The time has come for Scomi to consolidate into one large entity. With bigger scale, Scomi will be ready to fly higher,” a source told The Edge Financial Daily.

“As for the details, it is still being worked out and will be finalised on Monday. This is to facilitate Scomi and its advisers to carefully and properly structure the deal,” the source said, adding that Scomi’s board of directors, led by chairman Datuk Mohammed Azlan Hashim, will have to approve the proposals by Monday.

While the relevant details remain sketchy, the sources said Scomi’s consolidation plan will facilitate its desire to resolve funding mismatch issues, particularly at its engineering and transport unit.

“Scomi Engineering is a capital-intensive business, and from the annual report there seems to be a funding gap, while the various transportation projects themselves are taking a long gestation period to yield returns,” one of the sources said.

The source added that Scomi’s Achilles heel — the impending lawsuit and arbitration proceedings with the country’s largest intercity rail operator Prasarana Malaysia Bhd over the supply of monorail fleet — is among the many factors that prompted the consolidation plan.

Scomi via its engineering unit is dragging Prasarana to court, as well as arbitration proceedings to resolve a dispute over a RM494 million monorail expansion contract.

The ongoing dispute with Prasarana was not well-received by its external auditor Messrs KPMG PLT, which had on July 24 cast doubt on Scomi’s engineering unit’s ability to continue operating its business sustainably.

Adding salt to the wound is Scomi Engineering’s debts, which currently stand at RM525.6 million, equivalent to a gearing ratio of 190%, while cash flow remains negative. At group level, Scomi’s total borrowings stood at RM771.1 million as at end-March.

“Perhaps the consolidation exercise may also enable Scomi to restructure its group-wide debt to avoid potential cross default, while at the same time ensure that its businesses continue to generate adequate levels of cash,” a source said.

At the same time, the source said Scomi’s consolidation of its businesses will enable it to properly structure its latest venture into the three areas of renewable energy: solar, hydro and wind.

In the solar business, Scomi is teaming up with Synergy Generated Sdn Bhd, which owns a power plant in Setiu, Terengganu. Its 30%-owned investee company, Strong Elegance Sdn Bhd, is also undertaking a 30mw solar plant project in Sungai Petani, Kedah.

As for the hydro and wind business, Scomi is partnering with South Asia Logistics Services Ltd and Emir Equity Sdn Bhd, both of which are the shareholders of Imartek Sdn Bhd — a core component producer of hydro turbines and power generators.

Scomi Group, its 65.6%-owned Scomi Energy and 72.3%-owned Scomi Engineering  announced their share trading suspension just before 3pm yesterday. Prior to the suspension, the three Main Market companies, particularly Scomi Engineering and Scomi Energy, saw their share prices surging.

Scomi Group rose 0.5 sen or 4.55% to 11.5 sen with a market capitalisation of RM220.51 million.

Scomi Energy surged 2.5 sen or 23.81% to 13 sen, giving the company a market valuation of RM304.43 million, while Scomi Engineering soared 7 sen or 27.45% to 32.5 sen with a market capitalisation of  RM111.18 million.