This article first appeared in The Edge Malaysia Weekly on May 21, 2018 - May 27, 2018

AN already challenging operating environment seems to have got worse for ailing TH Heavy Engineering Bhd (THHE).

Last week, the stock hit an all-time low of four sen on what market watchers say is the result of an uncertain outlook for the Lembaga Tabung Haji-controlled company. At four sen, its market capitalisation was a mere RM50.5 million.

“Much of the [negative] sentiment stems from Destini [Bhd], its joint-venture partner,” a dealer at a local brokerage tells The Edge.

Destini is 24.84% controlled by Datuk Rozabil Abdul Rahman, who is said to be well connected to the former ruling Barisan Nasional coalition.

The company’s second largest shareholder (17.3%) is Minister of Finance Inc’s Aroma Teraju Sdn Bhd.

Former Perlis menteri besar Datuk Seri Shahidan Kassim also has a 3.68% stake via Batu Bara Resources Corp Sdn Bhd and Yayasan Pok dan Kassim.

To recap, in January last year, THHE formed a joint venture with Destini — THHE Destini Sdn Bhd.

THHE holds a 49% stake in the JV, which had secured a RM738.90 million contract for the supply, delivery, testing and commissioning of three offshore patrol vessels (OPV) for the Malaysian Maritime Enforcement Agency.

Apparently, Tabung Haji chairman Datuk Seri Abdul Azeez Abdul Rahim — who is also the member of parliament for Baling, Kedah — had played a key role in securing the contract.

A dealer familiar with the matter says, “With BN no longer in power, there are concerns over Destini’s prospects … hence the bleak sentiment [for THHE].”

In its 2017 annual report, THHE says, “The OPV contract is expected to contribute positively to the earnings and net assets per share of the group for the financial years ending Dec 31, 2018, through Dec 31, 2020.”

Hence, while its earnings seem secure until 2020, there is no certainty of more jobs after that.

Even with the OPV contract, secured more than a year ago, THHE has been reporting losses. It fell into the Practice Note 17 (PN17) category for cash-strapped companies at the end of April last year, and had been classified PN17 once before, from March 2010 to October 2012.

THHE is currently formulating a regularisation plan mainly centred on a novation of a contract for the provision of engineering, procurement, construction, installation and commissioning (EPCIC) and leasing services for the Layang FPSO (floating production storage and offloading) vessel awarded by JX Nippon Oil & Gas Exploration (Malaysia) Ltd to Yinson Holdings Bhd for a cash consideration of RM374 million.

In July 2011, THHE acquired an FPSO, Deep Producer 1 (formerly the 68,000dwt tanker, MV Laurita), at a cost of US$82.5 million, which was about 40% of the US$200 million the previous owners spent on building the vessel.

While the acquisition seemed like a good deal, the FPSO was acquired without a locked-in charter contract and THHE was burning about RM2 million a month in holding costs.

Finally, in May 2014, THHE won a US$900 million contract from JX Nippon, and the FPSO was slated to be deployed at the Layang oil and gas field — located in Block SK10, off Sarawak.

However, conversion costs of some US$230 million, or RM875 million, had to be incurred.

The FPSO was to have been ready in 2016 but THHE managed to secure an extension for another two years, until 2018, after which the FPSO was to be leased to JX Nippon until November 2023, but with an option to extend the lease up to October 2033.

At calculations and exchange rates back then, the JX Nippon contract was to provide a recurring income of about RM70 million annually to THHE.

With the novation plan, THHE’s revenue stream seems less clear.

Its only other asset capable of generating revenue is a 56.79-acre fabrication yard in Pulau Indah, Klang, Selangor. But this yard has been blacklisted by national oil company Petroliam Nasional Bhd since April 2016, following the company’s non-performance in the procurement, construction and commissioning of KNPG-B Topside PH II, Kinabalu Non-Associated Gas Development Project.

For its financial year ended December 2017, THHE suffered a net loss of RM120.22 million on the back of revenue of RM5.4 million.

Its annual report indicated that the keel-laying ceremony, or the start of a ship’s construction, for the three OPVs was on Dec 20 last year at its yard in Pulau Indah, which could explain why the earnings have yet to kick in.

As at end-December last year, THHE had cash and bank balances of RM17.31 million. It had short-term borrowings of RM322.73 million and long-term debts of RM30.29 million. Significantly, THHE has almost RM665 million in trade and other payables, as part of its current liabilities.

In its annual report, THHE says, “The group intends to seize the shipbuilding and maintenance, repair and overhaul opportunities from the government of Malaysia, such as the Malaysian Maritime Enforcement Agency, Marine Department of Malaysia, Royal Malaysian Customs, Eastern Sabah Security Command and Royal Malaysian Navy.”

But will Tabung Haji, which has a 30.08% stake in THHE, pump in more money?

In 2015, the pilgrim fund was the sole subscriber for THHE’s cash call of Islamic irredeemable convertible preference shares (ICPS).

Under the renounceable rights scheme, THHE had issued 1.19 billion new Islamic ICPS of 25 sen par value at an issue price of 25 sen on the basis of 16 ICPS for every 15 shares held in THHE. The ICPS had a tenure of five years.

Tabung Haji subscribed for 99.75% of the 1.1 billion ICPS offered and raised RM275 million for THHE. This means that the former will control 64.57% of the latter if the preference shares are converted.

To recap, Tabung Haji’s current predicament dates back to its acquisition of Ramunia Holdings Bhd in 2008. MISC Bhd had proposed to inject its oil and gas unit, Malaysia Marine and Heavy Engineering Sdn Bhd, into Ramunia in a reverse takeover valued at RM3.2 billion.

But MISC pulled out after unsatisfactory due diligence findings, following which Ramunia shed over 70% of its value.

The situation appears worse now, prompting questions as to what awaits THHE.

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