This article first appeared in Corporate, The Edge Malaysia Weekly, on May 16 - 22, 2016.

EXCITING times are ahead for Handal Resources Bhd. After a one-year delay, the offshore crane manufacturing and servicing company is now set to raise around RM100 million, at a time when the oil and gas (O&G) sector remains lacklustre.

Using a combination of debt and equity, the Kemaman-based group plans to raise the funds for working capital and to retire debt, group managing director and CEO Mallek Rizal Mohsin tells The Edge in an interview. It is planning a rights and bonus issue with regards to the equity financing.

Part of the funds will also be used for acquisitions, he says.

He adds that the group has short-listed several local non-listed companies involved in upstream and downstream O&G operations for a potential acquisition.

“We are always on the lookout for companies that can add value to what we are doing. These are local medium-sized, non-listed companies that still have room to grow, but because of their capacity, they do not have the right financial resources.

“We have had preliminary discussions with these companies regarding a potential acquisition and have gone a step further to provide them an acquisition offer term sheet,” Mallek adds.

He expects Handal to make up to two acquisitions by the fourth quarter of this year with the proceeds generated from its RM100 million fundraising.

Sitting on a negative cash balance of RM5.44 million and a gearing ratio of 0.32 times as at Dec 31, 2015, the group also has ample room to finance its acquisitions and would be comfortable gearing up to 0.8 times.

“Nevertheless, we do not want to be overly aggressive given the current O&G slump. But we are looking for technology-based companies that can provide cost efficiency when executing projects or jobs. These companies can be niche in their products and the owners are very much hands-on with what they are doing now,” Mallek says.

He expects the acquisitions to generate immediate profit and cash flow contributions, estimating that Handal Resources’ revenue will grow 10% to 15%.

Mallek, who is a major shareholder in Handal with a 20.5% stake, says the group had been in talks with two investment banks in June last year to raise the funds to invest in growth companies and for working capital, with a view to finalising a deal by end-2015.

“We did deliberate on the fundraising with our board of directors. But while we were discussing plans for the corporate exercise, oil prices started sliding [in June last year] and we were not sure how long prices would stay low and their impact [on the O&G sector],” he says.

“It has now been almost a year [and] we more or less know where oil prices are heading. You will be hearing some announcements [on Bursa Malaysia] in the coming months,” he says.

Meanwhile, an upcoming catalyst for Handal Resources would be the proposed tank farming project in Kelantan.

The group had entered into a heads of agreement with Perbadanan Menteri Besar Kelantan (PMBK), the investment arm of the state government, and special purpose vehicle (SPV) Tirai Dimensi Sdn Bhd in December last year to undertake the development and implementation of a tank-farming project in the state.

Mallek reveals that Handal Resources is in “advanced discussions” with representatives from PMBK and hopes to embark on the project by the middle of this year.

“We have yet to discuss the size of Handal Resources’ equity interest in the SPV, but for ease of funding and future financial requirements, we would like to own a minimum of 51%,” he says.

Mallek declined to reveal the value of the proposed project, except to say that it is “quite substantial”.

“We are also talking to a few oil traders to be offtakers for some of the oil tanks for storage. The business model is simple — we provide the storage to international oil companies or oil traders to store their products.

“But should this project take off, it would change the revenue and profit profile of Handal Group. It would be a big recurring income stream for the group,” he says.

Meanwhile, Mallek expects a better performance this financial year ending Dec 31, 2016 (FY2016), driven by its integrated crane business segment and new contract wins.

Handal’s net profit for FY2015 fell 10.9% to RM5.54 million from RM6.22 million the previous year, while revenue dropped 6.8% to RM114.62 million from RM123.03 million in FY2014.

Handal’s net profit for the first quarter ended March 31, 2016, fell 60.15% to RM212,000 from RM532,000 a year ago, due to lower gross profit margin at its crane fabrication and workover divisions. This was despite revenue increasing 10.4% to RM22.39 million from RM20.28 million previously.

“Our ongoing business is still intact. We are insulated from what is happening in the O&G industry in terms of the crane maintenance services segment because it is served by existing long-term contracts that only expire in the middle of next year,” he says.

The group’s total outstanding order book stands at RM147 million, which will keep it busy until end-2017.

It is also tendering for projects worth up to RM281 million — of which 40% are overseas, including Indonesia and Vietnam. According to Mallek, the success rate of its tenders is usually 60% to 70%. “We hope to see some results for the tenders by the fourth quarter of this year.”

“The only downside risk to our earnings is the impairment for our [offshore] oil rig, which has been idle since 2012 (due to the weak drilling industry). Either we sell it outright, or we provide for bare charter, whichever comes first,” he says.

In FY2015, impairment loss for the oil rig stood at RM5.4 million.

Handal Resources’ shares were untraded last Thursday, but it last closed at 28 sen on May 10, giving it a market capitalisation of RM43.97 million.

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