LOSS-MAKING Asia Bioenergy Technologies Bhd (AsiaBio), which is listed on Bursa Malaysia as an incubator fund, wants to diversify into the oil and gas (O&G) transport sector. Such plan raises eyebrows as the O&G industry has been going through a rough patch. The news put the company’s share price on a roller-coaster ride in the past few weeks, with its trading volume surging above the daily average.

The counter climbed 29% to 24.5 sen after the announcement on Jan 30, its highest level since March 2009, before slipping nearly 33% to 16.5 sen on Feb 4. Year to date, AsiaBio (fundamental: 1.20; valuation: 0.0) has appreciated 32%.

There are doubts as to whether the plan for AsiaBio, which is currently involved in biodiesel business, would ever take off, let alone being a lifesaver for the company.

In an interview with The Edge, AsiaBio executive director Steve Tan Sik Eek says now is a good time for the group to acquire petroleum tanker companies as operating costs are low.

“The low oil prices actually make a lot of difference. Moving forward, a company like Semua Shipping is good for investment because the operating costs have come down. We may not be able to seize this opportunity when oil is at US$100 per barrel,” he says.

To recap, on Jan 27, AsiaBio announced that it had entered into a heads of agreement (HoA) with Hoe Leong Corp Ltd, Sumatec Resources Bhd and Reachmont Logistics Sdn Bhd in relation to a series of transactions for the eventual acquisitions of Semua Shipping and Semado Maritime.

According to the HoA, the acquisitions will be satisfied with the issuance of new AsiaBio shares worth up to RM168 million, or about 20% of the company’s enlarged share base, as a consideration. The entire shares of Semua Shipping and Semado Maritime will be transferred to a special purpose vehicle (SPV).

The vendors will then enter into a shareholders’ agreement, whereby Hoe Leong and Sumatec (fundamental: 2.60; valuation: 0.30) will hold stakes in the SPV, based on their respective stakes in Semua International.

Sumatec’s 49% stake in the SPV will be transferred to Reachmont Logistics. In return, Reachmont Logistics will pay off part of the RM56 million debts owed by Sumatec to its bondholders as a consideration for the SPV stake.

Information is scarce on the identity of Reachmont Logistics. According to the Companies Commission of Malaysia, the shareholders of the company are Radijah Abdul Razak and Aziah Musa.

The due diligence process will only start this week. It is learnt that the vendors are looking at a sale price of RM168 million.

AsiaBio’s optimism is understandable, considering the surge in demand for tankers to transport petroleum and petroleum products as many energy-hungry Asian countries are taking advantage of the current weak oil prices to stockpile fuel.

There is also rising demand for fuel storage space. According to tanker brokers, requests for vessels to be converted into storage spaces for fuel products have been increasing. As a result, supply of shipping tankers will be tighter, thus pushing up rates, say the brokers.

Furthermore, the low crude oil prices would be a boon because bunker fuel accounts for 30% to 35% of the total operating costs of a shipping company, Tan explains.

CIMB Research analyst Gan Jian Bo anticipates tanker rates to rise 40% this year, continuing from last year’s increase of about 70%. The demand for tanker transport services is also expected to outstrip new deliveries for the second consecutive year.

“Based on the expected new building deliveries and scrapping rates this year, we believe tanker supply growth will be mild at just 1.1% year on year. Meanwhile, demand is estimated to grow 2.1% amid stronger imports from Asia,” states Gan in a Jan 22 report.

AsiaBio has been making losses since its financial year ended Jan 31, 2012 (FY2012). For the nine months to Oct 31, 2014, the company posted a net loss of RM1.28 million on revenue of RM36.1 million.

At the press conference to announce the deal, Tan says the SPV is expected to achieve a profit after tax (PAT) of RM14 million for FY2015. The combined PAT of Semua Shipping and Semado Maritime last year was RM8 million, he adds.

According to Tan, both Semua Shipping and Semado Maritime have ongoing contracts worth RM200 million to transport refined petroleum from the refineries in Miri to major ports in Peninsular Malaysia. However, these contracts are at the tail end of their tenure, raising uncertainties over earnings prospects.

The managements of Semua Shipping and Semado Maritime will renegotiate with the client, which is an oil major in Sarawak, to extend the contracts by at least another two years, he says.

“We want to grow this business. When the time is right, we will acquire new ships. In the industry at the moment, petroleum producers will only give out logistics contracts if the bidding company already owns a vessel. However, most companies would only place an order for a tanker if they have already secured a contract. The issue is cost — it ranges from US$20 million to US$30 million per vessel. This industry is definitely not for the faint-hearted,” he says.

AsiaBio is confident that it will be able to raise the required capital to grow its petroleum tanker business as it is backed by strong shareholders. Besides CPE Capital Growth Ltd, a China-based private equity firm that owns a 11.13% stake in AsiaBio, Perlaburan Mara Bhd also holds a 10% stake in the group.

While the transaction price has not been finalised, Hoe Leong and Reachmont Logistics are expected to hold substantial stakes in AsiaBio, should the acquisitions materialise. However, it is not clear whether Hoe Leong will retain its stake in AsiaBio given that Semua Shipping’s performance has been below its expectations.

“However, due to below-expectation performance of the Semua Group, the company believes that the proposed transactions would allow the company to free up cash and strengthen its balance sheet, settle various liabilities and disputes with third parties,” Hoe Leong states in the announcement to the Singapore Exchange.

When Hoe Leong first acquired a block of shares in Semua International back in 2010, it was guaranteed a PAT of at least RM31 million for the financial year ended Dec 31, 2011, by Sumatec. However, Semua International only recorded a PAT of RM14.25 million.

Should the deal materialise, it would be interesting to see how AsiaBio would grow this cyclical business, which prospects hinge on the movements of crude oil prices.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.

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