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This article first appeared in The Edge Financial Daily, on June 3, 2016.

 

KUALA LUMPUR: Muhibbah Engineering (M) Bhd, whose earnings prospects have been dragged down by its 60%-owned Favelle Favco Bhd, is seeking to consolidate the crane-building subsidiary amid the downturn in the oil and gas (O&G) sector.

Muhibbah managing director and co-founder Mac Ngan Boon said Favco, which is in a specialised equipment market, is suffering from the cyclical effect of the O&G downturn, but the silver lining is that the crane builder has strong cash holdings to embark on mergers and acquisitions (M&As).

As at March 31, Favco’s cash and cash equivalent reserves stood at RMRM342.2 million, compared with its borrowings of RM40.83 million.

“Favco is in a very strong position to embark on M&As; we are looking at opportunities,” Mac, who is also Favco executive director, told reporters after the group’s annual general meeting yesterday.

According to Mac, Muhibbah is looking for companies that are in involved in activities related to Favco’s crane-building business. Mac also revealed that the group has been actively engaged in talks with local and foreign companies, and has also been approached by an Australian company. “We are among the top three crane builders in the world. Certainly people in the field will come to us for future consolidation,” he said.

He stressed, however, that Muhibbah has no intention of trimming its interest in Favco as it continues to regard Favco as a strategic investment and a growth vehicle in the long term

Dragged by lower sales, Favco saw its net profit falling by almost 50% to RM11.37 million in the first quarter ended March 31, 2016 (1QFY16), compared with RM22.5 million a year ago. Revenue went down 24% to RM152.95 million from RM200.77 million.

Mac said that despite having a large exposure in the upstream business, Favco is still considered fortunate as it has non-O&G clients and service businesses that are able to mitigate some of the risks. He said he shared the views of Petroliam Nasional Bhd (Petronas) that while O&G players did right by expanding during good times, they now need to undertake consolidation to reduce costs. He also said that high asset prices prevented industry players from embarking on consolidation in the past, but “the businessmen are more realistic” now.

Despite the recent recovery in oil prices to close to US$50 (RM208) per barrel, Mac remains pessimistic about the industry and predicts that the sector needs at least another year to return to its normal track.

“Even though oil prices have rebounded, oil majors are still being careful about reinvestment as the rebound remains uncertain,” he said.

In the meantime, Muhibbah is aggressively looking out for other business sources that can provide recurring income. “We are still looking for things that are beyond what we are doing, or things that can provide us better earnings prospects for the next 10 years,” Mac said.

Following the group’s success in the Cambodian international airports business, Muhibbah has been seeking opportunities to penetrate Myanmar and Indonesia, but has been unsuccessful so far partly due to political uncertainties in those countries. In the construction field, Mac said Muhibbah is tendering for RM3.5 billion to RM4 billion worth of projects, of which 90% are within the country.

“Based on our track record, we tender for more than RM10 billion contracts yearly, and our average success rate is about 10% to 15%,” he said.

He added that this year is tough for the construction business, even though it is still expanding within the country, the opportunities are declining globally.

The group’s current order book stands at RM2.1 billion, and is expected to last until the middle or the end of 2017. Muhibbah reported a flat net profit of RM23.75 million for 1QFY16 versus RM23.29 million a year earlier. This was despite the group’s revenue rising 29.51% to RM481.78 million from RM372.01 million in 1QFY15.

“We are performing what every major company is doing. The market has been tough in the last one year, so any company that can maintain its financial performance will be happy,” said Mac.

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