This article first appeared in The Edge Malaysia Weekly on December 9, 2019 - December 15, 2019
FOUR public-listed companies are eyeing a RM220 million contract to build 18 fast interceptor craft (FIC) for the Royal Malaysian Navy (RMN) as it is likely to be the only big-ticket item that will be awarded for the armed forces over the next few months.
Boustead Heavy Industries Corp Bhd (BHIC), Destini Bhd, Muhibbah Engineering (M) Bhd and TH Heavy Engineering Bhd (THHE) are said to have submitted bids to build and deliver the FIC, say sources with knowledge of the matter.
“As BHIC is majority-owned by Lembaga Tabung Angkatan Tentera, naturally RMN prefers the contract to be awarded to the company. However, the Ministry of Defence will find the best candidate after looking at the overall package,” says a source associated with one of the candidates and who liaises with the ministry.
Another source says BHIC might not be awarded the contract as it is still racing against time and a tight budget to complete the littoral combat ships (LCS) in its shipping yard in Lumut.
At press time, the company had not responded to The Edge’s request for confirmation that it was bidding for the contract.
The LCS job, awarded to BHIC eight years ago in December 2011, is currently mired in a cost overrun and delay as delivery was originally scheduled for 2017.
The RM9 billion contract involves six frigates designed by France’s Naval Group, formerly DCNS. Four of them are being constructed at BHIC’s Boustead Naval Shipyard in Lumut, Perak. The first vessel, the KD Maharaja Lela, was launched on Aug 24, 2017, and was to be followed by a second vessel this year.
The cost overrun of the LCS job, estimated at RM1.4 billion more than the contractual amount, might be a point of contention if BHIC is awarded the FIC contract. Indeed, the Royal Malaysian Naval Veterans Association has lodged a report with the Malaysian Anti-Corruption Commission with regard to the cost overrun and delay in the delivery of the LCS.
While the FIC is a much smaller vessel, to be deployed to patrol the Sabah east coast for non-state intrusions, it is still a major asset for RMN.
The LCS cost overrun impacted BHIC’s profitability in its financial year ended Dec 31, 2018 (FY2018), as the group registered a loss after tax of RM108 million after recognising variation orders and higher project finance cost in the fourth quarter of the year.
BHIC was also awarded a contract to build four littoral mission ships (LMS) worth RM1.17 billion. However, the new Pakatan Harapan government decided that all four units would be built in China by BHIC’s partner shipyard instead of two in Malaysia and two in the republic.
“The group is pursuing additional claims with the relevant authorities to recover the costs arising therefrom,” says BHIC executive deputy chairman and managing director Tan Sri Ahmad Ramli Mohd Nor in the company’s 2018 annual report.
BHIC also owns and operates three other yards in the country — in Penang, Langkawi and a special yard for the servicing of the country’s two submarines in Sapanggar Bay in Kota Kinabalu, Sabah.
The Penang yard engages in shipbuilding, ship repair and servicing of various types of vessels, including anchor handling tugs, cargo ships and tankers, while the Langkawi facility specialises in the repair and service of leisure craft, such as sailing boats and yachts.
Destini’s interest in the FIC contract was confirmed by a source, although questions to the group’s representative went unanswered at press time. The company has experience in building vessels for the Malaysian Marine Enforcement Agency (MMEA) and is currently constructing three 83m offshore patrol vessels (OPVs) for the agency in collaboration with TH Fabricators Sdn Bhd, a subsidiary of THHE.
In January 2017, THHE Destini Sdn Bhd, the joint-venture company, received a letter of award from the government for the supply, delivery, testing and commissioning of the OPVs worth RM738.9 million. It will take about 3½ years from the time the contract was signed for all three vessels to be delivered.
In July 2015, Destini acquired for RM90 million Destination Marine Services Sdn Bhd, a company that was awarded the RM381.3 million contract to build and deliver six patrol vessels for the MMEA.
While Destini too is building vessels for the security forces, the OPVs are being built in its partner’s yard in Pulau Indah, Port Klang. So, if Destini were awarded the FIC contract, it will still have capacity in its yard.
The group is raising an estimated RM49.7 million through a private placement to a third-party investor. The funds will be used to repay bank borrowings and finance working capital requirements for existing and new projects.
The source says Destini went solo in the FIC bid. “It did not partner any party.”
THHE has been under fire over the last couple of years as the group was categorised as an affected issuer under Bursa Malaysia’s Practice Note 17 regulation in April 2017 while its independent auditors, Messrs Deloitte PLT, expressed a disclaimer opinion on its accounts for its financial year ended Dec 31, 2016.
Then, the company did not have sufficient resources to repay its borrowings as its current liabilities exceeded its current assets by RM733 million. Its auditors also pointed out that it had not complied with some of the financial covenants under its loans.
As part of its turnaround plan, THHE’s creditors had to take a haircut from their loans while its fabrication contract with JX Nippon Oil and Gas Exploration (M) Ltd for a floating production, storage and offloading facility was novated to Yinson Holdings Bhd for RM374 million.
In February 2018, the group shifted its core business from oil and gas fabrication to shipbuilding and ship repair in a move to improve its financial situation. Its CEO, Suhaimi Badrul Jamil, said at the time that the fabrication business was oversupplied and very competitive.
As the OPVs are being built in THHE’s yard, it is not clear if the group will be able to take on additional jobs if it wins the FIC contract. “THHE might have to partner another shipyard if it wins the contract,” says an industry observer.
Marine engineering, fabrication and construction company, Muhibbah Engineering, is not known as a shipbuilder for the armed forces. However, it has come up with its own design for the FIC called the CJ66.
According to Muhibbah’s website, the CJ66 is a rigid hull inflatable boat specially built to carry out special forces operations, high-speed pursuits, search and rescue, and marine interdiction operations.
Indicating its eagerness to participate in the defence sector, Muhibbah promoted its multipurpose mission ship — a floating base for maritime patrolling and enforcement — at the Langkawi International Maritime and Aerospace exhibition held in April this year.
In 2016, Muhibbah signed a memorandum of understanding with its Turkish defence and shipbuilding joint venture, Gulhan-Dearsan, to develop assets through the transfer of technology from the latter.
Gulhan-Dearsan is an active participant in Turkmenistan’s defence procurement, having delivered a total of 25 vessels for the Central Asian country’s naval and coastguard forces. In August this year, news reports from Turkey said the JV had been selected to build a corvette for the Turkmen navy.
If Muhibbah is awarded the FIC contract, it would be the first venture for the marine engineering firm in the defence shipbuilding industry. This capability would become another avenue of income for the group, which is dependent on the oil and gas and infrastructure construction industries.
In the nine-month period ended Sept 30, 2019, Muhibbah’s profit before tax dropped 9.6% year on year to RM172.7 million as profit contribution from its infrastructure construction division plunged 61.4% year on year to RM25.97 million.
Its performance during the period was supported by an increase in profit from its crane division as well as share of profit from its concession business.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.