WITH red ink spilling across the oil and gas (O&G) industry, TAS Offshore Bhd has not been spared from financial losses.
The Sibu-based shipbuilder suffered its first annual net loss of RM21.86 million in its financial year ended May 31, 2016 (FY2016). Its financial stress continues to creep up as its inventory, essentially vessels that are either completed or under construction, swells to the highest level since its listing.
The company’s audited balance sheet as at May 31 shows that its inventory rose to RM407.9 million in FY2016 — a surge of 142% from a year ago. One half of it comprises completed vessels and the other half, vessels under construction.
This is not a good sign, given the current O&G industry downturn. Unless it is a winery, whose stock appreciates in value over time, a high inventory is normally not favourable as it squeezes cash flow. In other words, TAS Offshore’s cash is tied up in the unsold vessels.
Inventory makes up 71% of TAS Offshore’s total assets, standing at RM574 million versus total liabilities of RM400.9 million.
Paring its inventory to raise cash could be challenging as supply far exceeds demand due to the scarcity of jobs as oil majors have put a brake on exploration and development activities.
According to a local industry source, there are at present about 100 idle vessels in Sibu, Malaysia’s de facto shipbuilding hub with roughly 40% of its registered shipyards. It is not known how many of them are a part of TAS Offshore’s inventory.
In hindsight, the company’s high inventory is the result of its quest for wider profit margins and a steady income stream.
According to its listing prospectus in 2009, TAS Offshore wanted to build its own ships, either for sale or for charter, using commonly used specifications. This was to improve its profit margins while the charter business was to provide it with a fresh revenue stream. The venture began shortly after its listing.
Unfortunately, this business model is working against it in the current industry downturn.
For its fourth quarter ended May 31 (4QFY2016), TAS Offshore recorded negative revenue of RM6.48 million. In the notes accompanying its financial results, the company explained that the negative revenue “was due to price adjustments for vessels sold”.
When a shipbuilder records negative revenue, it could be due to the cancellation of an order, in which event any money received has to be returned to the customer and a write-down of past revenue is needed.
It is worth noting that TAS Offshore’s subsidiary, TA Ventures, is in a dispute over the termination of a shipbuilding contract with another subcontractor due to late delivery by the latter. The other shipbuilder rejected the cancellation and has yet to refund RM12.33 million of progress payments, leaving TAS Offshore with no choice but to impair the amount in its accounts.
TA Ventures also initiated action to terminate three sales and purchase agreements due to late delivery but eventually reached an agreement with the purchaser to deliver one vessel and cancel the other two. Under the agreement, which is disclosed in TAS Offshore’s audited accounts, TA Ventures will also refund RM18.1 million in progress payments plus interest.
Nevertheless, TAS Offshore clinched two contracts last month to sell two harbour tug vessels for about RM31.6 million. It said the vessels are for one of its existing customers and expects to deliver them in the fourth quarter of next year.
TAS Offshore also expects earnings contribution in its current financial year, which will ease some of its distress but may not resolve its financial squeeze.
The slowdown in the O&G industry is reflected in TAS Offshore’s accounts. Annual revenue from its three biggest customers shrank 56% year on year to RM99.94 million while about RM13.2 million of its trade receivables of RM30.2 million is more than 120 days overdue, the accounts reveal. Some 83% of the RM13.2 million is owed by two of its major customers.
The audited balance sheet as at May 31 shows that the group is grappling with RM397 million of short-term liabilities, RM364 million of which comprises short-term trade payables. The remaining RM32.9 million consists of hire purchase costs and revolving credit.
With only RM26.4 million in cash as at May 31, meeting these liabilities over the next 12 months will be a challenge for TAS Offshore. However, trade receivables of RM30.2 million plus RM56.74 million in amounts due to the company from contract customers, if fully collected, would bring in another RM86.9 million.
Assuming full collection of the monies owed to it, TAS Offshore may be able to raise RM113.3 million, including its cash in hand. But this is not even a third of its short-term liabilities. Its debt-to-equity ratio was at 2.14 in FY2016 — up sharply from 1.38 in FY2015.
TAS Offshore did not respond to The Edge’s queries on its financial health.
However, according to its audited accounts, the company is “actively managing its operating cash flow and the availability of funding so as to ensure that all repayment and funding needs are met”. It is also “maintaining a sufficient level of cash to meet its working capital and capital expenditure requirements”.
The shipbuilder generated operating cash flow of RM23.8 million in FY2016. Shipbuilders working on contract orders may sometimes have billable payments tied to progressive work that are not reflected in their receivables, say industry players. Thus, TAS Offshore’s total receivables may be larger than stated in its accounts.
Its share price has been on a slippery slope in the past two years, tumbling from a peak of RM1.59 in July 2014 to a low of 33 sen this year. It closed at 34 sen last Thursday.
TAS Offshore’s founder, major shareholder and managing director, Datuk Lau Nai Hoh, has 26 years of experience in the maritime industry. Can he steer the company out of rough waters? His experience will definitely be put to the test.
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