This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.

TH Heavy Engineering Bhd (THHE), a 29.81%-owned associate company of Lembaga Tabung Haji (LTH), seems to be in a difficult position.

The company has a contract but apparently no money to execute it.

THHE is said to be facing financial difficulties, which have resulted in a delay in the refurbishment of its floating production storage and offloading (FPSO) vessel, Deep Producer 1, industry sources say.

“The contract is a lucrative one for THHE but issues with its cash flow might throw a spanner in the works,” says a source.

To recap, THHE had acquired distressed asset Deep Producer 1 (formerly the 68,000dwt tanker, MV Laurita) in July 2011, for US$82.5 million, which was about 40% of the US$200 million the previous owner had spent on building the vessel.

However, the FPSO did not have a locked-in charter and was not able to secure one for four years until 2014. When Deep Producer 1 was not chartered out, it cost about RM2 million a month in maintenance.

In the second quarter of 2014, THHE was awarded an engineering, procurement, construction, installation and commissioning (EPCIC) contract by JX Nippon Oil & Gas Exploration (M) Ltd for the supply and bareboat lease of an FPSO unit for charter at the Layang oil and gas field in Block SK10, off the coast of Sarawak.

The EPCIC contract was worth US$372 million or RM1.2 billion back when it was awarded and has a 7½-year tenure. The contract also had an additional potential contract value of up to US$457 million or RM1.46 billion at 2014 exchange rates, should Nippon Oil exercise the full extension option of up to 10 years.

The contract’s value is multiple times more than THHE’s market capitalisation of RM151.3 million based on its closing price of 13.5 sen last Friday.

While the details were unclear at press time, THHE is understood to owe Drydocks World — where Deep Producer 1 is being refurbished — some US$200 million.

Attempts by The Edge to contact THHE failed.

“But you must understand that Nippon Oil may not mind the delay. It’s not like oil prices are booming,” says a source familiar with the matter.

THHE is understood to have sought the help of its parent LTH, but whether the pilgrim fund will step in remains to be seen.

“For Tabung Haji, THHE is only an associate company. It only has 30% in THHE, so why should it save the company?” asks a source.

THHE owns 80% of Deep Producer 1 through Floatech (L) Ltd. The remaining 20% is controlled by privately held company Dynac Sdn Bhd, whose mainstay is the provision of cooling systems and heat ventilation, among other things, to the oil and gas industry.

A check on the Companies Commission of Malaysia website reveals that Dynac is almost wholly owned by Abdul Rahman Mohamed Shariff with Normala Mohd Sharif holding a very small stake of less than 1%.

THHE has been bleeding red ink for the past two financial years. In its financial year ended Dec 31, 2015, it suffered a net loss of RM44.79 million on revenue of RM100.57 million. In FY2014, the net loss was RM76.45 million on revenue of RM344.12 million.

THHE’s accumulated losses stood at RM61.7 million as at end-2015. It incurred a finance cost of RM7.34 million in FY2015.

As at end-December 2015, the company had a cash pile of RM77.59 million, short-term debts of RM341.9 million and long-term borrowings of RM64.5 million.

The fact that LTH bought into THHE in 2008 raised many questions. To recap, the pilgrim fund had acquired fabricator Ramunia Holdings (now THHE) when MISC Bhd proposed to inject its oil and gas unit, Malaysia Machine and Heavy Engineering Sdn Bhd, into Ramunia in a reverse takeover.

However, the proposal, valued at RM3.2 billion, was scrapped after MISC announced that there were “unsatisfactory due diligence findings”.

While Ramunia and MISC locked horns, the biggest loser was LTH. It was stuck with almost 29.7% of Ramunia and showed a paper loss of RM175 million from having aggressively accumulated Ramunia’s shares before the deal fell through.

In September last year, LTH subscribed for THHE’s rights issue of preference shares, which raised RM275 million, but the pilgrim fund was the sole subscriber.

THHE’s renounceable rights issue of up to 1.195 billion new Islamic irredeemable convertible preference shares (ICPS) of 25 sen was undersubscribed with only 30.04% taken up by shareholders. The rights were offered on a basis of 16 ICPS for every 15 shares.

“This represents an undersubscription of 836.6 million ICPS or about 69.96% of the total 1.195 billion ICPS available for subscription under the rights issue,” THHE had said last year.

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