This article first appeared in The Edge Malaysia Weekly on June 17, 2019 - June 23, 2019

SCOMI Group Bhd is in need of a clear business plan to convince investors that the balance sheet restructuring the group — which manufactures monorail train sets and provides oilfield and marine services — is undertaking will indeed put it on the path towards sustainability.

For starters, Scomi has to explain to its minority shareholders what kinds of businesses it will describe as “core” in the future if the transport solutions segment, which develops monorail systems, loses its intellectual property rights over the monorail technology.

This is because the properties of Scomi Rail Bhd, including the intellectual property rights over Scomi’s monorail technology, are under receivership, after it defaulted on RM201.9 million in loans granted by Malayan Banking Bhd (Maybank).

“Whatever Scomi wants to do with Scomi Rail, it has to consult the receiver and manager first. The role of the receiver and manager is to recover the claimed amount as quickly as possible,” an observer points out.

“So, if the receiver and manager find that it is best for the monorail technology of Scomi Rail to be sold off, Scomi cannot do anything about it. But it will be tough to bid for monorail contracts without that technology.”

This is a pertinent point for the restructuring of Scomi. While the group is undertaking balance sheet restructuring, it must also come up with a business plan to survive, says the observer.

To put it succinctly, one plan cannot succeed without the other.
 

Recapitalising Scomi to pursue business development opportunities

On May 27, Scomi proposed to undertake several corporate restructuring exercises with the aim of recapitalising the group and restructuring its debt.

MIDF Amanah Investment Bank Bhd is the principal adviser to Scomi while Astramina Advisory Sdn Bhd is the financial adviser.

The proposal includes the reduction of Scomi’s issued share capital — which will give rise to a total credit of RM184.96 million — the consolidation of every four Scomi shares into one share and the issuance of rights shares with free warrants to raise a minimum of RM75.59 million and a maximum of RM214 million.

The announcement states that the RM184.96 million credit from the share capital reduction may be used to offset future losses of the group, or in such manner to be determined by the board at a later date and in the best interest of the group.

Scomi also proposed a settlement agreement for all liabilities and obligations that it has with Maybank via cash payment of RM23 million and issuance of 83.33 million consolidated shares to the bank. 

The proceeds from the rights issue will be used for the cash settlement with Maybank, part repayment of advances from Scomi Energy Services Bhd (SESB) and non-trade creditors, working capital and expenses related to the exercise.

The proposals will result in the reduction of Scomi’s gearing ratio to between 0.98 times and 1.5 times, depending on the number of shares in issuance and shareholders’ equity after the completion of all the corporate exercises. Its gearing ratio currently stands at 1.98 times.

The proposals are aimed at putting Scomi in a better financial position to allow it to move forward and drive its business growth, Scomi says in an email reply to The Edge. “Thus, this corporate exercise is to recapitalise 

Scomi and provide it with the avenues to resolve its current financial challenges and bring it to a position that allows it to explore opportunities for business development.”
 

Receivership locks Scomi out of Scomi Rail 

Scomi entered into memorandums of deposit with Maybank on Sept 4, 2014, and Oct 30, 2015, whereby the group pledged 206.04 million shares it holds in SESB as security for the loan facilities granted to Scomi Rail.

Scomi Rail defaulted on the loan of RM201.9 million on Jan 25. After Scomi, as the holding company, also failed to pay a sum of RM113.96 million on Feb 8, Maybank applied for a winding-up order against the company, which was granted by the Shah Alam High Court on May 6.

While a settlement has been reached between Scomi and Maybank, the bank’s legal charges over Scomi Rail’s properties, including its intellectual properties, remain. This raises the question of what the future of Scomi’s transport solutions business without the technologies in Scomi Rail will be.

The receivership can be lifted, provided Scomi manages to convince Maybank that the restructuring plan is solid without selling the intellectual properties of Scomi Rail. 

Whether it is successful remains to be seen as Datuk Adam Primus Abdullah, the receiver and manager for the properties, is tasked to recover the defaulted amount for Maybank as quickly as possible.
 

Are oilfield services the future of Scomi?

On the future of Scomi’s businesses, the group says SESB’s oilfield business is expanding with a breakthrough contract in Kuwait. It adds that SESB is actively participating in tenders and has the experience to be a strong contender.

Scomi also contends that the monorail is considered a viable urban transport solution and many countries are looking into it. It says it is exploring opportunities in Egypt, China and its home market, Malaysia.

Still, Scomi admits that since transport projects are generally under the purview of the government, project materialisation will take time.

“We will continue to focus on our oilfield service and transport solutions capabilities and experience, but will not discount the potential of exploring complementary businesses that may be built on the technological expertise that we have,” the group says.
 

Major shareholders’ commitment a positive sign for Scomi

The balance sheet restructuring exercise has received the endorsement of Scomi’s largest shareholder, IJM Corp Bhd. The construction and property development company has given the undertaking that it will subscribe in full for its entitlement under the proposed rights issue.

IJM will subscribe for 175.5 million rights shares for RM31.6 million, raising its stake in Scomi to 31.62% under the minimum scenario, from the current 21.4%, assuming warrants C are fully exercised.

Apart from IJM, a new substantial shareholder, Sharp Ascend Ltd (SAL), will also subscribe in full for its entitlement under the proposed rights issue, plus excess shares allocated to them, up to RM20 million.

SAL is owned by Mohamad Shu’if Mohamad Hussain, a Bruneian entrepreneur. Shu’if is known as an investor for the royal family of Brunei, having been advising the Bolkiah family on investments since 2004.

Post-subscription of the rights shares, SAL will have about 16% equity interest in Scomi under the minimum scenario, assuming all warrants C are fully exercised. However, since SAL will be only investing up to RM20 million, it will not feature as a substantial shareholder under the maximum scenario.

Given the vote of confidence by IJM for the restructuring plan and the emergence of a potentially deep-pocketed investor in the form of SAL, should investors give Scomi a second chance?
 

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