This article first appeared in The Edge Malaysia Weekly on July 27, 2020 - August 2, 2020

IN an interview with The Edge in February last year, IJM Corp Bhd’s then CEO and managing director Datuk Soam Heng Choon said, “Everyone is wiser with the benefit of hindsight,” when asked if he would have prevented the conglomerate from buying into Scomi Group Bhd if he could turn back time.

The writing had been on the wall for several years before IJM finally decided to sell its 21.4% stake in the loss-making oil and gas (O&G) and engineering group on June 25. In fact, the investing fraternity had raised concerns about IJM’s move to hold on to its investment in Scomi over the last few years.

Thus, the recent announcement came as a welcome surprise to many. So what prompted IJM to finally decide to cut its losses and sell the stake?

According to people who are privy to IJM’s plans for its investment in Scomi, the group was committed to resuscitating Scomi by agreeing to subscribe to its portion of the rights issue proposed in May last year.

However, as there was no progress on the rights issue for more than six months and when Scomi slipped into Practice Note 17 (PN17) status in January this year, IJM decided to call it a day.

“IJM is an institutionalised company. It has a strict procedure that the board has to follow when making decisions that may affect the group’s value. So when Scomi was classified as a PN17 listed issuer in January, they [could not] propose to continue with the investment anymore,” one of the people tells The Edge.

Another says IJM was reluctant to put more money into Scomi after it became the largest shareholder in the group in February 2016. This happened after it converted RM110 million worth of redeemable secured bonds into 348.87 million shares then, increasing its stake to 24.59% from 7.66%.

After Scomi’s share capital consolidation exercise and issuance of new shares pursuant to its merger with Scomi Engineering Bhd in February 2018, IJM’s stake in Scomi was reduced to 21.43%, but it remained the largest shareholder.

The bonds were part of the investments undertaken by IJM in Scomi in September 2012. In the subscription agreement entered into by the two parties, IJM subscribed to 119.11 million shares for RM39.3 million, or 33 sen per share.

The bonds had a tenure of three years and a 0% coupon rate. When converted into shares, they carried a yield of 5% per year. The conversion price was set at 36.5 sen per share.

When the bonds were converted into shares in February 2016, Scomi’s shares were trading at around 17 sen per share.

“From the onset, IJM was clear that it didn’t want to put further money into Scomi. However, when things got worse for Scomi, IJM decided to support the group through the rights issue. But still, it didn’t work,” the person says.

Why the rights issue failed

In May last year, Scomi announced that the group proposed to undertake several corporate exercises to rationalise its financial position and proactively manage its capital structure. The exercise involved the reduction of Scomi’s share capital to RM40 million from RM224.96 million, to give rise to a total credit of RM184.96 million that may be utilised to set off against future losses of the group.

It also involved a plan to issue up to 1.189 billion rights shares together with 396.3 million warrants to raise a minimum of RM75.59 million. The issuance would be undertaken if the minimum subscription of 419.94 million rights shares and 139.98 million warrants could be achieved.

IJM, Scomi’s CEO Sammy Tse Kwok Fai and Sharp Ascend Ltd had undertaken to subscribe to 303.27 million units of the rights issuance, for a combined RM54.59 million. IJM would have subscribed to the largest portion of RM31.6 million.

Scomi’s management had to seek additional undertakings from existing substantial shareholders and/or new investors to meet the minimum subscription requirement. It could have failed to do so, resulting in the rights issue not going through.

It should be noted that the board of Scomi led the resuscitation plans with the support of major shareholders and investors, including IJM. But when the process took too long, one source privy to the matter says IJM started to lose confidence in the plan.

“IJM did not want to wait further, after more than six months since the rights issue was proposed. Then came the PN17 status in January this year that debilitated the resuscitation plan,” says one of the people involved in the corporate exercise.

“When a company is classified as PN17, a lot of things cannot be done. Its share price had then also dropped further to around four sen per share, which affected the proposal, as the rights issue was proposed at 18 sen per share.

“No banker would want to fund an investor to participate in the rights issuance of a PN17-status company. The company will also find it hard to secure margin financing for its working capital,” says the person.

This raises the question of whether it is in the best interests of shareholders, including minority shareholders, for Bursa Malaysia to be too strict and play by the book when it comes to companies whose major shareholders are working towards normalising their financials.

When contacted, an IJM spokesman says the PN17 status was one of the factors that derailed Scomi’s resuscitation efforts as it had an adverse impact on the company’s share price and rights issue exercise.

For IJM, it is in its strategy to deliver lasting value to its stakeholders by building and nurturing a portfolio of businesses and assets, he says. “This strategy may include, from time to time, exploring various investment proposals to acquire, enhance or dispose of assets.”

The spokesman adds that the timing of the disposal of the stake in Scomi is in line with the execution of its strategic focus on monetising low-yielding assets, cost optimisation and driving business growth through expansion.

“The divestment will enable us to further prioritise and reinforce efforts in our core business areas,” the spokesman says.

Over the years, IJM has progressively accounted for its share of annual losses from Scomi. The recent disposal gave rise to a loss of RM4.2 million.

It has proven to be an expensive eight-year affair for the construction, property and plantation conglomerate. Going forward, will it be able to find new candidates to fulfil its O&G dream?

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