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This article first appeared in The Edge Financial Daily on February 24, 2020

KUALA LUMPUR: T7 Global Bhd, the group previously known as Tanjung Offshore Bhd which ventured into the aerospace industry back in 2016, is expecting to see its maiden contribution from the business this year.

This is because 2020 marks the first year of operation for the group’s metal treatment plant in Serendah, Selangor, which should provide it with RM12 million in revenue from the segment for the year, according to the group’s executive director-cum- vice president for aerospace and corporate affairs, Tan Kay Vin.

This revenue estimation is based on the RM70 million worth of bids the group sent out based on the requests for quotation it had received, said Tan, who is also hoping that the group would be able to see the segment’s revenue contribution doubling to RM24 million in 2021.

The plant in Serendah is capable of bringing in a revenue of RM50 million per annum if it is running at full capacity. During a recent tour of the plant, Tan told The Edge Financial Daily that he expects the group to reach this level of capacity in three to four years.

T7 Global made its first step into the aerospace segment after inking a memorandum of understanding (MoU) with UK-based aerospace components manufacturer Kilgour Metal Treatments Ltd in December 2016 to pursue business opportunities in metal treatments. The MoU paved the way for an eventual 60:40 joint venture with Kilgour to set up a specialised metal treatment plant that will provide, among others, non-destructive testing, aluminium etching, and chrome-plating for aerospace parts to aerospace parts manufacturers.

With the plant now in action, Tan said the group is positive on the aerospace venture as it sees it as a ‘future growth’ segment and expects the business to provide long-term sustainability to the group. It will also act as a cushion to any negative impact from the oil and gas (O&G) sector’s cyclical nature.

T7 Global fell into the red for its financial year ended Dec 31, 2015 (FY15) with a net loss of RM76.26 million, compared to a net profit of RM1.06 million for FY14, as revenue sank 43% to RM60.68 million from RM107.35 million, amid higher operating expenses. The year 2015 was the year the Brent crude oil price slumped below US$50 per barrel to average around US$53 that whole year, in contrast to an average of about US$99 recorded in 2014 and US$108 in 2013.

“Oil and gas is our main business and we will continue to grow [it]. But due to the cyclical fluctuation in the nature of the oil and gas industry ... Besides, we know fossil fuels will run out one day. [So] as a group, we need to look for alternatives,” Tan said. “The aerospace industry is one of the things that we came across. It is sustainable and highly profitable … it is a new industry for our country as well as for this region,” he added.

Its potential is such that T7 Global envisions it can grow the business into one whose revenue contribution “can match with the O&G segment”, said Tan. O&G made up about 88% of the group’s revenue for FY18, when revenue came in at RM210.44 million, up 3% from FY17’s RM204.5 million. The group made a net profit of RM7.66 million for FY18, about four times the RM1.88 million it recorded for FY17, thanks to better profit margin.

The aerospace segment should be able to further lift the group’s profitability for FY20, said Tan, as it provides a gross profit margin of between 20% and 30%. In contrast, the group reported a gross profit margin of about 15% for FY18, with a net margin of 5.02% — mainly because the O&G segment is highly competitive. Still, FY18’s net profit margin was a big improvement to FY17’s, which was at 2.77%.

However, for the first nine months of FY19, the group’s net profit slumped 90% to RM415,000 from RM4.29 million a year ago, despite revenue rising 3% to RM171.07 million from RM165.57 million. The group said the weaker earnings were due to the issue of timing for the recognition of profit from its O&G projects.

Serendah Phase 2 in the works, another cash call possible

Meanwhile, upbeat about the aerospace business’ prospect, Tan said the group is planning to expand its Serendah plant, which is already giving the group “first mover advantage”, as there is rising demand for metal treatment services even while the industry is still relatively new in this region. Hence, the group’s plan for a Phase 2 to the Serendah plant, said Tan.

The group has spent over RM30 million on the metal treatment plant so far — the bulk of it raised from a private placement completed last June — and plans to invest up to RM20 million more. It will look at the possibility of another round of cash call to fund the expansion, as well as to further support its core O&G business.

Just two weeks ago on Feb 10, it proposed a private placement of up to 10% of its total issued shares to raise up to RM22 million to fund its on-going projects. These include its three-year contract with Sarawak Shell Bhd and Sabah Shell Petroleum Co Ltd, the five-year contract with Vestigo Petroleum Sdn Bhd, as well as the provision of third-party manpower services to MDC Oil & Gas (SK320) Ltd, an entity of Mubadala Petroleum.

It was the group’s second cash call in less than 12 months, after it completed the June private placement that involved 20% of its issued shares, which raised RM34.2 million for the group to use in the setting up of the Serendah plant and as working capital for its aerospace business.

T7 Global shares closed unchanged at 46.5 sen last Friday, giving it a market capitalisation of RM229.13 million.

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