This article first appeared in The Edge Financial Daily on January 20, 2020

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) seems to have thrown a lifesaver to TH Heavy Engineering Bhd (THHE) that has been in troubled waters for years.

Last week, THHE announced that it had obtained licences from Petronas to participate in certain oil and gas (O&G)-related jobs, after a near-four-year suspension. Petronas did not reveal the reason why it removed the blacklist on THHE.

THHE’s share price staged a rebound; it leapt to a three-year high of 12 sen from six sen.

The three-year licence lasting until Dec 23, 2022 is a critical prerequisite for THHE to again bid for offshore fabrication works locally, having missed out since April 2016 after its non-performance of one Petronas contract.

The new licence should also add to THHE’s reputation overseas, as it shows the company is recognised at home.

So now THHE stands a chance to win new jobs from the national oil firm. However, this does not guarantee a turnaround of the fabricator, as some quarters view it.

THHE still has a lot to do to put its house in order, given its current weak financial health. Furthermore, THHE has not obtained the main contractor status that it lost in 2017.

THHE will have to compete with other fabrication outfits which are likely to have stronger financial muscles and track records.

At a glance of its financials, THHE is having negative cash flow currently — something that will affect its competitiveness in terms of bidding for new jobs.

THHE, under the Practice Note 17 status for three years, has yet to address its high-leveraged balance sheet, also posing another hurdle for it to obtain fresh funding for new contracts.

Uncertainty about regularisation plan

THHE has been granted three extensions to its deadline to submit a regularisation plan to revive its financials. The latest deadline extension by the regulators allows THHE to submit the regularisation plan by April 23 — about three months from now.

This raises concerns if THHE will be able to meet the deadline this time to work out a regularisation plan and execute it to strengthen its financial footing.

On the other hand, THHE has taken measures to restructure its borrowings. As at Sept 30, 2019, THHE’s short-term borrowings were at RM98.88 million and long-term debts stood at RM40 million. Its trade payables grew to RM333.58 million.

In June last year, THHE revealed a scheme of arrangement with its creditors entailing to settle its RM110 million debts via an issue of Islamic irredeemable convertible preference shares (ICPS-i) plus cash.

There was a further recognition of debt waiver amounting to RM78.92 million under its arrangement with its scheme creditors in the scheme.

However, the creditors are unlikely to take up the scheme, accepting ICPS-i, as the settlement unless THHE has put a viable regularisation plan in place to revive the company because the preference shares will be worth much if the fabricator’s prospects remain bleak.

In short, the regularisation plan is the critical element to ensure the progress of the scheme of arrangement.

It is worth noting that Urusharta Jamaah Sdn Bhd, a wholly-owned unit of the ministry of finance, is the company’s single largest shareholder after the special-purpose vehicle took over the equity stake from Lembaga Tabung Haji.

In fact, Urusharta Jamaah is currently holding a big chunk of ICPS-i as a result of the ICPS-i rights issue in September 2015. The ICPS-i will mature on Sept 7, after which these preference shares will be converted into ordinary shares in THHE, bumping up Urusharta Jamaah’s shareholding to 64.44% from 29.8%.

This means that should THHE’s regularisation plan involve a rights issue to raise fresh capital, its major shareholder Urusharta Jamaah will have to pump in more money to recapitalise the company. Will the government agency do so?

Shipbuilding jobs offer temporary reprieve

In its search for sustainable business, THHE had relied on overseas projects and non-O&G-related shipbuilding and repairing works locally, in the absence of the Petronas licences in recent years.

The group has two contracts, both ending in 2020: construction of three offshore patrol vessels worth RM738.9 million for the Malaysian Maritime Enforcement Agency by its 49%-owned joint venture THHE Destini Sdn Bhd, and another US$11.4 million (RM47.4 million) fabrication subcontract for an offshore process platform project in India.

The group is in the midst of constructing a Multiple Use Slipway with multiple berths at its 56.79-acre (22.98ha) fabrication yard in Pulau Indah, Selangor, to allow shipbuilding and repair works on ships with displacement of up to 2,500 tonnes.

“As most of these tenders involve various agencies, the company is working closely with its new major shareholder (Urusharta Jamaah) to facilitate the procurement and expansion of these new contracts,” THHE said in June 2019.

It has been reported THHE is also bidding for a RM220 million job to build 18 fast interceptor craft for the Royal Malaysian Navy.

Nonetheless, the venture into shipbuilding has steered the company to be profitable.

For the nine-month period ended Sept 30, 2019, THHE’s net profit was RM9.77 million, while revenue stood at RM35.48 million.

Unfortunately the figure was minute, compared to its accumulated losses of RM587 million as at Sept 30 last year.

Despite the recent spike, THHE is still a far cry from its peak at above 90 sen in 2014, giving it a market capitalisation of more than RM1 billion then.

Until it resolves its cash flow position and debt levels, THHE is still on a poor footing and may not be fit to utilise the O&G industry upcycle, some quarters said.