This article first appeared in The Edge Malaysia Weekly on June 1, 2020 - June 7, 2020

CASH-strapped TH Heavy Engineering Bhd (THHE), a Practice Note 17 company since April 2017, announced on May 20 that its parent — Ministry of Finance (MoF) owned Urusharta Jamaah Sdn Bhd (UJSB) — was seeking a waiver from making a mandatory general offer for THHE shares it does not own.

The waiver comes about as UJSB is slated to convert 1.1 billion maturing irredeemable convertible preference shares (ICPS) in September, thus increasing its shareholding from 29.8% (334.16 million shares from a 1.12 billion share base) to 64.45% (1.43 billion shares of the enlarged share base of 2.22 billion shares), and trigger a mandatory general offer as UJSB’s shareholding will increase to more than 33%.

THHE says in its announcement, “As UJSB does not intend to undertake a mandatory offer, it intends to seek an exemption from the Securities Commission pursuant to Paragraph 4.08(1)(c) of the Rules from the obligation to undertake the mandatory offer, subject to amongst others, the approval of the non-interested shareholders of THHE for the proposed exemption.”

Many believe Securities Commission Malaysia will grant UJSB the waiver from undertaking the general offer.

“The request for the waiver is from UJSB, a MoF-controlled company, so it is likely to be given. [Furthermore], there has been a lot of leeway given to THHE as well — such as three extensions over two years to get its act together and exit PN17 — so why should the plug be pulled now?” one oil and gas executive says.

It is noteworthy that this is the second time THHE has slipped into PN17 status, having done so before in 2012 and exiting only to be classified again as PN17 five years later, in 2017. Now, it has to submit a regularisation plan by Oct 22.

How UJSB got the stake

To recap, UJSB obtained its shareholding in THHE after it took over the distressed assets of pilgrim fund Lembaga Tabung Haji (TH) at end-2018. UJSB had acquired stakes in 106 listed companies, including THHE, one unlisted plantation counter and 29 properties, including four hotels, and a plot of land at Tun Razak Exchange, for RM19.9 billion.

Meanwhile, the preference shares were acquired as a result of a corporate exercise in February 2015. TH, as THHE’s major shareholder then, had provided an irrevocable and unconditional written undertaking to subscribe in cash for its entitlement of up to 356.44 million ICPS at an issue price of 25 sen each, amounting to RM89.11 million, and up to 743.56 million ICPS at 25 sen each, amounting to a maximum of just less than RM186 million that were not subscribed by the other entitled shareholders. In other words, LTH underwrote THHE’s ICPS, and ended up buying almost all, or 99.77% of the preference shares.

For perspective, if a waiver from making the mandatory general offer is not granted, UJSB would have to fork out at least RM63.2 million cash — based on THHE’s closing price of eight sen last Thursday — to acquire 790 million shares not owned by it.

And that is over and above the premium UJSB paid for TH’s stake in THHE. News reports have it that UJSB had forked out almost RM1.14 per THHE share, or RM380.35 million, at end-2018, while the ICPS were parted with at 28.7 sen or for RM315.45 million.

THHE said in the May 20 announcement that it was not UJSB’s intention to undertake the mandatory offer and that the proceeds of the ICPS had been used for capital expenditure expenses. It added that THHE’s stock would become illiquid if the company shares were privatised and its stock removed from the exchange.

“As such, the proposed exemption — would facilitate the exemption of UJSB from undertaking the mandatory offer thus, allowing the non-interested shareholders of THHE to continue their equity participation in a listed company,” THHE said.

Many corporate personalities hold shares in THHE, although their shareholdings are fragmented.

UJSB is the only substantial shareholder. According to THHE’s FY2018 annual report, as at end-March 2019, Datuk Mohamed Faroz Mohamed Jakel from Jakel Trading, a fabric retailer and more recently a property developer, had 37 million shares or 3.38%; Datuk Seri Hadian Hashim, CEO of Icon Offshore Bhd, held 22.15 million shares (1.98%); Datuk Seri Su-Azian @ Muzaffar Syah Abd Rahman, a director of Protasco Bhd, had 9.8 million shares (0.87%); Edisi Firma Sdn Bhd, the vehicle of Ban Swan Gek and at one time a substantial shareholder of MyEG Services Bhd, controlled 7.72 million shares (0.69%); Quek Kon Sean, the son of billionaire tycoon Tan Sri Quek Leng Chan of the Hong Leong group, had five million shares (0.45%); businessman Datuk Ng Aik Kee owned 4.9 million shares (0.44%) and Pelaburan Mara Bhd held 4.52 million shares (0.4%).

KAF Investment Bank has been appointed independent adviser to the non-interested shareholders on the proposed exemption, which will be voted on at an extraordinary general meeting, the date of which has not been fixed.

Will things change at THHE?

One of the minority shareholders The Edge spoke to says, “They (UJSB) should have some plans considering they will have control of more than 60% of the company.”

A market watcher believes, however, that it would be difficult to give THHE a new lease of life and UJSB may not want to fork out more money for the offshore oil and gas facilities fabricator.

In March this year, THHE announced a regularisation plan, in which it sought to acquire ICE Petroleum Engineering Sdn Bhd, which is involved in fabrication, mechanical engineering works and services, and installation for the oil, gas and petrochemical industries. However, only a memorandum of understanding has been signed.

The MoU entails THHE acquiring ICE Petroleum Ventures Sdn Bhd’s entire 12.86 million shares in ICE Petroleum. For its financial year ended September 2019, ICE Petroleum chalked up an after-tax profit of RM2.75 million from RM217.33 million in revenue.

As at end-September last year, ICE Petroleum had total assets of RM101.22 million and total liabilities of RM80.80 million.

Terms such as the price tag for the acquisition are pending due diligence. However, the most profit ICE Petroleum has recorded is RM3.6 million from RM198.16 million in revenue for its financial year ended March 2018, which means its impact on THHE’s earnings could be limited.

For its financial year ended December 2019, THHE reported a net profit of RM12.4 million from RM56.56 million in revenue. Much of the revenue and profits are attributable to THHE Destini Sdn Bhd, a joint venture between wholly owned THHE Fabricators and Destini Shipbuilding and Engineering Sdn Bhd, which has a RM738.9 million contract for the supply, delivery, testing and commissioning of three units of offshore patrol vessels for the Malaysian Maritime Enforcement Agency.

As at end-December 2019, THHE had cash and cash equivalents of RM26.55 million, short-term borrowings of RM98.66 million and long-term debt commitments amounting to RM40 million. It had accumulated losses of RM584.39 million.

Complicating matters is a series of legal disputes against the company.

On a brighter note, THHE’s wholly owned unit THHE Fabricators was reinstated as a Petronas-licensed company, allowing it to undertake fabrication works, among others, but whether it will help THHE pull through these tough times remains to be seen.

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