This article first appeared in The Edge Malaysia Weekly on July 20, 2020 - July 26, 2020

THERE seems to be a cloud hanging over Scomi Group Bhd (Scomi). A few weeks ago, construction giant IJM Corp Bhd sold off its entire 21.39% stake (233.99 million shares) in the ailing oil and gas and engineering company.

The 21.39% block held by IJM was sold at three sen a share or a total of RM7.02 million to SBI Spectrum Sdn Bhd, the vehicle of current Scomi CEO Sammy Tse Kwok Fai.

To recap, in mid-2012, IJM subscribed for 119.11 million new shares or a 10% stake in Scomi for RM39.3 million, or 33 sen a share. It also subscribed for redeemable convertible secured bonds of RM110 million. The bonds were converted into new shares at 36.5 sen apiece in January 2017, when Scomi shares were trading at 15 sen apiece, and IJM’s shareholding swelled to 24.4% from 7.66%.

When IJM converted the Scomi bonds, there were sceptics who felt that the construction company was better off cutting its losses and moving on, leaving Scomi to fend for itself.

IJM is one of the largest construction players in the country, with a market capitalisation in excess of RM6 billion, and its largest shareholder with a 16.13% stake is the Employees Provident Fund.

With the departure of IJM, a long-standing pillar of strength for the Practice Note 17 (PN17) counter, what lies in store for Scomi?

The Edge reached out to Tse, seeking to find out what plans he had for Scomi, but he was reluctant to speak.

A source close to the company says, “There is potential for growth in the company but it would be speculative to comment just yet.”

While the source may seem optimistic, the general consensus is the opposite. Scomi ended trading last Thursday at 3.5 sen, translating into a market capitalisation of RM33.6 million.

Can Tse revive Scomi?

Tse was appointed an executive director of Scomi in July 2018 and a month later was made CEO. The initial assumption was that Tse was the frontman for Hong Kong-based businessmen to buy into Scomi. This, however, never happened.

While certain quarters say talks are still ongoing for a new shareholder to come into Scomi, the question is, why didn’t it occur  earlier — two years ago when Tse came in? The current weak and volatile oil price may dampen the company’s prospects.

When IJM bought into Scomi more than eight years ago, Brent crude oil prices were US$75 a barrel, in contrast with current levels of US$43 a barrel and half of that in April this year.

Tse seems to have his work cut out for him. Just after taking over the 21.39% stake in Scomi, Tse’s SBI Spectrum entered into a loan agreement with the former for the provision of financial assistance amounting to RM1 million.

According to Scomi, the RM1 million is for working capital requirements, and carries an interest rate of 8% per annum, with a repayment period of six months.

It is also noteworthy that RM2 million of unencumbered shares of Scomi Energy Services Bhd (SESB) — an associate company of Scomi — have been used as collateral for the loan. Scomi has a 29.42% stake in SESB.

While some may say that Tse is showing a certain level of confidence in Scomi, others point out that he was paid a salary and allowances of RM1.75 million in FY2019, the bulk of the RM2.21 million paid to directors. To put things in perspective, over the past 12 quarters, Scomi has suffered losses in 10 of them.

As Scomi has changed its financial year-end from end-March to end-June, there are no comparative figures for its latest results. For the period until March 2020, the company suffered a net loss of RM132.67 million from RM232.02 million in sales.

Scomi’s balance sheet is uninspiring as well. As at end-March this year, the company had cash and bank balances of RM2.19 million, while on the other side of its balance sheet, it had long-term debt commitments of RM215,000 and short-term borrowings of RM211,000.

As at end-March this year, Scomi had accumulated losses of RM309.37 million. During the period in review, it used up RM54.52 million in cash flows from operating activities.

Plans likely to have gone awry

In May last year, Scomi had announced corporate restructuring plans, which entailed a reduction in share capital, a consolidation of shares and a renounceable rights issue of 1.19 billion shares at 18 sen. Warrants would be used as a sweetener, on the basis of one warrant for every three rights.

The plan was to raise at least RM75.59 million to meet the minimum funding requirements of Scomi, and more importantly, IJM was supposed to subscribe for its entitlement of 254.3 million rights shares in full. At 18 sen apiece, IJM’s portion based on the 21.39% stake would work out to RM45.77 million.

There was also a proposed restricted issue of up to 215.1 million shares with 71.7 million free warrants at 19 sen to Tan Sri Wan Azmi Wan Hamzah and his vehicle Gelombang Global Sdn Bhd (GGSB). Wan Azmi had gone as far as to provide a RM21 million loan to Scomi in July 2019 as part of its proposal to reduce its liabilities and improve its capital base.

Wan Azmi and GGSB’s loans are securitised against 435.23 million shares in SESB owned by Scomi. Scomi defaulted and Wan Azmi now has an 18% stake in SESB.

With IJM out of the picture, what happens to the proposal?

There are also a slew of court cases, including one in which SESB has claimed RM54.52 million from Scomi.

Scomi’s unit, Scomi Engineering Bhd, which is in the monorail business, was wound up earlier this year after it was served a winding-up petition in late 2018 by Gemilang Coachwork Sdn Bhd, which is claiming RM7.17 million from it.

Scomi Engineering was at one time touted to be a big revenue generator, with businesses in India and Brazil among others, but those plans seem to have fallen through.

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