5th July 2014
THE oil and gas (O&G) industry may be in vogue for investors, but Eversendai Corp Bhd’s foray into the sector has not really piqued investor interest. In May, Eversendai announced it had bagged contracts for the construction of two liftboats valued at RM580mil.
Liftboats are generally self-propelled working barges that are used in a wide array of offshore jobs.
Eversendai group executive chairman Tan Sri A.K. Nathan describes the venture of building liftboats as a “breakthrough” on the premise that his is the first Malaysian company to do so.
Building and owning liftboats is a niche business in this part of the region. The only other company in this business is Singapore-listed Ezion Holdings Ltd, which is the largest liftboat owner in the world. Almost all major liftboat players are from the United States except for Gulf Marine Services, which has a base in the Middle East.
But can Eversendai successfully venture into this business? “Eversendai is traditionally known for its expertise in construction for steel and building structures. Can it pull this one off?,” quips one analyst covering the stock.
Eversendai shares are trading at 98.5 sen with a market cap of RM762.2mil. This is over 40% down from its 52-week high of RM1.75 recorded in July last year. The stock had traded to a 52-week low of 88 sen in March.
Hong Leong Investment Bank (HLIB) Research reckons that Eversendai’s share price has priced in expectations for contract flows and that it would take earnings recovery in the coming quarters to regain investor confidence after a weak first quarter of financial year 2014 (FY14). Eversendai’s net profit for the first quarter of this year fell 54% to RM10.99mil from RM23.68mil a year ago.
“Although the recent contract wins are welcome news and could help to make up for the weak first quarter, we believe execution would be key in investor perception,” the research firm said in an end-May report after Eversendai’s offshore unit secured the liftboat jobs from Vahana Offshore (S) Pte Ltd – a company wholly owned by Nathan.
The liftboats – named Aryan and Arjun – are expected to be ready in February and May 2016, respectively. Each liftboat will have a rectangular hull and four 95m truss-type legs with electric drives and pinion jacks that will allow it to jack up to a depth of 70m. There will also be a 300-tonne crane and accommodation for up to 150 people.
The units will be built at Eversendai’s fabrication yard on a waterfront land measuring approximately 200,000 sq m with 550 m of quayside in Ras Al Khaimah, the United Arab Emirates (UAE).
Nathan dispels pessimism that the company does not have the know-how to undertake the project. “Close to half the job scope in building the liftboats involve steel structures, where we have a stellar reputation. The hull and jack-up legs, for instance, are made of steel and we have the expertise for it,” he tells StarBizWeek. For the specialised areas of propel, control and jacking systems, the company has engaged the right expertise, he adds.
On why he chose to be the owner of the two liftboats through Vahana Offshore, Nathan says he is taking on a personal risk to first create a track record, given that liftboats are a relatively new concept in this part of the region. “We have a few offers on the table from parties expressing interest in our liftboats, but we have not struck a deal yet. Demand is picking up and we are confident,” he says.
Nathan is Eversendai’s founder and major shareholder with a 70.9% stake. The company’s other shareholders are the Employees Provident Fund with an 8.1% interest and Lembaga Tabung Haji with 5.2%.
Eversendai needs little introduction for its involvement in many iconic developments locally and overseas such as the Petronas Twin Towers and the Burj Khalifa in Dubai, UAE. Eversendai has a strong presence in the Middle East, with the bulk of its earnings coming from this market.
“We have built all types of complex steel structures since the 1980s, and in 2000, we moved into mechanical erection work for power plants. When I look at topsides in the O&G sector, I see steel structural works, so I know we can also execute our maiden liftboat project. In fact, it’s more challenging to build a coal-fired power plant,” Nathan enthuses.
Eversendai diversified into the O&G sector two years ago. Nathan says he has spent the last two years working tirelessly to scale up this business segment.
Acceptance rising
Analysts note that the concept of liftboats is fairly new but gaining acceptance in the O&G world. There are currently only two liftboats operating in Malaysia which are owned by SGX-listed Ezion and contracted to Petroliam Nasional Bhd (Petronas), according to Credit Lyonnais Securities Asia (CLSA) in a recent report. The irony is that Malaysia is touted to be the biggest capital expenditure (capex) story in Asia, with Petronas’ promise to ramp up its capex to a minimum of RM300bil from 2011 to 2015.
“The liftboat potential in this market is immense if there is the ability to break through the mindset of Petronas and its profit-sharing contract partners in expanding the use of a liftboat beyond accommodation,” noted CLSA. The firm noted that the liftboat in Malaysia is used mainly for its accomodation capacity, as accomodation barges are scarce here. Analysts reckon that demand for liftboats would grow as ageing production platforms need to be replaced.
However, CLSA noted that the economics of using a liftboat is attractive both for the client as well as the owner. “The payback for such an asset for the owner is relatively short, between 3½-years to 4½ years,” it pointed out. Liftboat day-charter rates are said to range between US$45,000 (RM143,300) and US$60,000 (RM191,067) per day, according to reports.
For the client, there are cost savings as being self-propelled, liftboats are more mobile and do not require the use of tug boats as opposed to jack-ups. The availability of cranes on the liftboats also means that clients need not charter high-cost derrick barges, which, in turn, can bring down costs.
Ezion’s earnings, which has shot up from S$13mil (RM33mil) in 2009 to S$160mil (RM409mil) in 2013, reflect the prospects of the liftboat venture. The company’s share price has also risen in tandem from 0.09 cents in 2009 to S$2.10, giving it a market value of S$2.78bil (RM7.10bil) as at the time of writing. A large number of Ezion’s 30-over vessels are liftboats.
Interestingly, Malaysian tycoon Tan Sri Quek Leng Chan of the Hong Leong group recently invested in Ezion, reinforcing the view of upside in the field. It has been speculated that Ezion could team up with offshore support vessel operator Alam Maritim Resources Bhd – in which Quek and parties linked to him have a 15.35% interest – to tap into the Malaysian liftboat services market, where Ezion has struggled to break through in a big way.
HLIB Research noted that liftboats could reap higher net margins of some 20% for Eversendai as opposed to margins of between 10% and 15% garnered from its existing divisions. Notably, the RM580mil contract is also the single-largest contract the company has secured since its listing in mid-2011, bringing its orderbook to RM1.7bil to date.
Assuming a conservative 10% net margin, Maybank Research forecasts between RM2mil and RM8mil per year net contribution in FY14 to FY15.
Nathan believes that the liftboats would spur its foray into related segments like jack-up rigs, floating production, storage and offloading services, and refurbishment and maintenance that would provide recurring income.
The company is bidding for O&G contracts worth some US$850mil (RM2.7bil) in the Middle East, Europe and Asia.
“By 2017, our O&G business should contribute 50% of earnings and help us achieve the RM2bil revenue target set,” he says. The other half is expected to come from the traditional structural steel and power plant businesses.
For investors, on the other hand, the “buy in” would come after execution. The testimony, perhaps, would arrive when the company obtains an order from a third party.
[Source]
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