AMID dwindling orders and stiff competition at home, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) is looking to diversify its geographical reach and reduce its reliance on the oil and gas industry by growing its marine business unit (MBU).

“One of the things that I’m looking at for our long-term strategy is how we can diversify from O&G. Right now, we are looking to diversify from offshore structure construction,” says MMHE’s newly appointed managing director and CEO, Abu Fitri Abdul Jalil, who replaced Frenchman Dominique de Soras in March.

“Marine is one area that we can expand into because we have been doing very well there,” he adds.

MBU contributes about 20% to MMHE’s top and bottom lines annually. For the financial year ended Dec 31, 2014 (FY2014), the business recorded revenue of RM320.8 million and operating profit of RM32.8 million. The group, meanwhile, saw revenue of RM2.7 billion and operating profit of RM122.6 million.

Fitri says while the overall capacity utilisation of its fabrication yard stands at about 60%, its marine dry dock is operating at more than 90% capacity, signifying brisk business.

Currently, MMHE (fundamental: 1.40; valuation: 1.10) has two dry docks with the capacity to take in about 100 vessels a year. The group wants to add another dry dock at its facility in Teluk Ramunia with an estimated investment of about RM500 million.

“We had to reject some 20% of available jobs because of capacity constraints. If we can increase our marine business, we can reduce our reliance on O&G,” says Fitri.

The MBU is said to be less affected by a low crude oil price environment and cuts in capital expenditure by oil majors. In the first quarter of this year, it was the group’s saving grace.

On Jan 12, the division secured an en bloc contract from South Korea’s Pan Ocean to repair and refurbish six very large crude carriers this year. It was MMHE’s only major contract win for the first quarter.

The group recorded a net profit of RM129.9 million in FY2014, 45% lower than the RM236.5 million reported in FY2013. This was due to its inability to sufficiently replenish its order book.

In fact, MMHE’s net profit has been falling since FY2012. It recorded a net profit of RM242 million in FY2012, 27.6% lower than that in FY2011. In FY2013, its net profit was about 2% lower than in the year before.

The group’s order book has also fallen, by 78% from RM7.3 billion in FY2009 ended March 31 to RM1.6 billion in FY2014 ended Dec 31. Its current order book will only last until the third quarter of next year, says Fitri.

MMHE only managed to secure RM356 million of orders last year, compared with close to RM3 billion in 2011.

Market observers wonder why MMHE is struggling to secure more orders despite its strong shareholders and ample yard capacity. It is 66.5% owned by MISC Bhd, Petroliam Nasional Bhd’s shipping arm, while French O&G engineering firm Technip SA holds an 8.5% stake.

Fitri attributes the problem to the market downturn due to low crude oil prices and the fact that Petronas cannot give contracts to MMHE directly. There are at least seven other O&G fabrication yards in Malaysia vying for the same jobs.

“The domestic construction and fabrication business has its limitations. It is not like we are constructing and fabricating every day. The domestic market is so limited and it has so many players. Petronas has to split the pie,” he says.

Besides growing its MBU, MMHE is also diversifying its geographical reach by bidding for jobs in the Middle East and Canada, says Fitri. Out of its current tender book of about RM7 billion, 60% are overseas jobs, he adds.

However, Fitri acknowledges that MMHE has not gained traction outside Malaysia yet. In the past, it had secured overseas projects through Petronas, such as the construction of the national oil company’s yard in Turkmenistan.

“In this region, people know us. But when we go to the Middle East and Africa, we are nobody. So, we have to get ourselves qualified first. That means we need to have the capability and capacity to undertake jobs with complex structures.

“If we don’t have the capacity and capability, we will not be able to compete overseas. The fact that we are able to bid overseas is already a big step. At the end of the day, it boils down to cost. When we look at cost, we have to look at what our advantages are,” says Fitri.

He explains that over the last few years, MMHE has been constructing complex structures, such as the SK316 central processing platform and wellhead platform, and Malikai tension leg platform. The experience it gained from building these structures has allowed the group to compete overseas, he points out.

In the international field, MMHE is competing against cost-competitive O&G fabricators from China and South Korea. These contractors have a cost advantage as they can secure steel from their domestic producers, says Fitri.

“Yes, it will be tough, as tough as competing with the overseas players here. At least we know what we are up against.

“In this particular case, we already have international competition here, which gives us the opportunity to size ourselves up and look at what we can do to improve. In a way, it has given MMHE the opportunity to identify the areas.”

According to MMHE, it has the biggest and most advanced O&G fabrication yard in the country. But as long as that advantage does not translate into stronger orders and better earnings, investors will continue to be wary of putting their money in the group.

At its closing price of RM1.21 last Thursday, with a market capitalisation of RM1.94 billion, the counter had lost 69% of its value since listing in October 2010.

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

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