This article first appeared in The Edge Malaysia Weekly on April 1, 2024 - April 7, 2024

AFTER more than two years being classified as a Practice Note 17 (PN17) company, EA Technique (M) Bhd (EATech) is confident it will get out of the financially distressed status in the third quarter.

“By hook or by crook, we want to complete the regularisation scheme by July. At the moment, we are waiting for the regulator to approve the current scheme,” its CEO Nasrul Asni Muhammad Dain says.

“Once we are lifted from PN17 status, we can bid for new contracts, especially for the floating storage and offloading (FSO) vessel that will require working capital.

“Fundamentally, in terms of operations, the company is doing well,” he tells The Edge in the company’s office in Setiawangsa.

However, KPMG made an unqualified audit opinion in the company’s audited accounts for the financial year ended Dec 31, 2023 (FY2023). The external auditor drew attention to the fact that EATech’s audited current liabilities of RM327.69 million exceeded its current assets of RM88.66 million, and that the company had repayment obligations of RM136 million due in July.

KPMG, which has indicated its willingness to accept reappointment, has cast doubts on the company’s ability to continue as a going concern given its weak balance sheet and repayment obligations.

When asked about the auditor’s opinion, Nasrul notes that KPMG is not wrong. But he points out that the figures were in FY2023, which does not take into account the regulationsation plan. He adds that EATech’s financial health has improved, that it has never missed payments to the banks, and it has been profitable for six consecutive quarters.

EATech, the operator of a diversified fleet of vessels including an FSO, submitted its regularisation plan to Bursa Malaysia last November.

This is the second plan as the first was withdrawn after a prospective white knight, Tan Sri Abdul Rashid Abdul Manaf, pulled out after it was unveiled to the public. “It was because of personal reasons; it wasn’t about the company,” Nasrul replies to a question on the withdrawal.

The efforts to revive the company’s financials started even before the submission of the regularisation plan.

EATech embarked on a vessel disposal programme in 2022 to raise money to pay off its debts. The divestments were part of the scheme of arrangement between EATech and its scheme creditors. By end-October, it had sold five vessels and raised roughly RM104 million. After deducting RM74.4 million for working capital and capital expenditure, EATech has RM40.08 million to pare down debts.

The latest regulation plan involves the issuance of 795.75 million new ordinary shares at 10 sen each to new investors to raise RM79.5 million, and an employees’ share scheme that entails the issuance of up to 10% of the total number of issued shares in EATech for eligible directors and employees.

Voultier Sdn Bhd will take up a big portion of the new shares and emerge as the largest shareholder with 51% of the enlarged share capital. Voultier is owned by businessman Datuk Wira Mubarak Hussain Akhtar Husni, who holds a 70% stake, and Datuk Lai Keng Onn, who is managing director of Kinergy Advancement Bhd, with 30% equity interest. Voultier will seek an exemption from the obligation to make a mandatory general offer.

Other investors are Lim Shave Huat and Datuk Seri Wong Choon Leong, who will be subscribing for 52.505 million shares or a 4.4% stake, and 33.16 million shares or a 2.5% stake, respectively.

Nasrul, who was brought in by current major shareholder Johor Corp (JCorp) to revive the company, will take up a block of 33.16 million shares or a 2.5% stake.

Nasrul assures that EATech will remain a bumiputera company, that is, a company with a minimum 30% held held by bumiputeras — one of the main requirements for companies to secure Petronas jobs.

“Voultier is 75% owned by a bumi entrepreneur and Sindora is also a bumi shareholder,” he explains.

Johor Corp’s stake is held through Sindora Bhd, a unit of its wholly-owned subsidiary Kulim Bhd. Sindora’s stake will be diluted to 20.02% from 50.05% following the exercise.

JCorp, which is also the company’s largest creditor, has agreed to a 70% haircut. The amount owed to the state-owned entity is RM275 million, which is roughly 87% of ­EATech’s current liabilities.

“With the 70% haircut, we will repay about RM82 million (to Sindora). The amount will be settled by the proceeds from vessel divestment and issuance of shares under the regulation plan,” says Nasrul, adding that the company’s current liabilities will contract substantially once the amount has been paid off.

The former banker’s optimism for the regulation plan partly hinges on the fact that its largest creditor is also the company’s substantial shareholder. This may give it some leeway on repayment terms should the white knights walk out halfway.

Furthermore, the vessel divestments have raised some cash, and more importantly the company is chartering out its vessels at much higher rates now. This means its operations will generate higher earnings in the next two years at least.

“We have a Plan B to address the financial issues in the event the current scheme falls through,” Nasrul says.

EATech has achieved six consecutive quarters of net profit up to the financial quarter ended Dec 31, 2023.

For FY2023, EATech posted RM23.69 million in net profit, compared with RM16.30 million in FY2022 and a net loss of RM150.65 million in FY2021.

Nasrul attributes its performance to improvement in the overall activities in the oil and gas sector. He says the group has garnered better contract margins from recent renewals, and its vessel utilisation rate has soared to 90%. Aside from upstream oil and gas and the FSO segments, the group has also diversified into port marine services, petroleum product shipping, and shipbuilding and repairing, although the latter caters mostly to its own fleet now, he says.

EATech has secured medium to long term time charter contracts of between two and eight years for most of its vessels, including tugboats and offshore service vessels.

“The previous contracts that we have for our vessels are based on a call on basis, whereby we only get payment when there is a job. Now, we are getting it (charter fees) for the whole year of operation,” Nasrul adds.

In terms of charter rates, he says the new contract has seen improvement of between 10% and 15% compared with the previous ones. Nasrul adds that its order book is currently at about RM400 million including extension periods.

EATech has a total of 26 vessels servicing the O&G and marine industries, making it one of the largest vessel owners in the country.

EATech’s financial stress started after it won a US$191.8 million contract in 2015 to convert a vessel into an FSO facility that would have been deployed in the North Malay Basin. The contract awarded by Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) was for the provision of engineering, procurement, construction, installation and commissioning for the FSO.

The contract was at the time the biggest job EATech had ever won. It was expected to be a major breakthrough and help build a good track record. Unfortunately, instead of being an earnings growth driver, the contract caused more financial troubles.

“The main problem was cost overruns,” says Nasrul. He notes, however, that the company completed the project in 2020, although there was a delay.

EATech was later sued by MMHE and required to pay US$25.5 million as a settlement. Its shareholder stepped in to settle the amount.

EATech slipped into a net loss of RM121.14 million in FY2017. It booked a net loss of RM105.5 million in FY2020 and RM150.64 million in FY2021, dragged down by a massive impairment of RM78.9 million in FY2020 and RM135.24 million in FY2021.

The company’s accumulated losses swelled to RM162.2 million in FY2021 and fell to RM122 million in FY2023 due to the annual net profit.

Nasrul explains that the accumulated losses will be reversed once the payables are settled when the 70% haircut on its scheme creditors kicks in.

Things seem to be falling into place at EATech. If the company’s regularisation plan is given the green light by the stock exchange, the worst could be behind the shareholders by the year-end, if not earlier. 

However, existing shareholders will have to suffer a massive dilution before they can enjoy the fruits of the restructuring efforts as the number of new shares issued is equivalent to 60% of the enlarged share capital. EATech’s issued share capital will balloon to 1.326 billion shares from 530.5 million.

“But it is a smaller share of a bigger pie … We should look at it this way. Our share price has rebounded from the low of three sen,” says Nasrul, when asked about the steep dilution. EATech has been searching for new contracts for its FSO since 4QFY2023, and getting one could potentially double the group’s earnings in that quarter, he adds. 

The company’s share price has climbed from a low of three sen in mid-2022. The stock closed at 31 sen last Friday, trading at a price-to-earnings ratio of nearly seven times. Assuming a 10% net profit growth to RM26 million, a back-of-the-envelope calculation shows that its earnings per share will be 1.78 sen, compared with 4.47 sen based on its FY2023 net profit of RM23.69 million on the existing share base of 530.5 million.

Nasrul and his team will have to work really hard to churn out earnings.

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