KUALA LUMPUR (Nov 27): Boustead Heavy Industries Corp (KL:BHIC) is selling its 51% stake in Contraves Advanced Devices Sdn Bhd (CAD) to its joint venture partner in the firm, German arms maker Rheinmetall AG for RM54 million cash.

The disposal of the stake will result in a loss of RM14.82 million to BHIC. CAD is a former subcontractor for the littoral combat ship (LCS) project, which has been fraught with delays and cost overruns over the last decade.

In a filing with Bursa on Wednesday, BHIC announced that its wholly owned unit BHIC Defence Technologies Sdn Bhd (BHICDT) and Rheinmetall had inked an agreement for the deal, after lengthy negotiations that started in end-December 2023, when BHIC lost control of CAD.

However, BHIC did not divulge how it lost control of the joint venture, which resulted in the group reclassifying the 51% stake to a “simple investment”. Accordingly, the investment is designated as financial assets carried at fair value through profit or loss.

“The disposal reflects BHIC’s strategic realignment, allowing the group to exit the LCS business, which had become non-core, and redirect resources towards growth-centric defence and commercial opportunities,” BHIC said.

In line with their JV shareholders agreement, in the event of a “deadlock situation” the disposal price is to be based on CAD’s net tangible assets (NTA). The RM54 million price tag, however, is at a 20.9% discount to BHIC’s equity share of CAD’s unaudited net assets of RM68.3 million as at end-December 2023.

Based on CAD’s unaudited financial statement for the financial year ended Dec 31, 2023, the group had RM240.13 million of cash and cash equivalents, RM568.06 million in current assets, as well as making RM25.5 million of profit after tax, on the back of RM103.57 million revenue.

BHIC has earmarked RM31.81 million of the proceeds for future viable investment in the aerospace, marine, weapons and combat systems sectors as well as the commercial segment. Another RM21.67 million in proceeds is to be reserved for working capital.

The disposal is expected to be completed in the first quarter of 2025.

Rheinmetall’s substantial shareholders comprise Societe Generale SA with a 10.97% stake, BlackRock Inc (5.54%), Fidelity Management & Services LLC (4.99%), Goldman Sachs Group (4.69%), Bank of America Corp (4.64%) and UBS Group AG (3.83%).

CAD, together with its wholly owned unit Contraves Electrodynamics Sdn Bhd (CED), had their contracts for the procurement, engineering, integration and supply of equipment and weaponry for the six LCS terminated by project contractor Boustead Naval Shipyard Sdn Bhd — now known as Lumut Naval Shipyard (LNS) — in August 2022.

Then, BNS was 68.85%-owned by Boustead Holdings Bhd, BHIC (20.77%) and Lembaga Tabung Angkatan Tentera (10.38%). The shipbuilder, now renamed LNS, is being fully acquired by the Ministry of Finance, Inc-owned Ocean Sunshine Bhd as part of the government’s plan to assume full control of the troubled LCS project.

Ocean Sunshine currently owns a 79.23% stake in LNS. Its RM1 deal to acquire the balance 20.77% from BHIC turned unconditional back in May this year.

It is worth noting that previously CAD and its unit CED had sued BHIC, its directors and BHICDT over the termination of their contracts.

The suit was later struck out. It is understood that this came after BNS paid CAD a settlement to resolve commercial issues in regard to the LCS project. The settlement was previously reported to amount to RM479.72 million.

With the RM14.82 million fair value loss recognised from the CAD disposal, BHIC posted a net loss of RM11.95 million for the third quarter ended Sept 30, 2024 (3QFY2024), bigger than the RM5.72 million in the same quarter last year.

Quarterly revenue surged 86.19% to RM71.7 million from RM38.51 million, mainly thanks to positive contributions from submarine contracts with the Royal Malaysian Navy.

No dividend was declared for the quarter.

For the nine months ended Sept 30 (9MFY2024), BHIC posted a net profit of RM6.55 million versus a net loss of RM7.16 million in the same period last year, as cumulative revenue more than doubled to RM191.81 million from RM77.67 million.

Going forward, BHIC said the government’s continued emphasis on strengthening maritime defence, including initiatives involving helicopters, submarines and defence systems, presents opportunities for the group.

“BHIC remains committed to delivering on these priorities, reinforcing our position as a trusted defence partner and enhancing Malaysia’s standing as a regional leader in defense innovation and capabilities,” it added.

Shares in BHIC ended 1.5 sen or 3.53% higher at 44 sen, valuing the group at RM248.28 million.