Times are exciting for the shipbuilding industry as a direct consequence of investments within the oil and gas sector.
Malaysia’s oil and gas (O&G) players are well buoyed by Petroliam Nasional Bhd’s (Petronas) RM300 billion five-year capital expenditure (capex) plans.
The country plans to develop 100 marginal fields and conduct four offshore enhanced oil recovery (EOR) projects.
With more than 130 new fields discovered, and more than eight billion barrels oil equivalent (BOE) resources discovered as of 2013, Petronas’ exploration efforts will continue at a steady pace, with 160 wells drilled during 2009 to 2013.
This encouraged offshore support vessel (OSV) providers such as Icon Offshore Bhd (Icon Offshore) – the largest OSV provider for the oil and gas industry here – to throw their hat in the game with its proposed listing on the Main Market of Bursa Malaysia in the near future.
Could this impending listing be a sign of better times ahead for shipbuilders, especially OSV manufacturers?
During its prospectus launch on May 30, Icon Offshore said it is well-positioned to benefit from robust Malaysian and Southeast Asian oil and gas industry outlook, supported by strong demand for OSVs.
The company pointed out several of its future strategies included consolidating its position in shallow water space while selectively expansion into deepwater projects and drive revenue growth through selective fleet expansion, diversification, and renewal programme to capture market opportunities that are presented to the company.
Besides that, Icon Offshore explained that most of the funds raised through its shares sale via the initial public offering (IPO) will be utilised to expand its vessel fleet.
The company owns a total of 32 ships and has one of the youngest fleet in the region with an average age of 5.1 years compared with other players in the Southeast Asia region which have an average age of 10 years.
Icon Offshore said it has four vessels under construction and is in negotiation to buy four more vessels by next year with one vessel to be disposed off, bringing its total fleet to 39 by the end of 2015.
This development indeed provides the much needed boost for shipbuilders as they look forward to receiving higher orders for the manufacturing of more vessels, especially OSVs and other type of vessels for the oil and gas industry for deepwater operations.
Hence, companies that are likely to benefit include home-grown TAS Offshore Bhd, Shin Yang Shipping Corporation Bhd, Sealink International Bhd and Sabah-based Coastal Contracts Bhd.
Therefore, fuelled by more capital expenditure by oil and gas players to further enhance exploration and production activities especially in deepwater, the shipbuilding industry could be riding on an exciting time ahead.
Outlook for shipbuilding, ship repair sector
According to an industry report, local shipbuilders are currently engaged in building larger and relatively more complex vessels.
Countries in the Southeast Asia region, it said, are the main destination for the export of Malaysian-built vessels. The new built vessels are also delivered to buyers in US, Africa and Europe.
Through Singapore, Malaysia’s vessels are said to be sold to shipping companies in Australia, UK and other European countries.
Additionally, the report observed that among the shipbuilding or ship repair industry, the OSV sector is a highly localised and competitive segment within the wider marine services market.
The report highlighted that back in 2011, the industry that consists of ship builders, ship repairers and marine equipment manufacturers recorded about RM7.05 billion in revenue.
In particular, industry players in East Malaysia continued to play a significant role by contributing 51 per cent of the 2011 revenue. At the same time, the shipbuilding or ship repair industry has attracted investments worth RM6 billion in 2011 as approved by the Ministry of International Trade and Industry.
After the recession, which hit hard on shipping businesses in 2009 as a result of the world financial crisis, global demand for new vessels are expected to grow by 26 per cent in the next few years.
The growth of fleets around the world has led to a direct impact on global demand for ship repair services since more ships are in operation. Hence, this scenario will give rise to higher demand for repair and maintenance work.
The report also revealed that in 2011, revenue amounted to RM1.3 billion was derived from the ship repair sector which contributed 18 per cent to ship building and ship repair’s total revenue.
On another note, after the global financial crisis, ship conversion business experienced a shortage of supplies from the highly demanded ship repair market.
It noted that companies were pushed to fulfill the high market demand with the conversion of oil tanker from single hulled to double hulled to respond to the urgent situation of rising market demand.
Some of the single hulled large oil tankers were also converted into floating production, storage and offloading (FPSO) vessels platforms adding that about 70 per cent of current FPSOs are the result of conversion from the former single hulled large oil tankers.
With the shipbuilding market likely to be replaced by double-hulled carriers, the report noted the conversion market is poised to enter a new phase as the country progress towards achieving Vision 2020.
In the meantime, the government under the Economic Transformation Programme (ETP) has set the Malaysian Shipbuilding and Shiprepair Industry Strategic Plan 2020 to enable shipbuilders to move up the value chain in the industry.
The targets include developing a niche in building medium-size vessels particularly
OSVs and gaining respectable shares in the global market for ship repairing market in the Straits of Malacca and offshore oil and gas industry repair market in the South China Sea. Additionally, the government in Budget 2014 said it will formulate a Logistics Sector Master Plan.
The Logistics Sector Master Plan will provide the strategic direction for the development of logistics infrastructure and supply chain as well as review of regulations and laws.
To support this development, the government said it will allocate RM3 billion in soft loans under the Maritime Development Fund through Bank Pembangunan Malaysia.
The fund will provide financing to encourage the development of the shipping industry, shipyard construction, oil and gas as well as maritime-related support activities, it said.
Therefore, with more services and job opportunities, this will enhance the industry’s prospects to the international market for shipping given the global environment and the small domestic market in Malaysia.
SHIN YANG SHIPPING
Local-based Shin Yang Shipping Corporation Bhd is hopeful of charting steady growth ahead through expansion of shipyard facilities and vessel fleets to achieve sustainable growth in the midst of a challenging environment.
“The challenge for the group is to further improve its efficiency and productivity.The group shall continue to work on achieving and realising the full use of its resources.
“The prospects for the shipping industry continue to remain challenging and the group is prepared with sustainable and market driven routes for its fleet movements.
“We also believe that the shipping industry will benefit from the steady growth especially with the projects to be started off under the Sarawak Corridor of Renewable Energy (SCORE), to tap into the business of transporting raw materials from Bintulu to Samalaju Industrial Park,” Shin Yang said.
Furthermore, existing oil palm and reforestation plantation, heavy industries, downstream processing industries are continuously expanding.
“Hence, the need for sea transportation provides a vital link to the international markets is crucial since we are still a net exporting country.
Shin Yang noted that while it continues to pursue expansion, it is also mindful of managing its operational costs as it will also be an important priority in the coming quarters.
The company believed that it will continue to thrive and learn from the challenging time whilst capitalising on the strength of the economies of scale of its operations by controlling its costs well in order to remain stable as a reputable shipping player.
The group has planned out its capital expenditures for the next one to two years as well as its medium and long term strategies for expansion.
Currently, it has about RM710 million of new vessels building and constructing contracts for completion and delivery over the next one and half years.
When asked further on the company fs expectations to secure any new jobs or customers from the oil and gas industry, Shin Yang noted that the company is always in discussions and negotiations with potential parties for more vessels construction locally and abroad.
Shin Yang revealed that the company at present has a total fleet size of 297 vessels.
Those vessels include 72 AHT of which 12 are currently stationed and working in the Middle East regions for projects works and chartering to oil and gas players.
Apart from that, Shin Yang said there are also 18 containers vessels plying in South East Asia region and East Malaysia as well as 18 cargo vessels for dry bulk plying Far East regions.
Besides that, the group has four crude palm oil (CPO) tankers and three sets of CPO barges and tug.
As for the international shipping market, Shin Yang observed that the shipping industry is facing a dilemma in the dry bulk segment due to plunging rates for carrying commodities products and container shipping.
The company said the global vessels over-capacity has further hampered freight rates for container shipping lines.
For the domestic market, Shin Yang observed that the performance of shipping companies is much more below expectation due to weakening freight rates and increasing bunker costs added with higher compliance requirements.
“Given the current global economy situation, the sector is expected to be in rough conditions.
“We see the shipping industry to be in a very challenging position and in order to sustain in the sector, players must be able to stand firm to its commitments, responsibilities and meet its objective to comply with the shipper fs requirements.
“We believe that the strength of domestic and coastal shipping demand would keep our economy growing.
“The economy is expected to remain robust with our export-oriented to Intra-Asean trade and increased export to China.
“Other challenges for the shipping industry include weathering the economic crisis faced by many shipping companies, especially due to the slow recovery of the Baltic Dry Index (BDI) coupled with increasing inflationary pressure due to rising commodity prices including bunker costs has put pressure for the industry to sustain its growth, h Shin Yang noted.
Despite experienced some rebound for higher container handled and dry bulk trades in the past, Shin Yang pointed out that the those signs have not occurred on a sustainable basis for analysts to be convinced that the shipping industry is well on its recovery path.
TAS Offshore is upbeat on new demand for OSV with higher technical specifications for deep sea operation for the oil and gas industry.
The company said it will expand its built-for-sale activities and expanding its tugboats market primarily to Indonesia besides venturing to Papua New Guinea.
TAS Offshore foresees the demand for tugboats from the mining and timber industries in Indonesia to remain encouraging.
“Based on the contracts secured by us and those of other shipyards, it seems that the demand for OSV and tug boats remains positive. We will seek to enhance our market share growth by focusing on our shipbuilding activities.
“Growth is expected to be supported by the demand in tugboats coming from the mining and timber industries and OSV sought after by oil majors for the deep sea oil exploration and production activities.
“Our current contract on hand will last into financial year 2015. In addition, we are involved with the built-for-sale business model which provides better returns.
“Besides actively prospecting for new clients from the new market segments to add to our customer base to enhance our sales growth, we are also searching for good opportunities to diversify our business activities,” TAS Offshore said.
In financial year 2013, TAS Offshore said it delivered 12 tugboats, one harbour tug, one AHTS and one landing craft.
As at August 2013, the company has a total orderbook of more than RM363 million comprising RM270 million for AHTS, RM4.5 million for tugboat, RM15.6 million for harbour tug and RM73.2 million for offshore vessels.
Likewise, the company in several filings to Bursa Malaysia between October 2013 and March 2014 said it has secured contracts for vessels sale for a total of RM51.2 million.
The contracts are the sale of one unit of AHTS worth RM38 million and one unit of utility tug valued at RM13.2 million.
Coastal Contracts is another player working hard to materialise more opportunities from the O&G upstream value chain.
Coastal Contracts chairman Ng Chin Heng said currently, the group is executing its expansion plan through a two-pronged approach, which is extending its participation in the lucractive upstream sector and scaling up its OSV shipbuilding value chain.
“The market for OSVs has been very encouraging with higher selling prices and stronger delivery orders underpinning our prospects.
“Furthermore, we note a growing preference for higher-specification and larger capacity newbuilds in line with the industry’s increasing technical demands.
“We believe we are well-prepared in propelling our way towards a sunrise sector,” he said.
Ng said the group is also in the midst of fabricating a US$210 million high-specification jack-up rig, representing its maiden foray into the rig building and chartering sector and is expected to be completed by the fourth quarter of 2014.
Due to the company’s versatility and economic benefits, its high specification jack-up rig has garnered keen interest by a number of oil and gas players.
As such, Coastal Contracts will continue to own and operate more lucrative offshore assets which may include jack-up gas compression service unit (JUGCSU), jack-up drilling rig, mobile offshore production unit (MOPU), or even a floating production unit or floating drilling rig in the future.
Ng is confident with the market demand for more JUGCSU, Coastal Contracts expects more units of the JUGCSU will be required in the Gulf of Mexico under Mexico state-owned oil corporation Petroleos Mexicanos (Pemex)’s long term strategic plan for gas management.
Furthermore, he is also confident with the offshore production solutions market in Southeast Asia.
In Malaysia, he pointed out fourteen oil fields (four of the oil fields are located offshore Sabah and Sarawak) that has been identified under enhanced oil recovery (EOR) initiative.
With the group fs strategically located fabrication yard in Sabah, Ng said Coastal group fs competitive edge in the offshore production solutions market will be further enhanced.
Sealink International Bhd, another home-grown shipbuilder also shared similar views with other shipbuilders reckoning that the oil and gas industry will present more opportunities for the firm to increase its businesses.
Chief executive officer Yong Kiam Sam in the company’s latest Annual Report observed its chartering division actively participating in tenders for contracts which are likely to be awarded in the second half of 2014.
“Charter rates have remain relatively flat due to the current oversupply of OSVs in the market.
“However, with the anticipated award of the OSV contracts by end of 2014, we expect a gradual strengthening of the charter rates, which will have a positive impact to the group.
“We believe the increased O&G activities and demand for offshore marine support vessels in Malaysia and the region will augur well for Sealink.
“If the demand for offshore marine support vessels can be sustained in the near term, we expect an upward pressure on charter rates, which would then have a positive impact for Sealink Group, h he said.
To further bolster its ship charter sector, Yong said Sealink is working with several parties in the oil and gas sector to form strategic business alliances.
“This would enable Sealink group to capture a higher share of the chartering business of offshore marine support vessels in Malaysia, h he added. “This alliance would also positively benefit Sealink group in the future.
Yong also said Sealink Group’s shipbuilding division has embarked into building newer and larger vessels which are in compliance with the new requirements, rules and regulations.
Yong noted that the change was vital for Sealink group to remain ahead of its competitors and to keep abreast with the shift to larger vessels for the deep water operations.
“We believe the change will augur well for Sealink group and will also increase our profitability in the future.
“Construction of these new designs has started and will keep our shipbuilding division busy for the next few years. h.
FINANCIAL PERFORMANCE AND ANALYSTS OBSERVATION
As for companies financial performances in the first quarter of 2014 (1Q14), among the four companies, the net profit of Shin Yang by far has made the most improvement.
Shin Yang has managed to return to the black with a net profit of RM5.64 million in its third quarter financial year 2014 (3QFY14) or 1Q14 compared with a loss of RM3.89 million registered in the same quarter last year, a significant improvement by more than 200 per cent.
The shipping company attributed the turnaround of its earnings to higher profit contribution from its shipbuilding and ship repair segment as a result of more vessels delivered and more vessels repair works in the reporting quarter.
Shin Yang observed that its turnover for 3QFY14 also improved 28 per cent year-on-year (y-o-y) to RM282.7 million attributed to higher revenue generated from the sale of new build ship with three units of vessels delivered and increase in vessels repair works for its ship repair segment as well as higher income from container shipping segment in the reporting quarter.
TAS Offshore which reported its latest financial results said its net profit for its 3QFY14 jumped 99 per cent to RM10.46 million.
The company also witnessed its turnover for 3QFY14 rising 177 per cent to RM114.29 million.
TAS Offshore explained that the higher turnover achieved was due to sales from the completion and delivery of two units of AHTS vessels, one unit of harbour tug and two units of tugboats.
At the same period, Coastal Contracts net profit increased 58 per cent y-o-y to RM49.16 million while revenue grew by 33 per cent to RM224.7 million in 1Q14.
Coastal Contracts attributed the sales of different mix of vessels and higher margins to its healthy earnings while revenue increased due to higher number of vessels delivered in 1Q14 as compared with 1Q13.
On the same note, Sealink Group’s 1Q14 net profit increased 7.7 per cent to RM4.65 million.
However, the shipbuilding company’s revenue in 1Q14 declined by 28 per cent y-o-y to RM36 million from RM50.5 million in 1Q13.
Sealink noted that while it recorded higher income for its ship charter division, its shipbuilding division’s revenue was substantially lower due to less contracts received for shipbuilding and the delivery of completed vessels to customers.
Apparently, the situation has dragged down the group’s overall revenue for 1Q14. For financial year 2014, the company believes that revenue from more works arising from contract extensions and sales from hybrid vessels will contribute positively to the group’s overall financial performance for 2014.
Judging by their financial performance, a research firm, RHB Research Institute Sdn Bhd (RHB Research) – which covers TAS Offshore and Coastal Contracts – opined that both companies will be able to maintain their strong earnings.
TAS Offshore future prospects remain intact supported by its RM330 million strong orderbook as at end of February, it said.
The research firm noted that the company could potentially benefit more by capitalising on the lower tax system in Labuan by channelling vessels of bigger sizes under its wholly-owned subsidiary in Labuan, TA Ventures (L) Ltd.
It said the company will gain from lower effective taxes at around 15 per cent when its Labuan subsidiary starts recognising greater profits in financial year 2015.
RHB Research said, gWe continue to be positive on the prospects of the oil and gas sector and TAS Offshore fs strong fundamentals, supported by its strong earnings growth, potentially higher margins arising from its build-to-stock model and its ability to capitalise on Labuan fs low tax sytem, h the research firm said in a March report.
The research firm in another report said the company fs earnings could potentially surge in financial year 2015 upon the delivery of its build-to-stock vessels to its clients as its profitability has been factored in when the company secured the orders.
As for Coastal Contracts, RHB Research said its latest orderbook of RM2.4 bilion provides a 13-year earnings projection for the company.
The research firm said Coastal Contract fs jack-up drilling rig once completed by the end of this year and being chartered will provide another re-rating catalyst for the company.
It noted that the company fs jack-up rig has already attracted chartering interest from local and international oil and gas players including South America second largest oil corporation Mexico-based Pemex.