WITH A potential merger of the Scomi group of companies on the cards, the focus is on whether SCOMI GROUP BHD will be able to re-establish itself as the darling of investors.

Scomi Group is trying to kill two birds with one stone via the corporate exercise - unlock value for the shareholders and consolidate its balance sheet.

The group of companies comprises four listed entities, three in Malaysia and one in Indonesia.

They are the parent company, Scomi Group, Scomi Engineering Bhd , Scomi Energy Services Bhd and PT Rig Tenders Indonesia Tbk, which is listed on the Indonesian stock exchange.

Note that Scomi Group is the single largest shareholder in Scomi Engineering, Scomi Energy and PT Rig Tenders with equity interests of 72.33%, 65.65% and 80.54%, respectively.

The merger, which involves the three listed entities on Bursa Malaysia, is expected to streamline Scomi Group’s operations and finances, as the group refocuses its strategy on its two new growth engines moving forward – rail and renewable energy.

The corporate restructuring process will see total debt currently owed by Scomi Engineering (RM526mil) and Scomi Energy (RM245mil) being consolidated and undertaken by the parent company.

According to sources, upon completion of the exercise, which also entails a share consolidation and a bonus issue of warrants, the group’s gearing ratio could trend lower at a range of 0.7 to 0.8 times, from 1.34 times in financial year 2017 (FY17).

In addition, assets under the two subsidiaries will also be consolidated, providing Scomi Group with a stronger balance sheet.

Speaking with StarBizWeek, Scomi Group chief financial officer Mukhnizam Mahmud says that a stronger balance sheet in asset value is crucial for the group.

“Moving forward, as we expand further into non-oil and gas (O&G) businesses such as the monorail and renewable energy segments, we need a good balance sheet to support us.

“We may look at relevant asset sales to improve our cashflow and to raise funds for our expansion in future,” he says, while adding that cost-saving measures will also be taken to streamline its finances.

Via the merger, Scomi Group is projected to have a market capitalisation of RM600mil to RM1bil, compared with RM219mil currently.

The consolidation exercise is also timely, considering the fact that all four listed entities of the Scomi group of companies are in the red.

In its FY17 ended March 31, Scomi Group sank for the first time in four years into a net loss of RM107.6mil from a net profit position of RM22.5mil in the previous financial year.

This was on the back of a lower top line, which declined by 37% year-on-year (y-o-y) to RM862.9mil from RM1.38bil a year ago.

Reflective of the tough operational environment faced by the industry, the counter’s share price has dropped by nearly 23% over the last one year.

Moving into FY18, Scomi Group is expected to see a slow recovery, if any, as challenging macroeconomic conditions are anticipated to continue.

“The challenging global trends will be further felt in FY18 and are anticipated to have a profound impact on the energy and logistics sectors.

“Hence, the recovery is likely to be slow in FY18 and vulnerable to any potential developments in the global socio-political environment. This scenario is likely to persist in the near and possibly, medium term,” Scomi Group says in its FY17 annual report.

Scomi Energy, which primarily serves the upstream value chain of the O&G industry, has also taken a hit both operationally and financially, following the subdued oil price environment.

In FY17, the company’s net loss widened to RM126.39mil from RM2.73mil a year earlier, due to a lower top line.

Its overall revenue was down by 42.09% y-o-y to RM700.06mil from RM1.21bil in FY16, primarily attributed to its drilling and marine services segments which posted lower revenue contribution.

Share price-wise, the counter has been trading lower by 35% over the past one-year period.

On the other hand, Scomi Engineering has performed well with regard to its share price movement. The counter has surged 76% in the past 52 weeks, albeit a poorer financial performance.

Its net loss in FY17 widened to RM19.76mil from RM1.84mil previously and this was due to the reversing of certain claims, unrealised foreign-exchange losses, lower work done in the rail segment and lower sales in the commercial vehicle segment.

The top line was 6.68% y-o-y lower at RM162.88mil.

The company, which is continuously eyeing opportunities both domestically and internationally, has submitted monorail bids in Thailand and Turkey. It is also on the lookout for opportunities in other potential markets such as Brazil, India and China.

The Indonesia-listed PT Rig Tenders was also loss-making in FY17, with its net loss widening to US$12.95mil from US$12.15mil a year earlier.