CONSTRUCTION group Eversendai Corp Bhd’s plans to inject a liftboat business into the group will see it facing a challenging operating environment.

While its target of the new segment contributing at least 25% to the company’s profit looks to be achievable, Eversendai will have to contend with low oil prices and capital expenditure cuts by oil majors.

Eversendai, which is involved in structural steel works and energy businesses, is paying RM235 million to acquire the entire issued and paid-up capital of Vahana Offshore (M) Sdn Bhd from its founder and chairman/managing director Tan Sri A K Nathan in a related-party transaction. The deal will be satisfied via the issuance of 770.49 million new redeemable convertible preference shares (RCPS) at 30.5 sen each.

At RM235 million, the purchase sum is 48 times Vahana Offshore’s net profit of RM4.9 million for the financial year ended Dec 31, 2019 (FY2019). For FY2018, it incurred a net loss of RM5.34 million. Net profit margin came in at 10.1% for FY2019, a reversal from -31.2% for FY2018.

Incorporated in May 2013, Vahana Offshore is engaged in the operation, chartering and management of liftboats, marine vessels, tugs and barges. As at end-December 2019, it had current liabilities of RM708.99 million versus current assets of RM11.89 million.

An analyst, who declined to be named, says Eversendai will have to provide enough incentives for its minority shareholders under the deal. “It’s such a big deal involving a related-party transaction. You should give a profit guarantee to protect the minority shareholders. It (Eversendai) has to show the minority shareholders that this acquisition is earnings accretive and won’t increase its gearing.”

As at Dec 31, 2019, Eversendai’s gearing stood at 1.3 times and is expected to increase to 1.51 times after the proposed acquisition and a one-for-two free warrants exercise.

“There will be a depreciation when the liftboats start operating, so you have to make sure that it will generate enough revenue to offset the cost,” the analyst adds.

Another analyst is concerned over the outlook for Vahana Offshore in the current low oil price environment. “Charter rates will come under pressure given that oil majors are cutting capital expenditure, hence the new segment is unlikely to significantly lift its financial performance.

“Eversendai is already operating in a very competitive environment with low profit margins. Its construction business is not doing well, and now it is injecting an oil-and gas-related business, which is not doing so well,” he explains.

A K Nathan, through Vahana Holdings Sdn Bhd, holds a 71.11% stake in Eversendai. Urusharta Jamaah Sdn Bhd is the second largest shareholder with a 5.16% stake.

As interested parties, Vahana Holdings, A K Nathan and his son Narishnath Nathan will abstain from voting on the proposed acquisition and diversification at an extraordinary general meeting to be convened later. BDO Capital Consultants Sdn Bhd has been appointed the independent adviser for the transaction.

Given the potential headwinds in the liftboat segment, it remains to be seen if the minority shareholders would be convinced by the proposed deal, which was first announced in February. The price tag was revealed on June 30.

In its filing with the stock exchange, Eversendai says the offshore liftboat services market is a niche segment in the offshore O&G industry. Liftboats are commonly used to perform maintenance on O&G well platforms.

Vahana Offshore owns a liftboat called Vahana Aryan while another, known as Vahana Arjun, is under construction and targeted to be completed and commence its operation by June 2021.

Vahana Aryan and Vahana Arjun have secured five-year charter contracts with Zamil Offshore to work in Saudi Aramco projects, starting in June 2020 and June 2021 respectively.

Vahana Offshore’s principal market is the Arabian Gulf — United Arab Emirates, Saudi Arabia, Kuwait and Qatar — which accounted for 99.58% of its total revenue in FY2019.

Meanwhile, Eversendai, whose order book stands at a record high of RM2.9 billion, reported a net loss of RM10.15 million for the first quarter ended March 31, 2020, compared with a net profit of RM11.14 million in the previous corresponding period, mainly due to unrealised foreign-exchange losses amounting to RM11.4 million.

This is the second quarterly loss in a row for the group. Last year, its net profit plunged 80.5% to RM13.7 million from RM70.24 million the year before, on the back of a loss of RM49.5 million in the energy sector. The lower earnings in 2019 were due to inadequate utilisation of Eversendai’s fabrication yard in Ras Al Khaimah, the United Arab Emirates.

The company’s external auditors, Messrs Baker Tilly Monteiro Heng PLT, had expressed a qualified opinion in its financial statements ended Dec 31, 2019, partly due to the adverse changes in the O&G market and continuous losses incurred by its energy segment.

Eversendai’s share price has jumped 93.1% from a low of 14.5 sen in March. Year to date, the stock has fallen 29.1%, closing at 28 sen last Thursday and giving the company a market capitalisation of RM218.7 million.