Saturday, October 6, 2012

Scomi's investment by IJM: Stopping the rot?

Usually I am not very interested in construction companies. This is because I am not able to evaluate how effective these companies are especially when they are evaluated by the total work order at hand. Even work order may not often be translated into substantial profits as who knows what the margins are for the work that these construction companies have secured. One of the few that however gained my interest is IJM. It is a very well managed construction firm with little direct connection to the government - who is the main awarder of contracts in Malaysia for many years. IJM is very well managed that it survived the 1997 - 1998 financial crisis and during then, it was much smaller than Gamuda, Renong, UEM etc.

Some of those names, if you notice did not survive past the crisis. Since then, IJM continued to grow and now, it is no longer just a construction company but a conglomerate with diverse interests. Seeing below, IJM is now a company which is into plantation, property development, construction etc. Its strength,  expertise and brand makes land owners and smaller companies want to work with them. A case in point is now Trinity (previously Talam) which rode on IJM to complete some of the projects it had not managed to complete.

Today, IJM is not even owned by a single controlling shareholder. The largest shareholder is EPF (16%) with KWAP and PNB together form the 3 substantial shareholders. In fact, all the 30 top shareholders - not one of them is an individual. The fact is, the management and owners do not really connect in terms of who is in control. Management works for the shareholders, while funds such as PNB, EPF, KWAP are just investors. This kind of structure is very often seen in the US and West Europe countries, but seldom seen in Malaysia.

On another note, Scomi was that well connected, (probably) poorly run company which could not have survived pass a once powerful leader (I think many would know who this company is connected to). These kind of stories have been recycled time and time again. Renong, UEM, Gamuda, Ho Hup are some of the few large construction companies which were giant in Malaysia once but are either no longer around or lost their shines. Yes, Gamuda has lost its shine.

While Scomi is not into construction, but it is a similar kind of company with business nature where IJM thrives - i.e. relying on contract awards. Companies as such - when it is well connected, it may get preference in terms of getting contracts. But the biggest problem is what if the connection thingy subsides? IJM like company into the rescue.

Just look at this trend. It failed pass 2009 when Malaysia had a change in Prime Minister - even if the person who took over the premiership is from the same party, things can change so quickly - SEE.

Now, just recently IJM seemed to be putting a small little rescue package for Scomi by injecting RM150 million (RM39.3 million cash + RM110 in convertible bonds) for a 25% stake. Is this an opportunistic move by IJM or is it purely throwing money for nothing? However, just look at it this way. At that price, don't you think is a small fee to pay to be in the oil and gas industry?

I am not surprise by IJM's selldown though as by the debt that Scomi has, it seems like a bad investment.

Scomi's debt

However, as I see it, (for which many may not agree), IJM will look at it as an opportunity to move into the (could be) lucrative but very competitive oil and gas industry instantaneously. As I see it, Scomi has lost its way as it was never meant to be well managed and with the lost of revenue and contracts, it needs one who was less dependent on connections (but with substance) to survive. If you look properly, Scomi already has the ingredient to be a decent sized oil and gas contractor in where it is strong at. It has operations in as many as 27 countries - and to instantly grow that is not easy. But the management side is probably lacking. In an industry where quality and costs control are very very important, IJM is probably the guy.

The biggest challenge here if the intention is noble - which I think it is - is the right mindset for turnaround. And it would definitely be positive for both companies, unlike what the current perception is where Scomi is the beneficiary while IJM is being negatively viewed by this move.


yhtan said...

Beside that, IJM worthy point is the quality of management. Especially during the time Tan Sri Krishnan Tan, he grew IJM with such a size now.

Plantation - Venture in a right time and in cautious mode, end up paying them well. Starting to bear fruits for the group.

Property - On par with other giants like Sime Darby, SP Setia and Mah Sing. Still need some improvement on township planning.

Construction - No contract, no income. That's the negative part of construction company. Still remain one of the core business, this part is very political link when come to government project.

Look at IJM invested into KEuro, years later they won the project. If IJM didn't save KEuro, i don't think they will manage survive till now, i see the investment in KEuro is win-win situation for both parties. A good chess play by IJM.

Well, only time will tell ;)

Malaysia Stock Talk said...

"Yes, Gamuda has lost its shine"

Not so agreeable on this. Gamuda has achieved second consecutive record profit for the past 2 years and possible achieving the 3rd one this financial year.

Global financial meltdown in 2008 could be the main reason for Scomi's poor results in the past 2 years

felicity said...

Probably have not been fair to a company which has LDP, Sprint highway, Smart tunnel (which appeared on National Geography) etc.

However, the "lost its shine" comment is on a company which was a darling stock once upon a time. Nowadays though, probably more investors are more worried over a company which is able to get beautiful projects - is it the ability or is it the connection. For how long more?

As for Scomi, I think using the crisis (as mentioned in its annual report) is a convenient way to tell why it is performing poorly. I think it is more than that!

Malaysia Stock Talk said...
This comment has been removed by the author.
Malaysia Stock Talk said...

Still one of the most capable and efficient contractors.

Compare their performance in the Padang Besar-Ipoh double track project with the contractor who took so long to complete the Ipoh-Rawang stretch at sky high escalated cost.

And the progress of the MRT which very much intact under the PDP model as compared to the LRT extension being undertaken by other party and suffering significant delay

felicity said...

On that I do agree.