Destined for turnaround
Restructuring and acquisition see Destini’s bottom line improving
AFTER a series of restructuring exercises and a shift into the commercial sector, Destini Bhd, formerly known as Satang Holdings Bhd, is seeing a turnaround.
The company that mainly serves the defence, marine, aviation and oil and gas (O&G) industries recorded a compounded annual growth rate (CAGR) of 40% in turnover between 2010 and 2014.
Group managing director Datuk Rozabil Abdul Rahman says the company is confident of securing more contracts for the provision of tubular handling equipment and running services in the O&G industry, despite the volatile market condition and slump in oil prices.
“We fully acquired tubular handling services provider Samudra Oil Services Sdn Bhd for RM80mil via shares early last year. This was timely as the acquisition allowed us to secure some contracts from the Pan Malaysia cluster of jobs when the oil price was about US$105 (RM397.3) per barrel,” Rozabil tells StarBizWeek in an interview.
Destini bagged Pan Malaysia contracts worth RM800mil to provide tubular handling services for 18 rigs for a period of five years. However, with the drop in the oil price and cost-cutting measures by national oil company Petroliam Nasional Bhd (Petronas) last year, the company is left with jobs for only eight rigs now, says the 43-year-old Rozabil, who has a direct and indirect 31.6% stake in the group via BPH Capital Sdn Bhd.
“The acquisition of Samudra is a strategic move to enter the O&G market and bodes well for our hopes to be an integrated engineering solutions provider globally,” he says, adding that it has ventured into Vietnam, Myanmar and the Middle East after the takeover.
“For the next three years, we will focus on Myanmar and the Middle-East markets,” says Rozabil.
Destini has a footprint in the United Arab Emirates (UAE) when it took over Singapore-based Techno Fibre Pte Ltd in 2013. The group formed a joint-venture (JV) company with several O&G players in the UAE to carry out tubular handling services there.
Rozabil says Destini has managed to get “a paid trial job” from Abu Dhabi Oil Co, scheduled to start this July 25.
“Once they are satisfied with our job, the company is on track to secure 20 rigs with a contract value of US$10mil.
“Saudi Arabia has not reduced its production of oil. So, Destini must leverage on this, with a bigger plan to tap into the Saudi Arabia market,” says Rozabil.
Vanguard which was acquired by Destini in 2013, manufactures life boats, fast rescue boats, davits systems and hooks.
In Myanmar, the group secured jobs for tubular handling services worth US$4mil for five rigs three weeks ago from a major O&G player.
In addition to that, it has also submitted its tender to provide tubular handling services for 66 rigs in Myanmar to a Thai-based petroleum exploration and production company that operates projects worldwide. The contract value for this is US$32mil.
Despite recording a CAGR of 40% in turnover between the financial years ended December 2012 and 2014, Destini’s profit margins have been narrowing.
For the financial year 2014, the group’s net profit climbed 33.6% to RM14.52mil from RM10.87mil a year ago. This was on the back of a revenue that had surged 79.2% to RM167.26mil from RM93.31mil in 2013.
In 2012, Destini registered a net profit of RM7.05mil on a turnover of RM56.8mil.
Rozabil attributes the narrowing profit margins from 2012 to 2014 to the group incurring higher costs due to its expansion.
“We had spent quite a bit in expanding our business segments since 2012 and faced fluctuations in demand patterns for both the marine and O&G sectors. This led us to outsource certain jobs to cope with high demands for our products and services,” he points out.
A look at the latest quarterly results shows that Destini has cash and cash equivalents of RM23.9mil, while its long and short-term borrowings are at RM33.8mil. It has trade payables of RM70.2mil and receivables of RM23.3mil, indicating that the business is capital-intensive.
“This business is capital-intensive and that is another reason why margins are low,” says Rozabil.
Expansion into high-barrier and niche markets
Destini’s expansion into aviation and marine is tied to its core business of providing maintenance, repair and overhaul (MRO) services for safety and survival equipment. Among the areas that the MRO services cover are life jackets and ejection seats in aircraft.
“Being an MRO provider, we have to compete with foreign firms, but the only way to stand out is to enter high-barrier and niche markets,” he points out.
On the marine side, it took over Singapore-based Techno Fibre (S) Pte Ltd and Vanguard Composite Engineering Pte Ltd in 2013.
Vanguard manufactures lifeboats, fast rescue boats, davits systems and hooks, while Techno Fibre provides MRO services relating to lifeboats, davits, load-testing equipment and fire safety. The two companies have presence in over 10 countries globally.
“We bought the two companies to reduce our reliance on Government contracts and it’s a gateway to a wider network of O&G industries,” he says, adding that O&G firms offer premium prices for Destini’s products and services.
The group intends to make Vanguard its wholly owned unit by acquiring the remaining 49% interest within this month.
Meanwhile, Destini’s recent RM90mil proposed acquisition of Destination Marine Services Sdn Bhd (DMS) is expected to generate new revenue streams for the group.
DMS already has in its hands a RM381.3mil contract from the Malaysian Maritime Enforcement Agency to build six units of new-generation patrol craft over three years.
In addition, DMS is equipped with a six-acre shipyard in Port Klang that can build vessels up to 400 tonnes. This provides sufficient space for Vanguard to set up its outfit in Malaysia, says Rozabil. The group hopes to materialise this by December.
On the aviation front, the group expanded into the commercial aviation market when it bought 80% of SafeAir Technical Sdn Bhd through Destini Aviation Sdn Bhd (DASB) last month. It formed a JV company with Avia Technique, United Kingdom, to provide line maintenance and MRO components for the aviation industry.
Line maintenance is a daily inspection by technical specialists on an aircraft to ensure that it is fit to fly.
SafeAir is certified by the Department of Civil Aviation in Malaysia, Singapore, the Phillipines and Thailand.
Based on its present customer base, the company is handling about 5,000 turnarounds per year.
“We are in the midst of negotiating with a major low-cost carrier that will increase the number of turnarounds to about 60,000 per year,” he reveals.
In November last year, Destini tied up with Thales Asia Holding Pte Ltd, a move that it hopes will open more opportunities in the aviation industry.
Rozabil says Destini was involved in a successful development programme with Forges De Zeebrugge SA (FZ), a unit of Thales Group in Belgium, to install the FZ Rocket Systems on Royal Malaysian Air Force F/A-18D and Hawk aircraft.
In 2013, Destini was awarded a RM46mil FZ Rocket Systems procurement contract, to be delivered in batches till 2016.
Thales is a global technology leader in defence and security, and aerospace and transport markets, while FZ is a European leader for air-to-ground rocket systems and rocket ammunition. Its technologies have been historically used in more than 55 countries.
As at June 30, Destini’s total tender book was about RM600mil.
In 2014, the aviation sector’s contribution to group revenue was 44%, while marine was 27%, followed by O&G with 28% and automative, 2%.
Rozabil became the group managing director of Satang Holdings in January 2011. The name was changed to Destini in 2012.
At that time, almost 100% of its income was derived from the Defence Ministry.
Rozabil had gone on a restructuring plan and rebranding exercise to bring the company to where it is now and diversify its income.
Datuk Freddy Lim Nyuk Sang holds 11.7% in Destini. He is also the chief executive officer and non-independent executive director of palm oil firm Kretam Holdings Bhd, while UOB Kay Hian (Hong Kong) Ltd holds 10.7% and Merrill Lynch International 5.1%.
Although the name Destini is perhaps not synonymous with its nature of business, the company has a string of contracts to keep it going. It also has a management that seems focused on increasing shareholder value.
The stock was at its highest on June 30, 2014 at 74 sen.
It is now trading at a price-to-earnings ratio of 32.24 times, according to Bloomberg.
The counter closed up 15 sen or 2.54% to 61 sen yesterday, with a market capitalisation of RM488.7mil.