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Saturday, 24 June 2017

(The Star) Cash-rich Silk Holdings

Company now sitting on RM365mil following sale of highway

It is certainly a good problem to have – having money and needing to figure out what to buy with it.

This is the dilemma currently faced by oil and gas company Silk Holdings Bhd following the completion of the sale of its highway, – the Silk highway – to Permodalan Nasional Bhd (PNB) for RM380mil. Following the completion of this deal on April 28, Silk is now sitting on a pretty pile of RM365mil in cash.

So on Thursday, Silk announced it will be using a portion of the proceeds for a special dividend. Initially, it had allocated RM70.15mil to distribute as a cash dividend of 10 sen a share.

In its Bursa filing on Thursday though, Silk said it would be giving out an extra 5 sen as interim dividend on top of the 10 sen dividend, hence bringing the total payout to 15 sen a share.

On the same day, during its AGM and EGM, Silk shareholders approved a dividend reinvestment plan (DRP), awarding shareholders an option to buy new shares in the company using their dividend proceeds.

Silk also locked the issue price of the new shares under the DRP at 32 sen per share.

This represents a 9.25% discount to the adjusted five-day volume-weighted average market price of the shares immediately prior to the price-fixing date.

This looks like Silk may be able to raise more funds again, as the issuance of the new shares are more or less a rights issue. So with more money likely coming in, although at an unknown quantum for now, investors will definitely want to know what Silk plans to do with its pile of money?

Silk has said it will spend some RM200mil to strengthen its oil and gas business. This gives it another RM90mil to go shopping around for a new business.

“Quite frankly we haven’t decided what we want to acquire. However, we are very open to looking at a new sort of business. As you can see, we have made a name change –Marine & General.

“The ‘General’ is an indication that we are looking to diversify,” Silk executive chairman Datuk Azlan Mohd Hashim told reporters after the company’s AGM and EGM.

Silk’s proposed name change to Marine & General Bhd has been approved by shareholders.




Azlan: ‘Quite frankly, we haven’t decided what we want to acquire. However, we are very open to looking at a new sort of business.’



Azlan adds that while Silk is open to acquiring a new business, he wouldn’t want the new venture to be too far out from Silk’s core competency.

“The opportunities are always there. We could look at the logistics or a non-marine sector. Something which is profitable and cashflow accretive, that would definitely be under consideration,” he says.

More importantly, Azlan says that with the cash proceeds, this enables Silk to strengthen and give flexibility to its financial position, particularly in the oil and gas segment.

Turnaround in O&G

Following the disposal of its entire equity interest in Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd to PNB, the group’s remaining business activities are primarily the provision of vessel charter services serving the upstream oil and gas industry via the offshore support vessel services subsidiaries, Jasa Merin (M) Sdn Bhd and its subsidiaries, and the downstream oil and gas sector via the chemical vessel subsidiary, Jasa Merin (Labuan) Plc.

Accordingly, the division, previously termed as the oil and gas support services division, is now classified as the marine logistics – upstream division while the division previously termed as the marine logistics services division has been renamed as the marine logistics – downstream division.

Now, to only have the oil and gas business isn’t exactly inspiring, considering the poor performance of the sector over the last three years.

Azlan says the worst is now over, and things are bottoming out.

He expects this financial year ended Dec 31, 2017 (FY17), to be a lot better than what it was in FY16, as there are now early signs of improvements.

For its first quarter to March 31, 2017, net losses widened to RM17.07mil from RM7.7mil previously.

Revenue also dropped to RM30.7mil from RM46.89mil previously.

This was mainly contributed by its upstream division, which recorded higher pre-tax losses of RM35.7mil during the period.

For the financial year ended Dec 31, 2016, Silk made losses of RM74.39mil on the back of RM303.92mil in revenue.

This was on the back of higher depreciation, amortisation, finance costs and vessel impairment charges.

Certainly, Silk’s earnings track record have never been great. Profits were lumpy, and even for the years that it made profits, it was never very much.

This was because during the duration that it still owned the highway business, and despite the highway operations turning cashflow positive since 2008, the bulk of those returns went toward repaying bond holders.

“It is early days but after two years of a downturn, things are getting better. Tenders are now being called,” says Azlan.

“Right now, our marine upstream sector has stabilised at a utilisation rate of 50%. It was a lot worse last year.

“Meanwhile we have a 100% utilisation rate for our downstream marine sector, with relatively long term contracts,” says Azlan.

He adds that for FY17, Silk will also benefit from the full contribution of the downstream sector - this was not fully consolidated in the last financial year, as it only commenced operations in the second quarter of the year.

The downstream division operates three chemical tankers.

“Furthermore, when we recorded our poor results last year, our utilisation rate for the upstream sector was below 50% last year,” says Azlan.

On a potential mergers and acquisition exercise with another company, Azlan says Silk was not opposed to it, however there would need to be synergies.

“It must be a proper match, where both parties will reap benefits.

“We will definitely consider a consolidation if it means a win-win situation for both parties,” says Azlan.

The DRP plan

Meanwhile, after its 20th AGM and EGM on Thursday, Silk shareholders approved a DRP, awarding shareholders an option to buy new shares in the company using their dividend proceeds.

Apart from this, shareholders also approved a share buy-back authority to purchase up to 10% of the issued share capital of Silk.

Silk says its board of directors decided that the DRP was applicable to the entire portion of the dividends.

Silk also locked the issue price of the new shares under the DRP at 32 sen per share.

This represents a 9.25% discount to the adjusted five-day volume-weighted average market price (VWAP) of the shares immediately prior to the price-fixing date.

“The five-day VWAP of the shares immediately prior to the price-fixing date of RM0.5026 adjusted for the dividends per share of 15 sen is RM0.3526,” Silk says.

The company will be submitting an application to the stock exchange for the listing of and quotation for the new shares under the DRP.

The fixing of the issue price of 32 sen could be a reason why shares in Silk did not rally upon the announcement of the special dividend.

In a way, this provides a cap to the share price’s upside, as it means the subsequent new Silk shares will be listed at 32 sen.

As shareholders are also given an option to use the dividend proceeds to subscribe to the new shares (which are at a cheap price), in a way this also encourages shareholders to use their proceeds to reinvest in the company.