An ace up its sleeve
The Star(BizWeek)
6 June 2007

THERE is certainly an argument to be made for striking while the iron is hot, especially in a sector generating as much buzz as the oil and gas industry. With oil prices hovering around US$60 per barrel, exploration and production spending on the up and up and the Trans-Peninsula Pipeline poised to revolutionise logistics in the sector, it's certainly heating up for oil and gas players in Malaysia. 

With that in mind, there is bound to be heightened demand for services both up and down the sector's value chain in the near future. That's where Ramunia Holdings Bhd comes in. 

Ramunia is a Johor-based fabricator of oil and gas structures, the gargantuan rigs perched atop the ocean that harvest black gold from its briny depths. The company makes jackets and topsides, while also providing services including commissioning and maintenance for offshore installations. 

As the sector booms, Ramunia is one of the companies that you've probably heard about a lot in recent months – and you're about to hear a whole lot more. 

That's because the company is perfectly poised to cater for the upswing in demand that is set to rear its head. Unlike most companies seeking to cash in a particular sector that's swiftly heating up, Ramunia already has an ace up its sleeve. It's the one little word it can whisper in the ear of prospective suitors and those bidding for its services alike: capacity. 

What it boils down to is the size of Ramunia's fabrication yard. Located on the east coast of Johor's southern tip, its location shelters it from the potentially destructive attentions of monsoons in the South China Sea, while it is in close proximity to Malaysian oil fields as well as ports in Johor Bahru and Singapore. 
Most notably, however, the 170 acre yard is the largest in Malaysia and South-East Asia. 

“Size matters!” is the enthusiastic take of chief financial controller Mohamad Reezal Siddiq. “It means you can take on big structures, and that is where we are positioning Ramunia. We've all got all the important elements that make up a good yard, such as a long wharf area to load and unload big structures, water depth, and size.” 

The yard's deep sea front allows Ramunia to load its products directly aboard vessels. It has a 836 metre (m) quay with current water depths between 3m and 9m, with the option for further dredging to increase depths up to 12m or 15m in order to accommodate bigger structures such as floaters and semi-submersibles. 

Ramunia's two previous yards come up to 90 acres, which the company is currently operating at 50% capacity. The company recently added a third yard which increases its total yard size to the aforementioned 170 acres (see sidebar), adding an additional 80 acres of unused capacity at just the right time. 

Under the waves 

Because of the time required to fabricate the likes of jackets and topsides, the work going on at yards around the world is a reflection of orders placed between two and three years ago. Before the relevant structures are constructed, a host of other work must be undertaken, beginning with exploration (see attached value chain).  

Currently, heightened exploration activities are justified by the backdrop of rising crude oil prices. With this in mind, Ramunia has identified a three to five-year window during which it anticipates a glut of new fabrication projects on a massive scale. 

There are 10 open deepwater blocks located off Sabah and Sarawak, the first of which (the Kikeh field) will begin pumping oil in the third quarter of this year. In the next three to four years, Petronas will offer a further six or seven blocks. Ramunia is one of just seven Petronas-licensed major fabricators that can bid for fabrication works. 

“The numbers boggle the mind,” says Reezal. He's not kidding – according to the company, upcoming local deepwater projects with proven reserves amount to RM42bil as at January 2007. At the same time, deepwater blocks currently under field study are worth a further RM30.5bil. 

That's a whopping RM70.5bil worth of deepwater projects on the horizon. Of course, that figure is the cost of developing the entire block, while fabrication activities account for 20% to 25% of the total. Nevertheless, it's little wonder that fabricators across the country are scrambling to expand their yards.  

However, capacity is very much at a premium, as Reezal explains. 

“If you place an order with certain fabricators, they will only be able to deliver in three to four years' time. It's the same scenario everywhere, for just about all services, not just yards. We have a lot of capacity, which is against the grain in the industry right now, so it is the right time for us to move into this arena.” 

Breathing down the necks of fabricators is the threat posed by China's yards, which Reezal says will “fill in the gap very quickly”. As such, Ramunia feels it is imperative to get things underway and swiftly establish a track record. 

Having the excess capacity certainly helps, allowing the company to aggressively gear up in terms of projects – just at the right time. 

“Delivery is king right now,” says Reezal. “If one fabricator can deliver in ten months and another can deliver in 12, guess who's going to get the project? Paying a premium is not an issue, as timely delivery is paramount, but security of supply is important.” 

It is precisely that reason why oil and gas majors enshrine a track record, and why Ramunia is so focused on building one. Reezal points out that the company has shown it can deliver, giving it a “running start” in terms of bidding for deepwater projects, but a big piece of the puzzle fell into place when Dr Daniel Ahn Chung-Sung came on board. 

From Korea with love 

Dr Ahn, Ramunia's newly appointed managing director, is the founder and former president of South Korea's Hyundai Heavy Industries (HHI) offshore and engineering division. His presence has opened up many doors for a relatively young company seeking recognition and looking to recruit specialised talent.  

“It's the chicken and egg story. When you're new, people ask what we have done, but of course we can't do anything until they give it to us! So having him on board allows us to bid for (bigger) projects because they know he has delivered before. Likewise, he has enhanced our ability to attract the top foreign talent,” says Reezal. 

Aseambankers, which initiated coverage on Ramunia last month with a glowing report and a strong buy call, feels that Ramunia will soon be transformed into an international player that has much of HHI's DNA incorporated into its business model. 

“Dr Ahn's entry is part of the bigger picture, because we can't be upgrading our facilities without the right people. He brought in his team of experienced people from around the world,” says Reezal. 

“He started with an empty yard for Hyundai 20 years ago, and he built it up, so the templates are there. You don't have to reinvent the wheel. They know what to do, and have given us a lot of good advice in terms of developing and upgrading the yard.” 

Upgrading the company's facilities allows it to both improve productivity and bid for the grail of deepwater jobs. To this end, Ramunia has spent some RM356mil to acquire the additional yard, purchase machinery and automate services. 

Most of the company's shallow water work is currently done outdoors. However, deepwater structures require more stringent controls on factors such as humidity, so Ramunia has also constructed several new structures and buildings in order to prepare. 

Ramunia currently handles structures up to 5,000 metric tonnes (mt). The company is looking to position itself in the 15,000mt to 20,000mt niche, which very few yards in the region can currently handle. Reezal explains that though the big boys like Hyundai can go up to 40,000mt, their burgeoning order books have freed up Ramunia's chosen niche for the aforementioned three to five-year window. 

Malaysian fabricators are traditionally labour intensive, and thus are lagging behind the likes of Korea and Singapore in terms of automation. Reezal feels that this is a privilege that is coming to an end, especially with more yards in China coming onstream. This automation will also help when Ramunia turns to deepwater topsides, which are made on a modular basis, thus requiring multiple modules to be constructed simultaneously. 

“We're hoping to get this yard ready by the first quarter of 2008. By the second quarter we can start bidding for deepwater structures, while the financial impact will be felt in 2009. It's a process, not something you can just switch on and off,” he adds. 

The way forward 

According to Reezal, this will make Malaysia the first deepwater centre in Asia, and the fourth in the world after West Africa, the North Sea, and the Gulf of Mexico.  

Should Ramunia ride the wave in Malaysia, the company can then take a look at the bigger region, where the likes of Indonesia are currently awarding deepwater blocks for exploration. 

All the same, he is well aware that the process is not going to happen overnight. As such, he emphasises that Ramunia is not going to give up its bread and butter, namely the structures that it currently fabricates. 

Going forward, Ramunia is looking to introduce more value streams to its existing operations. One option is decommissioning, which the company is already licensed to do, and is looking at implementing in three to five years. New environmental laws prevent platforms from being abandoned, ensuring that they are dismantled and brought back, a potentially significant business within the upcoming window. 

On that note, the company has also set up tubular steel rolling facilities in collaboration with Mackra Pte Ltd. The facility's initial capacity will be 36,000mt per annum. Aseambankers reckons that this will allow Ramunia to derive potential cost savings of about US$400 per mt. 

Reezal notes that all Malaysian fabricators currently send out to Batam, Korea or Thailand, so the facility would serve Ramunia's internal requirements while also allowing it to capitalise on demand in the Malaysian market. 

Over and above that, Ramunia can also capitalise on Dr Ahn's international networking, for instance the company's move to enter the Indian market. 

“We're looking at India in a big way,” says Reezal, pointing out the company's recent collaboration with Punj Lloyd Ltd to bid for the RM1bil Mumbai High North Development project. 

“At the end of the day, our short-term objectives are as important as our long-term health. The point to make is that whether you're doing one big project or 10 smaller ones, you're using the same team. Shifting our focus to bigger projects allows us to maximise our resources in terms of economies of scale.” 

Ramunia recorded a net profit of RM5mil during the first quarter of the current financial year ending December, on the back of RM82.7mil in revenue. The earnings represented a substantial increase over RM1.2mil and RM32.7mil recorded respectively during the previous corresponding period. 

In the 2006 financial year, the company recorded RM17.6mil in net profit on RM351.6 in revenue, up from a net loss of RM27mil and revenue of RM183.2mil the previous year. It currently has an order book of about RM1.3bil, is bidding for some RM9bil worth of projects and maintains a 20% to 25% strike rate. 

“Our vision is to be the preferred contractor within the EPC (engineering, procurement, construction) sphere. We want repeat customers,” sums up Reezal, outlining Ramunia's target of US$1bil in turnover by 2010 combined with its approach to win customers' trust via reliable delivery, product quality and pricing. 

Size does not matter

JUST how did Ramunia Holdings Bhd, listed on Bursa Malaysia's second board in January 2005, become the largest fabricator in Malaysia?  

As chief financial officer Mohamad Reezal Siddiq points out, it goes back to the story of the company's yard. 

Established in 1981, the yard formerly belonged to Promet Bhd, before Danaharta took over following the financial crisis. 

Even during its Promet days, Yard C was leased to Sime Engineering Bhd. Ramunia Energy & Marine Corp Sdn Bhd (Remcorp) took over in 2001, purchasing all three parcels. 

Because the company was still starting up, Yards A and B were injected into the listed company, while Sime Engineering was allowed to maintain its operations in Yard C. This allowed Ramunia to commence operations with a manageable amount of capacity while deriving rental income from the middle yard. 

According to Reezal, Ramunia saw more visible development in 2005, and thus took over Yard C. Sime Engineering's rental had expired by then, so the yard was absorbed into Ramunia's existing facilities.  

Aseambankers notes that this enabled Ramunia to raise its annual fabrication capacity by 174% to 85,000 metric tonnes (mt), translating into a combined open fabrication space of 590,084 m2. 

But why the big fuss over a piece of land? Reezal explains that in the oil and gas fabrication industry, capacity is hard to come by. There are natural barriers to entry, as setting up a yard of this nature requires reclamation and construction that typically take 24 months. From that point, the yard needs to settle before it can be certified as being able to undertake a certain tonnage of capacity. 

“For all the money in the world, if you want to start a new yard, you literally have to wait between 30 and 36 months before you start bidding. However, there is always the option to look at acquiring existing yards,” says Reezal.  

Private talk 

Last September, Ramunia was looking down the barrel of a takeover when Sime Darby Bhd came a-calling. Armed with a war chest of some RM3bil, Malaysia's oldest conglomerate was eyeing fabrication yards, and the fact that Sime Engineering's lease had come to an end was not wasted on its parent. 

Synergy Drive Sdn Bhd put paid to all that. The merger of Sime Darby, Golden Hope and Guthrie to form the world's largest listed oil palm plantation company saw the former's focus shift away from acquiring Ramunia. Still, as Reezal explains, it was hardly the first time Ramunia had such an offer, and it is unlikely to be the last. 

“Over the past three years we have been approached by everyone from Singaporeans to regional players, and some local players. They have all been unsolicited offers, and at the end of the day, they are looking at the yard space. It was the same thing with the Sime story, as their capacity was halved almost overnight when the lease expired.” 

Reezal takes great pains to emphasise that Ramunia does not solicit offers, but it also cannot control unsolicited offers. But what of the mixed signals the company seems to be sending, especially considering its mooted transfer to Bursa Malaysia's main board? 

“If that doesn't send a clear signal, we don't know what will. We are planning to make the transfer happen in the middle of next year, as the merits of the move include a better profile, increased credibility, and more institutional investors. It also makes it easier for us to raise funds,” is his take. 

“We are growing our balance sheet gradually to cater for bigger and bigger jobs. We need to be mindful of gearing; we're going to start borrowing on a project basis as projects get bigger, so we need to match it with the equity side so our debt/equity ratio doesn't go out of whack.” 

Upon sourcing funding and the full exercise of its existing warrants, employee share option scheme (ESOS) and full conversion of existing ICULS and ICPS, Ramunia's paid-up capital will enlarge to 919.9 million shares. 

However, Aseambankers notes that the ICULS and ICPS cannot be converted prior to their maturity dates of Dec 20, 2007 and Dec 20, 2009 respectively, so the only dilution to earnings per share (EPS) in the current year is the potential warrant conversions.  

The research house has a target price of RM1.80 for Ramunia, based on 15 times financial year 2008 (FY08) EPS.”Nevertheless, we believe there is further upside potential to Ramunia's earnings and target price beyond FY08, which is when growth will really kick in as the majority of its yard is expected to be fully-loaded,” says Aseambankers.