21 July 2012
Interview with Malaysia International Shipping Corp (MISC)'s president and chief executive officer Datuk Nasarudin Md Idris on MISC's business outlook
It's not an easy task to helm a shipping company in the current environment where overcapacity and a sluggish market are pressuring rates. Nevertheless, MISC president and chief executive officer Datuk Nasarudin Md Idris remains calm and optimistic in steering the company into calmer waters. Below are the excerpts of the interview.
Q: Will there be any more provisions for exiting the liner business?
To date, we have made provisions of RM1.45bil in the last financial year and another RM222mil in the first quarter. We do not foresee any further provisions but we never know as dismantling a business is far more difficult than starting a new business.
In the liner business, we had a total of 29 vessels in our fleet, 16 owned and 13 in-chartered.
How much have you gained from the sale of the vessels?
For some vessels we made a profit and for some we didn't. On average, we are slightly better than book value. If we have over-provided, we will write it back. We hope what we have provided so far is sufficient.
Was there any sentimental value attached to the liner arm?
This is one of the businesses MISC started with. However, at the end of the day if you factor in our RM3bil losses over the last four years in the liner business, this was a decision that we had to take for the greater good of MISC. If we did not exit the liner business, it would have dragged MISC further down as a whole, and we were not prepared to allow that to happen. It was a tough decision that we had to make.
We have offices in Australia, Japan, India, China and several agency networks worldwide. Closing those agencies and offices was quite a difficult move for us. Revenue-wise the liner arm had been big. In the heydays, revenue was RM2bil. But if we look at the history of the liner business in the past 20 years, we had more losses than profits.
What is the outlook for fabrication now?
It is still very good in view of the many new projects Petronas wants to do domestically. There's a renewed focus on domestic development as well as on enhanced oil recovery, and this bodes well for the fabrication industry.
Back to shipping, how many more vessels do you have on order and do you have to cancel any of them?
You'd have to foot a very hefty cancellation fee when orders are cancelled.
For petroleum shipping, we have four Suezmaxes this year and two aframax-sized Dynamic Positioning shuttle tankers which are contracted on a long term (15 year) basis with Petrobras, as well as four VLCCs scheduled for delivery in 2013.
In Brazil there are many deepwater fields. The two aframax-sized Dynamic Positioning shuttle tankers are not for exploration but will be used for shuttle runs from the oilfield back to shore. We will take delivery of these two vessels this year.
On the chemical fleet, we do not have any more newbuilds.
For LNG, we are seriously looking at a fleet renewal programme.
You also have a stake in NCB Holdings Bhd. Can you clear the air on whether you are exiting, like you did the liner business?
It's doing very well and has paid handsome dividends. It has been a good investment for us.
Are you looking into more investments like NCB?
For the time being we have to sort out our own issues. MISC is a shipping conglomerate. We have seven businesses after exiting the liner operations and all of them are competing for funds for expansion.
Financial resources are limited for any company. Because of that, we have to be highly rigorous in evaluating the economics of new projects and investments.
When do you expect to see light at the end of the tunnel for the company?
I think from now, it will be positive in terms of our profitability. If you strip out the provisions and impairments, we made RM500mil in core profit before tax in the last financial year ended Dec 31, which was only a nine-month period (due to the change in financial year end). I wouldn't say we can match the years prior to that, but we hope to stop making losses, and as we move forward, I believe we would be able to do so after taking the hefty provisions.
So we should not expect anymore negative surprises this year?
I think it will be a question of how much profit we can make. We are confident of returning to the black unless the market turns bad.
You've been in the shipping business for long?
I've been on the board of MISC for quite a while, but became the CEO of MISC in the last two years.
It's a tough time to be in the business?
You can say it's the worst of times. But it's also a challenging period in the industry.
Will MISC participate in Petronas' floating LNG (FLNG) facility?
They have taken the final investment decision and the project is proceeding on schedule.
An FLNG cost billions. If we have the capacity to invest, we would like to, but it's a question of our ability to invest and to raise finances.
Tell us about your ability to pay dividends.
There were no dividends last year. Shareholders are not happy if we don't pay dividends, but it's about the capacity of the company to pay.
If you look at our track record, we have paid dividends amounting to RM6.5bil in the last 5 years with the exception of last year.
What is your outlook for the business?
In the case of shipping, we will likely see two more difficult years especially for the petroleum and chemical shipping.
As for LNG, we will hold steady because it is very much on long term charters. There are new opportunities that we must seek with Petronas and with other LNG developers in the world.
As for Malaysia Marine and Heavy Engineering Holdings Bhd, I'm quite confident it would do better after the acquisition of the former Sime Darby Engineering yard.
What has MISC learnt from this episode?
The downturn in the industry has adversely impacted many players. We call it a bloodbath. Some people may say it was expected, given the spurt of new orders three to four years ago when people were gung-ho about building new ships.
What we are experiencing today is not something unique to MISC. Most shipping companies are in dire straits and that's the nature of the market.
We want to rebuild our strength as a company, and we have to relook at our portfolio of businesses to minimise volatility. For example, we may have to rely more on term than on the spot market. That's exactly what we're doing today with the two shuttle tankers in Brazil.
Arising from the Macondo incident, there are also concerns about pollution risks in the Gulf of Mexico. So a consortium comprising oil majors are building this modular capture system that can help mop up oil spills.
We are proud to be chosen to be part of this initiative and managed to secure a 20 year contract for the 2 modular capture vessels (MCVs) which will be used to mitigate oil pollution risks in the US Gulf.
We are moving towards long-term contracts, but we cannot run away from the fact that we are operating in a highly volatile environment.
Another issue is to strengthen our balance sheet and cash flow so we can undertake greater investments in the future. We have part of our financial resources tied up in huge assets today in the likes of Gumusut-Kakap, Asia's first deepwater semi-submersible floating production system (FPS), which is slated for completion by early next year and will only start generating income and cashflow by the later part of 2013. Our capacity to borrow is very much dependent on our cash flow.
If we have good cash flow, we have a bigger debt headroom, thus we can borrow in order to invest in new projects. But if we are cash strapped, our debt headroom shrinks, and we can't raise new capital to invest even though there may be many good opportunities out there.
As we move forward, we need to be more judicious in the use of capital. We should be more rigorous in evaluating new projects and time our investments well.
We do not have a crystal ball. But companies who are able to invest at low asset prices would be more robust and resilient to weather the storm during difficult times.