The recovery stories of most companies are punctuated by cost-cutting, measures to improve efficiency, and for some, retrenchment exercises for staff as they sank into the red during the pandemic.
For engineering services firm Dyna-Mac, which mainly builds what is known as topside modules and facilities of FPSO (floating production storage and offloading) modules, this was not the case. There was no retrenchment of staff throughout the pandemic, and they were all kept on full pay. Instead, the management took a pay cut to lower costs.
Three years ago, the company faced a crisis of a different kind with the passing of its founder and then CEO Desmond Lim in October 2019, and was staring down a balance sheet that was $24 million in the red in FY2019 ended December 2019. Almost immediately after, Dyna-Mac was hit by the Covid-19 pandemic, deepening its losses to $58.4 million for FY2020.
However, current CEO Lim Ah Cheng, who joined in March 2020, managed to engineer a turnaround, leading the company to a profit of $5.6 million in FY2021 ended December 2021. This came on the back of a revenue of $220.2 million, an increase from the $84 million in FY2020 when work progression was disrupted by the pandemic.
“Revenue was very low and the overheads were disproportionately high then. People and team morale were also very low,” recalls Lim in an interview with The Edge Singapore, referring to the time when he just took over just as the pandemic was raging. To improve cash flow which is the lifeblood of every company, Lim channelled whatever funds the company had into production and essential capex, forgoing non-essential expenditures such as office renovations.
The company also changed the way it went about securing contracts. Under the previous management, Dyna-Mac would bid for open tenders to win jobs. Instead, Lim insisted on negotiating directly with his potential clients by engaging them early and building a sound working relationship with them to meet budget and deadlines together. “It’s smart bombing instead of carpet bombing,” he quips.
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Most notably, Lim chose to not take on socalled EPC or engineering, procurement and construction contracts where the contractor is responsible for everything and has to deliver the completed project to the owner within a predefined time and cost.
Instead, Lim got Dyna-Mac to take on what is known as “remeasurement contracts”, where rates are provided in the contractor’s tender, either based on the price estimate or price schedule.
In such contracts, the actual amount of work done is measured against the pre-determined rates and the contractor gets payment based on work completed. By doing so, the client bears the risk, instead of Dyna-Mac.
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How did Lim convince his customers to take on these agreements? By building trust and by fulfilling everything it had promised, says Lim.
Going beyond expectations
He recalls a March 2020 project that could not be completed on time in another overseas yard due to the pandemic. When the customer came to Dyna-Mac, Lim told the customer he would complete the project, even with limited capacity.
In the end, what was supposed to be a 14-month project was completed in four months, although this was partly due to how some of the structural works had already been done by the overseas yard.
“Due to the aggressive schedule, our customer had expected to receive the modules from Dyna-Mac with 70% completion but we achieved completion above 80%, significantly reducing the work needed to be done onboard the vessel,” says Lim, adding that Dyna- Mac received a safety bonus on top of the agreed payment.
In contrast, Lim claims that other yards may take on many projects but could not cope with the demand, causing delays and hurting customers’ confidence. “It is not good if our industry cannot keep its promises and can’t deliver on our commitments. We cannot blame Covid or give excuses. More importantly, we must do our very best to keep to scheduled deadlines,” says Lim.
Furthermore, the company also accomplishes what is known as “zero carry-over work”, which means that the FPSO modules loaded onto the vessels do not require any other additional work and can go operational immediately.
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While “carry-over work” is very common in the industry, Dyna-Mac’s zero carry-over work standard means that other downstream work can be completed quicker, so the vessel can start work sooner.
Apart from work processes, trust between the company and related parties is very important in keeping the company afloat.
Lim paid his subcontractors and suppliers earlier than agreed so they can meet their financial obligations. In return, goodwill is forged which may translate into better terms for future projects.
It is the same with customers. When the customer with the March 2020 project came back with another project but had an issue with the budget, Lim looked it over and after deciding the project was still profitable, agreed to take on the project and even gave a discount.
“I knew the customer was already losing money for this project and we have already made some profit. We must try to help our customer instead because if our customer feels the pain, they will never come back again. But if he remembers that we had helped him during difficult times, he will probably consider us for future projects,” says Lim.
Strong demand and CCS
Looking ahead, Dyna-Mac intends to remain a specialised fabricator of FPSO modules.
This is because Lim expects strong demand for FPSO topside modules fabrication over the next few years given rising crude prices and under-investment in production capacity by the industry over the last few years. Furthermore, the very few FPSO fabricators Asia has are mostly in China.
Lim gives this analogy: “If you are good at selling chicken rice and you are the only chicken rice stall in the market, you should sell what you cook best and your business should be very good. You don’t have to serve everybody, but you should have enough customers to keep you very busy.”
Recognising the shift towards sustainability, Lim also wants to adapt Dyna-Mac’s FPSO manufacturing know-how to make compressors for carbon capture and storage (CCS) systems.
Dyna-Mac specialises in making compressors on FPSO modules to inject compressed air into oil wells to force out the crude for processing. Similarly, the compressors used in CCS systems can be used to inject carbon dioxide into depleted wells, taking carbon dioxide out of the air and storing it in the ground.
He expects CCS to be a very big growth area for the company. Planting trees or building solar panels, while good, barely moves the needle on decarbonisation. “If I can capture and move the carbon dioxide, pump it somewhere down into the ground, then I can solve the problem on an industrial scale,” adds Lim.
‘Overlooked’ play
Dyna-Mac has attracted more attention from the investment community in recent weeks. In an unrated report on June 29, SAC Capital analyst Lim Shu Rong describes the company as “a force to be reckoned with”, given its long operating experience in the niche of making the topside modules for the offshore industry.
“In view of higher oil prices and pressing energy security needs, upstream players are inclined to ramp up oil production. The FPSO market is a huge beneficiary of this development as production assets are moving towards deeper water,” writes the analyst.
In an earlier report on June 16, which is also unrated, UOB Kay Hian calls Dyna-Mac an “overlooked beneficiary of the oil and gas capex cycle”, noting the company’s $180 million order win in May, bringing its total order book to a record $641 million, representing nearly three years of revenue based on its 2021 numbers.
The brokerage says that Dyna-Mac appears confident about increasing the size of its order book but also stated that it will be prudent and take on work that it is confident of executing.
Besides improving business prospects, UOB Kay Hian believes Keppel Corp, Dyna-Mac’s second-largest shareholder, might divest its 24.3% stake. Late founder Lim’s estate holds the largest stake of 41%.
Meanwhile, Dyna-Mac, according to UOB Kay Hian, has an existing strategic partnership with Malaysia Marine and Heavy Engineering, China Merchants Group (CMG) and Baker Technology which can be tapped on to scale up production when needed. “Its CMG linkage also enables it to access relatively cheaper financing via its banking arm,” notes UOB Kay Hian.
Separately, CEO Lim and independent director Henry Tan have recently bought shares. Most recently, on May 26, Tan, whose day job is the group CEO of Nexia TS, paid 15.7 cents each for 500,000 shares. Lim himself on May 13 paid an average of 14.2 cents for 168,000 shares, bringing his total stake to 1.98 million shares.
UOB Kay Hian forecasts that on an annualised basis, the company appears to be on track for at least 30% earnings growth in 2022. As at March 31, the company had no debt and a cash balance of $114 million compared to its June 28 market cap of $236.1 million.
Due to the dry spell of contracts, Dyna-Mac has not paid a dividend for the past five years, notes UOB Kay Hian. However, Lim says a dividend will be considered at “an appropriate time”.
“Once profitable and with a healthy cash flow, management must consider the interest of its shareholders, but also motivate the staff team to work even harder, invest into productivity, capex and keep a portion for future growth,” he adds.
As at June 28, Dyna-Mac trades at 23 cents, which represents a gain of 152.75% year to date.
