In his four decades in the marine industry, Thomas Tan, executive chairman and CEO of Kim Heng 5G2 , has been through four of the industry’s cycles. As he leads the company out of the most recent downturn, there is an almost palpable sense of relief.
“Looking back at all our reference points, for every seven years, there has been one bad year,” says Tan in an interview with The Edge Singapore. “I think this round has been the worst I’ve ever seen. It was like a tornado sweeping across an entire town.”
Kim Heng provides a range of marine and offshore-related services, including building, repair work and chartering. In 2HFY2022 ended December 31, 2022, Kim Heng reported earnings of $2.3 million, rebounding from losses of $2.2 million in 2HFY2021.
For the larger part of 2022 and the year to date, Kim Heng’s share price has traded within a rather narrow and flat range of around 10 cents. Nonetheless, it is already a big improvement over the lows of 4 cents or so in 2021. Based on its May 30 closing price of 10 cents, the company is valued at 9.97 times earnings and has a market value of $72.4 million.
Presumably, its recovery prospects have drawn interest from new investors. Last June, Credence Capital, which had invested in Kim Heng since its IPO, sold its entire 17.71% stake to the newly-formed Hildrics Capital fund at 10.5 cents a share. Hildrics Capital is jointly owned by former UOB banker Choo Kee Siong and Wee Teng Chuen, whose father is UOB CEO Wee Ee Cheong.
Positive outcomes
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As devastating as the current energy crunch may have been for many, Tan believes it also provided some positive outcomes. “Soaring oil prices boosted economies in many regions, especially the Middle East. In turn, that provided them with significant budget surpluses to pay down their debt while diversifying and re-strategising their energy dependence to renewable energy like solar or hydrogen,” he says.
For Tan, the energy crisis may have been necessary to “wake the world up” and force the recognition that having alternative energy sources is non-negotiable. With oil prices remaining high and global supply staying tight, he is optimistic about Kim Heng’s renewables business segment and the direction it is taking.
Tan had identified “growing opportunities” in the offshore renewable space in 2019 when he began to reposition and transform the company’s business to address this market gap. In the past few years, Kim Heng has revamped the skillset of its workforce and expanded its scope of services to include horizontal drilling rigs, the laying of submarine fibre optic cables, and offshore wind cable installation.
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In 2021, Kim Heng secured a turnkey contract for the lifting and installation of wind turbines in Vietnam and upgraded its equipment fleet with the purchase of a 1,250-tonne crawler crane.
The company has also clinched critical projects to expand its global footprint, including entering into a non-binding MOU with Crowley Wind Services in 2022 for offshore wind farm cable-laying and installation projects along the east coast of the US.
And in Taiwan, where Kim Heng has operated since 2019 and continues to be “very active”, the company was awarded a contract to provide design, engineering and drilling equipment for the installation of pipe conduits using horizontal drilling relating to submarine power cable installation works for an offshore wind farm project.
Tan says one of Kim Heng’s “main goals” will be the constant development of its renewables business, the first of the company’s five pillars of growth. “We set up our subsidiary Adira Renewables to identify the business unit we have to grow,” he adds. “Renewable energy is unavoidable. We just have to follow where the money is going.”
Oil and gas growing in tandem
However, Tan insists Kim Heng’s new focus on renewables will not come at the expense of its oil and gas segment. He believes the segment had been neglected and left underdeveloped until a “push” from the war in Ukraine, which sent prices surging given Russia’s role as a major exporter of both oil and gas.
“Tapping alternative sources of energy is very capital-intensive and requires infrastructure and technology,” he explains. “Some countries simply do not have the money to pay for renewables. With these high oil prices, some countries are turning back to coal, even in Europe. They don’t have a choice — they still need to keep their electricity running.”
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Tan sees both sides of Kim Heng’s energy business growing in tandem as the global picture points towards even investments in oil and gas and renewable energy in the next several years.
He says that continuing to grow its oil and gas business also means Kim Heng could offset fluctuating revenue from renewable energy projects, which, due to their capital-intensive nature, tend to be lumpy.
In FY2022, revenue generated by Kim Heng’s renewable energy segment decreased 45% or $8.1 million to $9.8 million from $17.9 million in FY2021, mainly due to the lower value of contracts secured in its offshore wind farm projects in Taiwan and the completion of projects in the preceding financial year.
Meanwhile, revenue from Kim Heng’s oilfield services segment increased by $11.9 million or 82% from $14.5 million in FY2021 to $26.4 million in FY2022 as material sales and projects picked up following the easing of Covid-19 restrictions.
Its oil and gas adjacent segments of vessel chartering and marine construction also improved from $27.4 million and $3.4 million in FY2021 to $28.6 million and $15 million in FY2022, respectively.
‘Prudence’ the name of the game
The continued momentum that Kim Heng has seen in these business segments comes off the back of the company’s “first venture” into operating its offshore vessels in 2017 — another volatile year for oil markets — which allowed it to improve its vessel operating capabilities by offering full-scale offshore solutions in rig towage and other marine activities.
In July that year, Kim Heng acquired three anchor-handling tugs of 10,800 horsepower each at “distressed prices”. Many over-leveraged industry players were unable to wait out the downturn and in the face of insolvency, forced to sell their assets for a song.
During that time, vessel charter rates were so depressed they could not cover the operating costs of these assets, forcing their valuations to drop as much as 90% from past purchase prices due to excess capacity. “We decided to enter the market then because it was simply untenable for other industry players,” says Tan.
On Feb 24, Kim Heng announced that Ruhm Mazu, its 49%-owned indirect subsidiary, would purchase nine vessels for US$9.28 million ($12.56 million) from owners who could no longer afford to run them and had therefore been arrested by their creditors.
This fleet includes one special service offshore support vessel, four anchor-handling tug supply vessels and three offshore support vessels. Of these acquisitions, the most valuable vessel is an accommodation barge with a capacity of 400 passengers. Tan figures this was a “good bargain” as he had paid around US$5.5 million for a barge that was built for US$35 million.
The company has grown its fleet of vessels to 20, including six that were acquired during the Covid-19 period and its recent acquisitions of nine arrested vessels. “We are always looking for such remedial assets by financial institutions that we can acquire at very low entry prices so that we can have the opportunity to repurpose them by either operating them or reselling them to buyers,” says Tan.
However, the aim of acquiring these distressed assets at steep discounts is not simply to make a quick buck. “We need to pace ourselves. In many of these situations, [the vessels] require much capital to be refurbished.”
A significant proportion of Kim Heng’s revenue in the past few years has been reinvested into the reactivation of these vessels, the returns for which are only now starting to become evident.
Over the past few years, industry underinvestment has created a limited supply of available vessels and rigs. Coupled with significantly improved demand expected to remain robust in the near term, Kim Heng expects this to translate into greater demand for its services and offshore assets.
“At the start of this process, it may have seemed like we were losing money but that’s because we were ploughing the money back into the investment to build the business,” Tan explains. “Now, it is starting to show results because to expand and grow, you need to also put the money in to make it happen.”
Being mindful of the ebb and flow of the oil and gas markets, he emphasises the need for Kim Heng to be “very careful” even when things are going well. “Like any business, we talk about not being overstretched. It’s important to remain prudent and not get carried away,” says Tan.
