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Nam Cheong confident it can avoid another debt revamp

CEO argues firm's net asset value will improve as valuation for its OSV fleet increases along with vessel day rates


NAM Cheong is emerging from a debt revamp with negative equity on its books, but its management is confident that with continuing shareholders' support, the company's book value stands to improve as the offshore support vessel (OSV) market recovers.

Nam Cheong's CEO Leong Seng Keat told The Business Times the liabilities of the OSV-focused firm, which totalled over RM2.12 billion (S$705 million) as at June 30, 2018, will be reduced in the third quarter once the conversion of over RM500 million of debt - mainly unsecured bank loans and notes - into equity takes effect.

The debt forgiveness as implied in these equity swaps will result in a paper gain that will also surface in the firm's Q3 report card.

Additionally, the firm has gone ahead as planned to launch on Tuesday a one-for-one renounceable rights issue that is expected to raise RM88 million in new equity. That's a drop of ocean compared to its negative equity of over RM1 billion as at the end of first half.

Yet, Mr Leong held steadfastly to the view that the firm would not require a new round of debt revamp or another cash call after the current rights shares issuance to ride through the rest of an industry downturn.

He argued that the firm's net asset value, which stood at negative 53.6 sen as at June 30, 2018, will improve as valuation for its OSV fleet increases along with vessel day rates.

He projected that vessel day rates will inch up as contracting activity continues to rise with oil prices stabilising in a healthier band.

In this respect, Nam Cheong appeared on course to expand the topline contribution from its vessel chartering business with newbuild contracts getting difficult to come by.

For the six months ended June 30, 2018, vessel chartering contributed 27 per cent of the firm's revenue, up from 16 per cent for a year-ago period.

Utilisation of its 24-strong fleet averaged about 60 per cent during the first half, still falling short of the assumed 65 per cent fleet utilisation for the projections outlined in its debt revamp plan.

But its gross margin from vessel chartering of 39 per cent for the second quarter and 25 per cent for the first half, vastly out-performed the industry average. With the OSV sector still troubled by vast overcapacity, vessel day rates are mostly only enough to cover operating expenses, analysts have said.

What could have helped bolster its operating margin is the firm has already taken a massive impairment and writedown back in August 2017, that has gone towards aligning values of its vessels with the market conditions.

The firm is adding another seven vessels to its operating fleet. These vessels are being delivered under an agreed arrangement with Fujian Group Shipyards to settle Nam Cheong's outstanding obligations due to its build-to-stock programme.

Nam Cheong used to thrive on commissioning yards to build ships on speculative basis for delivery to third-party owners before the market took a turn for the worse. The contingent liabilities linked to such build-to-stock programme amounted to some US$866 million, a scheme document obtained by BT earlier showed.

Without naming the parties involved, Mr Leong said Nam Cheong has tabled "win-win proposals" in seeking to resolve these liabilities. He declined comments on the details but sources said Nam Cheong has lost certain deposits paid to some yards.

Despite the setback in this downturn, Mr Leong said he would not rule out pursuing a build-to-stock programme in the future. While some have blamed Nam Cheong for contributing to a build-up in excess capacity, its CEO argued that building vessels to stock have in fact, enabled crude production "to speed up" during times of better oil prices.

Expressing confidence over continuing shareholders' support, he said: "Our shareholders are accustomed to the fact that we don't go with conventions."

At an extraordinary general meeting in August, Nam Cheong won over 99 per cent support from its shareholders towards the proposed rights issue and issuance of new shares to its creditors.

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