Corporate: EPIC to grow its core business
By Isa Ismail, The Edge Daily

Eastern Pacific Industrial Corp Bhd (EPIC) will be concentrating on growing its core businesses of providing services to the oil and gas industry, now that control of the state government in Terengganu, its largest shareholder, has changed hands.

"Under the former state government, the company had ventured into non-oil and gas businesses such as property development over the past four years," says EPIC's new chairman Datuk Mohamed Awang Tera.

Although he acknowledges that going into property development was not such a bad thing for EPIC as it has been profitable for the company and its shareholders, Mohamed explains that the company is looking at ways to streamline its operations to better serve the oil and gas sector.

"The current board is looking into rationalising the whole EPIC structure, such as whether EPIC should continue with property development or concentrate on oil and gas alone," Mohamed tells The Edge in an interview.

"Among the steps we are considering are to swap certain assets with our parent company so that there is no overlapping businesses."

EPIC, which is mainly involved in providing logistics services to oil and gas companies operating oil rigs off the East Coast of Peninsular Malaysia, is 40% owned by Perbadanan Memajukan Iktisad Negeri Terengganu (PMINT), the state's equivalent of a state economic development corporation. Lembaga Tabung Haji is the second largest shareholder with a 21% stake.

Through EPIC subsidiary Eastern Pacific Properties Sdn Bhd, the company is involved in developing a three-phase project on 11 acres of land in Paka, Dungun. According to news reports, the company has already invested RM22 million in the first phase, comprising a bazaar, 25 two-storey and 49 three-storey shopoffices. The second phase is a business centre, while the final phase is likely to be a hotel.

Last October, EPIC announced that it would acquire the Paka development land for RM4 million payable to the state government and the Dungun district council.
Mohamed, who is a member of the Terengganu State Executive Council and state assemblyman for Chukai, declined to identify which oil and gas assets held by PMINT EPIC would be keen to trade Eastern Pacific Properties for.

But analysts reckon that EPIC may be keen to take over PMINT's 15% stake in Kemaman Port, thus raising its stake in the port to 51%. EPIC may also be interested in KFS Support Services Sdn Bhd and Jasa Merin (M) Sdn Bhd, in which PMINT has a 62% and 51% stake, respectively. According to EPIC's 2002 annual report, both companies are classified as related parties and both have operations similar to KSB's.

Analysts believe that EPIC's 100%-owned subsidiary and main income earner, Kemaman Supply Base (KSB), which is one of the five wharves in government-owned Kemaman Port, has a virtual monopoly to provide logistics services on the East Coast.

"KSB is licensed under the Customs Act to be the sole legal landing place that will provide a storage and logistics base to handle all the requirements of the production-sharing contractors operating in offshore locations on the east of Peninsular Malaysia," says an analyst with a local research house.

According to EPIC's notes to its 2003 results, the petroleum supply base contributed a profit of RM30.05 million and turnover of RM63.06 million for the financial year ended Dec 31, 2003. EPIC had posted a net profit of RM19.9 million and a turnover of RM70.51 million for that financial year.

Analysts note that EPIC and KSB are well insulated from the risks that other oil and gas players are subject to. KSB has 200 tenants that service more than 55 offshore oil and gas rigs.

However, prior to the recent general election during which the ruling coalition took over the state government, analysts were always quick to caution investors about its government ownership: "EPIC is a buy, especially for investors who are not worried about its lack of liquidity and political risks," says a report by a local research house.

No stranger to port operations
As the former Kuantan Port Consortium Sdn Bhd managing director for four years and general manager of the Kuantan Port Authority four years before that, Mohamed is no stranger to port operations. He was appointed to represent the new state government on EPIC's board, replacing former chairman Datuk Wan Abd Mutalib @ Wan Musa Embong.

Fellow directors Datuk Tengku Hassan Tengku Omar and former state councillor Yahaya Ali joined Wan Abd Mutalib's departure from the board in early April.
Coming on board with Mohamed is Datuk Mohd Pauzi Ismail who has joined EPIC as executive director.

"We are now looking into expanding EPIC's supply base operations beyond the East Coast of Peninsular Malaysia," says Mohamed. He reckons that Southern Thailand is an obvious potential market for offshore logistic support as EPIC can still serve rigs in Thai waters from its present base.

"We believe we have the expertise as we've been doing offshore supply since 1982," explains Mohamed. "For Southern Thailand, the investment would be minimal as we can still operate out of our base in Kemaman."

Offshore supply is an international business, points out Mohamed. Thus EPIC has to be efficient and provide the best business to be competitive.

Sludge management
EPIC is also looking into expanding its business in sludge management systems which it reckons has large potential. Residual chemical waste, Mohamed points out, is hazardous and must be disposed of properly.

"We want EPIC to be the early bird, the pioneer to process waste and sludge. But this will require some amount of education [for both EPIC and its customers], we need to gather more experience. We are prepared to take some initial losses [to penetrate the market]," he says.

According to latest results, the sludge management business made a loss of RM2.67 million last year.

Mohamed says EPIC eventually wants to reduce its dependence on KSB to about 60% and make crude waste management a bigger contributor to the company's bottom line.

"Presently, most waste is just stored in Terengganu as it is too expensive to transport to the treatment plant in Bukit Nanas, Port Dickson, which is run by Kualiti Alam Sdn Bhd. So we want to be the alternative to Kualiti Alam, providing waste management in Terengganu itself," he explains. Mohamed's interest in waste management is apparent as he is also chairman for industrial development and tourism in the state.

Besides streamlining its operations and growing its sludge management business, Mohamed believes that the change in government will also hasten the privatisation of Kemaman Port, a process which has been ongoing for five years.

Its main market is no longer as potent as it was before: Gunawan Steel has folded while Perwaja Steel has been downsized.

"The entry of the new government in the state will mean that the terms of the privatisation will be more agreeable. Hopefully, we can sign the privatisation agreement this year," he says.

Despite the readiness of government agencies such as the Economic Planning Unit to go ahead with the privatisation, EPIC itself wants to revise certain terms based on the reduction in tonnage throughput in the port now that steel players have become less significant users.

"The tonnage today is not as high as previously so if we accept the present terms, the internal rate of return for EPIC may be negative," says Mohamed.

EPIC currently holds a 36% stake in Kemaman, while Perwaja Steel Sdn Bhd, Road Builder (M) Holdings Bhd and PMINT hold 10%, 39% and 15%, respectively.