Corporate : Bottomline Boost
Eastern Pacific Industrial Corp, niche service provider to oil and gas companies, is set to secure a hefty portion of the business in Terengganu.
By Norsiah Nurani,Malaysian Business

Original article cut out

NEW developments are brewing at Eastern Pacific Industrial Corp Bhd (EPIC).The Terengganu-based group, which provides niche services to major oil and gas companies, is poised to play a bigger role in the sector, particularly in that state.

Amid a rationalisation scheme initiated by the new state government, EPIC is likely to be the flagship company that will house Terengganu's oil and gas investments in logistics services and infrastructure development.

"The state government is expected to group all its investments in the oil and gas sector under EPIC, which eventually could turn into a pure oil and gas play after hiving off its interest in property in another state-owned unit," says the head of research of a foreign brokerage.

EPIC, with a reputable track record and solid backing from the state government, isinvolved in managing the petroleum supply base by providing and maintaining port services and facilities, property development, enviromental management and investment holding.

Perbadanan Memajukan Iktisad Negeri Terengganu (PMINT), the state's economic development arm, hold a 40.1% stake in EPIC. It also owns 62% of KFS Support Services Sdn Bhd and 51% of Jasa Merin Sdn Bhd, which are involved in logistics services and the provision of marine transport services respectively. The two companies are likely to be injected into EPIC for a combination of cash and shares, he says.

Looking at the bigger picture, the research head believes that EPIC may also take over the state government's 15% stake in Kemaman Port Sdn Bhd (KPSB), as part of the streamlining exercise, thereby raising its interest in the port operator to 51% from 36% at present. The other shareholders are Road Builder (M) Holdings Bhd with 39% and Perwaja Steel Sdn Bhd with a 10% stake.

According to the research head, the diversification and rationalisation augurs well for EPIC as it would enhance its exposure to the oil and gas sector and ultimately its earnings base. It is also timely in view of recent discoveries of oil field off the east coast of Peninsular Malaysia, which would further boost oil reserves. The existing oil fields offshore Terengganu are expected to last between eight and 10 years, he adds.

EPIC's exposure to the oil and gas sector is through its 99.1% - owned unit Pangkalan Bekalan Kemaman Sdn Bhd (PBK) that owns, manages and operates the main petroleum supply base - the Kemaman Supply Base (KSB) in Malaysia, one of only two such facilities in the country. The other is located in Labuan serving the oil fields off East Malaysia.

PBK is licensed under the Customs Act to be the sole legal landing place to provide a storage and logistics base to handle all the requirements of the production-sharing contractors operating of the east coast of Peninsular Malaysia. "This make it a virtual monopoly, and its risk profile is somewhat lower compare to other oil and gas players which have to compete for short-term contracts," says the research head.

KSB, built on a 130-hectare site in Kemaman, began operation in 1982 and is the jewel in EPIC's crown. It was specially designed and developed as a comprehensive logistics supply base and enjoys both natural and geographical advantages as an onshore base.

PBK currently houses 208 tenants, which provide services to 63 offshore facilities. The services provided by these tenants include oil production and exploration, fabrication, pipe threading, engine refurbishment, supply of food, fuelling activities, forwarding and shipping.Its major clients are Petroleum Nasional Bhd, ExxonMobil Exploration and Production Malaysia Inc, Petronas Carigali Sdn Bhd and Talisman Malaysia Bhd, which together contributed 60% of PBK's revenue in 2003.

According to the foreign broker, PBK is expected to show higher profits this year as increased activities in oil exploration and production will translate into higher demand for itsservices. Additionally, it has secured a new client, Murphy Peninsular Malaysia Oil Co Ltd, which began operation in PBK early this year, bringing to five the number of oil companies operating in PBK.

In anticipation of higher demand, PBK plans to increase its facilities, including the general warehouse, store and open-yard facility under phase two and boost its fleet of mechanical handling equipment.

Drilling months for exploration and production activities are expected to rise to 143 this year from 137 last year while the number of vessel calls and cargo handling this year are also seen to increase to 4,058 (2003:4,018) and 855,972 tonnes (2003:846,216 tonnes), respectively.

In port management, EPIC has been managing Kemaman Port since 1998 and will continue to do so until it is privatised to a consortium company in which the former would hold a 36% stake.

As infrastructure development is a natural extension of EPIC's existing operations, the listed entity is speculated to take over the Terengganu Government's interest of 15% in the portas part of the state's ongoing restructuring exercise. If this materialises, then EPIC would emerge as the largest shareholder in KPSB with a 51% stake.

EPIC diversified into property development in 2001 on a small scale under the former PAS-led state government. Now that control of the state and ultimately the company has shifted to the Barisan Nasional (BN)-led government, EPIC's new Chairman Datuk Mohamed Tera was reported as saying that the group is assessing the continuation of property development.

The group's maiden property venture is the Paka Business Centre in Paka town comprising shop-houses and offices, bazaar and lots for future hotel and shopping centre development. Its is also evaluating potential areas for future development. Last year, the division achieved a small profit of RM570,000.

A sector that EPIC is keen to expand is enviromental management, which it ventured into only recently. The group made a breakthrough in the sector when its wholly owned subsidiary,Natuream Enviro-Services Sdn Bhd (NESB) was awarded a sludge cleaning and treatment project by Petronas Penapisan (Terengganu) Sdn Bhd in mid-2003.

The successful handling of the Kerteh project, jointly undertaken with Amtech Chemical Sdn Bhd, has given the group invaluable experience. The projects has shown encouraging results and both parties are now pursuing it at the next level.

Upon full commercialisation of the project, it is envisaged that the solution will be accepted and recognised as superior technology to handle and stabilise sediment waste in Malaysia.

Going forward, NESB is confident of securing more such projects from Petronas and other oil majors. It has also received invitations from oil companies in the region to provide total sludge treatment solutions. NESB is currently collaborating with its foreign partners to realize this objective. For the first half of the FY04, the division posted a pre-tax loss of RM 0.4 million.

On outlook, SBB Securities Research says the expected increase in oil and gas exploration andproduction and production activities, particularly by Murphy Oil, Petronas Carigali and Shell Malaysia, would be a boon to EPIC. ' We have forecast revenue and earnings growth of 25% to RM83 million and 20% to RM24 million, respectively, for FY04,' it said in a report.

Apart from its steady and monopoly-like earnings, growth could also come from increased utilisation rates and capacity or a price hike for its range of services.

Research houses are also anticipating higher dividends from the company. Its balance sheet is strong with zero borrowings and cash of RM 66 million as at end-June. 'With RM66 million cash and 14.9 sen in annual earnings, there is ample room for a rise in dividend payouts in the future,' SBB Securities notes.

Its adds that the stock is poised for a re-rating closer to its peers on the back of current focus on oil and gas-related stocks.

Some of the benefits of being back in the hands of the BN-led state government include improve perception of the stock among investors and higher chances of getting contracts.

SBB Securities has placed a fair value of RM2.30 for the stock while Kim Eng Research Sdn.Bhd gives it a value of RM2.62.

At a market price of RM1.72 a share at the time of writing, EPIC is trading at a prospective price-earnings multiple of 8.6x FY04 and 5.8x FY05 earnings. Hence, the share has further upside potential.