Nothing in this article is intended to be financial advice and should not be taken as such, please do your research before investing.
⚠️ This is considered a high-risk stock.
Introduction
The principal activities of Beng Kuang Marine Limited are the provision of corrosion prevention services relating to repairing ships, tankers and other ocean-going vessels and investment holding.
The principal activities of the subsidiaries are the provision of infrastructure engineering services, provision of corrosion prevention services, supply and distribution of hardware equipment, tools and other products and provision of freight transport services.
The company has been making consecutive losses. Its working capital has been negative and cast doubt on the company’s ability to continue as a going concern.
It was added to the SGX Watch list on 6 June 2023. Companies are added to the SGX watch list as they had accumulated losses in their past three financial years. If they do not meet the relevant requirements to exit the SGX watch list within 36 months, they may be delisted or have their shares suspended with a view to a delisting. Rule 1314(1) of the listing manual states that a watch list company has to record consolidated pre-tax profit for the most recently completed financial year, based on the latest full-year consolidated audited accounts, and also needs to have an average daily market capitalisation of $40 million or more over the preceding six months, to exit the watch list.
Investing thesis
1. Improving financial performances
Similar to other marine, oil and gas-related companies, its revenue has been dropping since 2012 and burdened with huge debts to survive and service. Things have turned slightly more positive in recent years.
- Revenue continues to grow
- Improving cash position
- Working capital is turning less negative.
2. Recent developments:
A. Partial lease and sale of waterfront yard in Batam, Indonesia
It has a 32.8-hectare (328,956 square metres) waterfront fabrication yard in Batam, Indonesia. The lease for the Batam yard has been fully paid in advance till 2037 with options for a further lease extension of 20 years and a final term of 30 years. It remained under-utilised since FY 2014 due to the downturn in the offshore oil and gas sector. The company has been seeking opportunities to extract more value and increase utilisation for the yard.
The status to date has been:
- Secured fresh tenancies to partially lease out 13 hectares for a total of about $1.9m per year
- Sale of two-thirds of the yard for an aggregate amount of S$18.53m. It will seek shareholders’ approval for the sale of a further 10.0 hectares for $9.89 million.
| Lease | Sell | |
| Status | Secured fresh tenancies to partially lease out 13 hectares for a total of about $1.9m per year | Signed two agreements to sell approximately two-thirds of property for an aggregate amount of S$18.53m Obtained shareholders’ approval via an Extraordinary General Meeting on 21 Jun 2023 for the disposal of 90,000 square metres forming part of the Group’s shipyard in Batam Will seek shareholders’ approval for the sale of a further 10.0 hectares of land and waterfront for $9.89 million |
| 23 Jun 2023 | Sale of a further 100,970 square metres of land for $9.895m; $8.21m excess over the net book value as of 31 Dec 2022 | |
| 13 Apr 2023 FY2022 Annual Report | Secured fresh tenancies to partially lease out 13 hectares of its 32.8-hectare unencumbered waterfront yard in Batam, Indonesia for a total income from leasing of approximately $1.9m per annum | |
| 12 Apr 2023 | Sale of 90,000 square metres of land for $8.64m; $7.693m excess over the net book value as of 31 Dec 2022 | |
| 28 Feb 2023 FY2022 results | Signed two agreements to sell approximately two-thirds of the property for an aggregate amount of S$18.53m Obtained shareholders’ approval via an Extraordinary General Meeting on 21 Jun 2023 for the disposal of 90,000 square metres forming part of the Group’s shipyard in Batam Will seek shareholders’ approval for the sale of a further 10.0 hectares of land and waterfront for $9.89 million | Actively seeking opportunities to partially lease and sell which has a market value of $35.3m |
The rationale for the disposal was:
- The land comprises part of the Batam Shipyard that has remained under-utilised since FY 2014 due to the downturn in the offshore oil and gas sector. The company believes that the Proposed Transaction is an opportunity for the company to realise the value of such an unutilised portion of the Batam Shipyard at a reasonable premium to its investment costs, to mitigate the challenges of evolving economic market conditions for the marine and oil & gas industry as a whole.
- The Proposed Transaction will enable the Group to substantially repay its bank borrowings and reap substantial interest savings as well as lowering the depreciation expenses as the Group transforms towards an asset-light strategy.
- It will strengthen the group as a going concern, via the strengthening balance sheet and reducing its net current liabilities.
Yes, the disposal will improve its cash position and working capital significantly. It will also boost profitability with its annual rental income. What is their plan thereafter?
B. Employee Share Option Scheme, Performance Share Plan and Share Buyback Mandate
In a recent Extraordinary General Meeting held in July 2023, the company proposed the adoption of the employee share option scheme (ESOS) and performance share plan (PSP) (together with the partial sale of 90,000 square metres of its waterfront yard in Batam).
These are good initiatives that give them the flexibility to carry out if and when they choose to.
3. Changes in Executive Chairman and CEO
Mr Chua Beng Yong has been appointed Executive Chairman on 3 January 2022. He is one of the founders. Previously, Mr Chua Beng Kuang, also one of the founders, was the Executive Chairman since 2008. They are brothers and together with other brothers, they founded and managed the company together.
Mr Yong Jiunn Run was appointed CEO on 2 June 2021. It is the first “outsider” to be appointed (excluding CFO). His responsibilities include making major corporate decisions, developing and steering corporate plans, and implementing business directions and strategies for the Group. He was CEO of CIMB Group Commercial Banking, Senior MD of CIMB Commercial Banking Singapore and Director of CIMB Cambodia PLC with more than 30 years of experience in corporate and commercial banking. He must have brought in to improve the financial performance. He could be instrumental in the idea and decision to lease and dispose of their waterfront yard in Batam, Indonesia which has been under-utilised since FY2014. He invested in the company and has been increasing his stake to 4.07% (8.1m shares).
4. Very micro-cap and not being noticed
As of 11 August 2023, its market cap is only S$14.96m. It is not covered by analysts. It had been an illiquid stock until their announcement on the part disposal of the waterfront yard in Batam in April 2023. With its low share price ($0.077), the stock is prone to speculation and volatility.
Risks
Biggest risk: Being on SGX watch list and being suspended/delisted for unable to fulfil the requirements within 36 months
It was added to the SGX Watch list on 6 June 2023.
Rule 1314(1) of the listing manual states that a watch list company has to record consolidated pre-tax profit for the most recently completed financial year, based on the latest full-year consolidated audited accounts, and also needs to have an average daily market capitalisation of $40 million or more over the preceding six months, to exit the watch list.
Can it be a going concern? They are taking active steps to improve its balance sheet with the partial lease and disposal of its underutilised waterfront yard in Batam and tugboat.
Can they be profitable? Revenue continues to grow and losses are decreasing. If the trajectory continues, they should be profitable.
What I will be paying attention to
- Revenue, earnings, cash position, free cash flow and order books
- Plans after the completion of their partial lease and sale of the waterfront yard in Batam
- Insiders’ trades
- Macro risks that can derail its turnaround. The company needs a supportive macro environment to turn around.
Conclusion
Here is a bet on whether Beng Kuang Marine can survive, turn around and able to get out of the SGX watch list.
Most people just avoid and skip such small and loss-making companies especially those being added to the SGX Watch list. Turnaround is difficult and many do not succeed. So, why waste time and effort to analyse and believe that they can turn around? The risks are high and real unless we know more than the market and have confidence that we have an edge. This is a very contrarian bet; not suitable for everyone and cannot be followed blindly.
I think Beng Kuang Marine has a chance after delving into the details as presented in this post
- The partial lease and sales of their waterfront yard in Batam have not been reflected in their balance sheet yet. Their second sale has not sought the approval of the shareholders.
- Besides paying debts, what else will they do with the money to improve their businesses? What will the longer-term profitability be with the partial rental income of $1.9m per year? If they can achieve at least break even with their business, they are profitable.
- However, we need to see more positive developments in their operating business to propel Beng Kuang Marine into a stronger position which they have to do.
The recent addition to the SGX Watch list will add more pressure to accelerate their turnaround as they need to achieve a market cap of at least 2.85 times to $40m or more over the preceding six months (by January 2026), a condition of the SGX Watch list or face the risk of suspension/delisting.
I will be monitoring its development closely to validate the investing thesis.
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