BHIC clarifies reason behind US$17.1m sale of Chulan tankers

BHIC clarifies reason behind US$17.1m sale of Chulan tankers
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KUALA LUMPUR (Jan 5): Boustead Heavy Industries Corp Bhd (BHIC) today clarified that the disposal of its three Chulan chemical tankers was because the net operating returns from the continued chartering of the tankers were minimal and insufficient to cover financing and maintenance costs.

"This fact was reported in regular quarterly reports to Bursa Malaysia and in the relevant annual reports, and comments have been made consistently about the unsatisfactory financial returns from the chartering business," it said in a statement today in response to an article that appeared on The Edge Malaysia's 'Frankly Speaking' column, in its Jan 4-Jan 10 edition.

In the article, The Edge had urged BHIC to explain why it ventured into the tanker business four years ago in the first place, the difficulties it faced and why it decided to fold after BHIC announced on Dec 23 that it would be disposing of its three chemical tankers to Jasa Merin (Labuan) Plc for a combined US$17.1 million (RM73.47 million) or US$5.7 million (RM24.49 million) each, the proceeds of which it would use to reduce its existing loan and borrowings.

In its statement today, BHIC said in its previous news release which accompanied the announcement of the disposal of the tankers, it was made clear that the reason BHIC assumed the contract for the vessels in 2010 was to mitigate a situation where the original buyer had cancelled the contract to build the vessels prior to their completion. 

"Rather than provide for significant capital losses on the unfinished vessels, the decision taken at that time was to complete the vessels and put them out for charter with a view to earning profits, based on management judgement at that time," BHIC said. 

The three Chulan chemical tankers were completed in 2011 and BHIC said although they were employed "almost continually" since their completion, largely on charters to major oil companies, "the net operating returns were minimal and insufficient to cover financing and maintenance costs, in line with the continuing overall weakness in the shipping sector".

Given the current market conditions for charter rates and the continuing low oil price, which means that potential charterers are cutting costs, the financial outlook for the chartering business is considered to be unattractive, it noted.

Hence, its decision to dispose of the tankers.

BHIC said the disposal decision will result in a loss of approximately RM12 million to the group, which is the difference between the book value of the assets and the selling price, and is the sole criteria for determining any profit or loss on disposal.

"When assets are held for sale, as was the case for the Chulan tankers from mid-2015, standard accounting practice is that the book value of the assets is always the lower of cost adjusted for diminution in value, and the market value of the assets.

"An increase in the book value is not possible under standard accounting practice, and the assertion in the article that this might be so and could have led to an even greater loss is fundamentally unsound," it added.

BHIC also noted that if the Chulan tankers had not been sold in 2015, a provision for diminution in value of approximately RM12 million would still be required in its 2015 financial accounts.

"In the absence of a transaction, it is BHIC's practice to professionally value the Chulans annually and to recognise any diminution in the value of the assets at financial year end," it explained.

Additionally, BHIC said if the disposal had not been made as announced, estimated depreciation, compulsory special maintenance costs on all three vessels and interest expenses in 2016 would have exceeded RM14 million in extra charges against its consolidated earnings for the 2016 financial year.

"The rationale for disposal of the Chulan tankers is considered to be compelling, therefore," it stressed.

As at 2.49pm, shares in BHIC were trading 9 sen or 4.74% higher at RM1.99 apiece, valuing the group at RM472.07 million.

(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)