A change in fortune
Doreenn Leong 

Studies have shown that shares of companies enjoying a political nexus seldom provide handsome gains for investors.So, if a fund manager is mandated to deliver returns over a short timeframe, staying away from politically-linked stocks is a good way to boost risk-adjusted returns.

Investors who bet on listed companies linked to the previous ruling party Barisan Nasional saw a reversal in their fortunes following the shock win by the Pakatan Harapan coalition in the 14th general election (GE14).

Among the adversely affected stocks were Destini Bhd, George Kent (M) Bhd, MyEG Services Bhd, KUB Malaysia Bhd and Malaysian Resources Corp Bhd. On the other hand, there were also stocks that became bullish due to perceived links with personalities in Pakatan Harapan such as Opcom Holdings Bhd, Thriven Global Bhd, Eden Inc Bhd and Alliance Bank (M) Bhd.

For the adversely affected companies, it led to talk of some of them changing ownership.

One of the top losers among counters linked to the former government, when the market re-opened three days after GE14, was Destini.

Its share price dived by 40.7% or 17.5 sen to close at 25.5 sen with about 28.3 million units traded on May 14, mainly due to its huge reliance on government contracts. Year-to-date, Destini’s share price has fallen about 50%.

Its president and group CEO Datuk Rozabil Abddul Rahman is its largest shareholder and reportedly an Umno Perlis treasurer. “Rozabil is said to be looking at selling his stake in Destini at around 50 sen. However, investors may not be too keen,” says a source.

The counter closed at 26 sen on July 17, translating into a price-earnings (P/E) multiple of 10.83 times. It traded at a 52-week high of 70 sen on July 20, 2017 versus a low of 19.5 sen on May 24.

When asked by FocusM if Destini is up for sale, Rozabil asks, “For sale? Why?” adding that he is not selling his stake.

In fact, filings with Bursa Malaysia show that the businessman has been increasing his stake in the company. He had held a 24.74% direct and indirect stake as of April 30 but had increased it to 26.44% collectively as of July 13. The Ministry of Finance (MoF) via its wholly-owned subsidiary, Aroma Teraju Sdn Bhd, holds 17.3%.

Fund managers reckon Rozabil may want to take advantage of the current low price to accumulate the shares as he deems the company to be undervalued.

Destini is a one-stop engineering solutions provider with diverse interests in the aviation, marine, land transport and O&G sectors. It is one of the leading maintenance, repair and overhaul (MRO) service providers in the region.

For the first quarter ended March 31, 2018, Destini’s net profit fell 22.9% to RM7.75 mil from RM10.05 mil a year ago on the back of a 38.5% drop in revenue to RM137.57 mil from RM223.72 mil. The poorer results were mainly attributable to lower contribution from aviation manufacturing services.

During the period under review, Destini’s earnings per share fell to 0.67 sen from 0.87 sen in the previous corresponding period.

On May 8, the company was served with a writ of summons dated April 29 and a statement of claim dated April 22 by the Inland Revenue Board (IRB). The IRB is demanding for the settlement of the outstanding tax payable, inclusive of penalties, totalling RM6.58 mil for the 2016 year of assessment.


Values emerge after rout

Hong Leong Investment Bank says in its report on May 17, the selling of Destini was overdone as its 6.3 times FY19 P/E (36% below its average 10-year P/E of 9.8 times) and 0.59 times price-to-book (P/B), which is 55% lower than the 10-year average of 1.3 times, could have priced in the potential business uncertainty, supported by its high barrier to entry businesses and decent orderbook coupled with an anchor shareholder, the MoF.

“Destini’s core business of MRO safety and survival equipment for the Royal Malaysian Air Force (RMAF) is defensive and has a high barrier of entry, and its orderbook of RM930 mil could provide earnings visibility for FY18-19.

“With the group’s proven expertise and experience as well as good track record and competitive pricing, we see there are good chances of success in new helicopter supply, vessel construction orders and rail-related contracts. Many of the existing and new contracts will also provide MRO service opportunities,” the research house adds.

Rozabil, 46, is unperturbed by the change in government and welcomes Pakatan Harapan’s open tender policy. He remains confident Destini will stand to benefit.

“My focus is to build up the business and let the company’s performance speak for itself. I’m here to manage the business to ensure that it consistently generates good profits and dividends to shareholders,” he told the media recently.

Rozabil stresses that his political alignment is not a factor in determining the company’s fortunes. “History shows that when I took over Destini and managed to turn around the company within a year, I had run it as a businessman and not as a politician,” he says, adding that the company’s recently approved dividend policy of between 30% and 40% of net profit is a sign of its commitment to shareholders.

He says Destini will continue to seek more private commercial jobs and expand its reach geographically to fuel growth in its bid to reduce reliance on government jobs, which contributed close to 80% of its revenue back in 2012.

He hopes to achieve a revenue composition of 60% commercial projects and 40% government jobs within the next three years.

Meanwhile, Rozabil expects overseas jobs to contribute around 30% to 40% to its revenue, driven by O&G and marine fabrication works in Singapore in the next two to three years.


Boost in MRO biz

Similarly, CIMB Research does not expect Destini’s business to be significantly affected by the election of the new government.

The research house maintains its “add” rating on Destini, with a target price of 60 sen based on 17.6 times estimated earnings for 2019.

CIMB Research says in a recent report, Destini is expected to recognise revenue from the sale of six helicopters to the Defence Ministry (Mindef) in the second quarter of this year.

It adds that the helicopter contract, which is valued at RM322 mil, is to be completed by August. Revenue from the contract should help boost Destini’s earnings.

“The company is expected to start MRO services from August 2019, after the one-year warranty expires for the six military helicopters to be delivered to Mindef by August 2018. We estimate the helicopter MRO business with Mindef could be worth RM40 mil annually for Destini.

“We would not be surprised if the government orders more military helicopters from Destini in the near future, providing a likely boost to its MRO business,” says CIMB Research.

The research house expects Destini to generate more than 80% of its revenue from the marine and aviation sectors this year.

“We expect the marine revenue to be driven by the construction of New Generation Patrol Craft and Offshore Patrol Vessels for the Marine Maritime Enforcement Agency, to be delivered by 2018 and 2020, respectively.

“We expect Destini to also bid for MRO contracts for these vessels upon the completion of their construction,” it adds.

Rozabil has been instrumental in the company’s turnaround and move away from dependency on government aviation MRO contracts.

He surfaced in the company, previously known as Satang Holdings Bhd, in 2011.

For FY17 ended Dec 31, Destini posted a net profit of RM30.67 mil – an increase of over four times from the RM7 mil registered in FY12.

Two years ago, it diversified into the rail MRO services segment and is currently completing a RM62 mil job from Keretapi Tanah Melayu Bhd to supply 35 motor trolleys and two rail road vehicles by 2019.

Its current outstanding order book is at RM930 mil, which gives it earnings visibility for FY18 and FY19.

The company has done well financially in the past few years after much restructuring. Between 2012 and 2016, its revenue grew more than six times to RM354.76 mil while net profit more than quadrupled.

In January last year, Destini’s joint venture with Lembaga Tabung Haji-controlled TH Heavy Engineering Bhd secured a contract worth RM739 mil to supply three offshore patrol vessels to the Malaysian Maritime Enforcement Agency.

This came just over a year after it completed the acquisition of a shipbuilding unit in December 2015.


Oil and gas boon

As for its oil & gas business, Destini said it was awarded an umbrella contract for the provision of well abandonment integrated services for Petronas Carigali Sdn Bhd.

Last November, Destini announced it will be partnering Singapore-listed Federal International (2000) Ltd to collectively bid for oil and gas projects in South Asia and Southeast Asia.

“This new joint venture will pave the way for new business opportunities for our oil and gas division with the expansion of our scope of service,” Rozabil said.

Destini said it will be able to leverage on Federal International’s overseas network to expand its services beyond Malaysia. It will also be able to leverage on the partner’s existing presence in Indonesia to expand its marine-related businesses.

Destini said Federal International not only has presence in Singapore, Indonesia and Malaysia but also Brunei, Thailand, Indonesia, India, Japan, China, UK and the US.

The partnership, via a 50:50 joint venture company in Singapore, was incorporated on Jan 15 under Federal Destini (S) Pte Ltd.

The JV intends to bid for floating production systems in greenfield development, transportation and installation services, well abandonment and field decommissioning services, and downhole and well workover services.

While Rozabil is confident the company will not be affected following the change in the federal government, investors might adopt a wait-and-see attitude until Destini is able to show consistent growth moving forward. 

This article first appeared in Focus Malaysia Issue 291.