JT 8.2016This article by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 11 August 2017. The article is republished with permission.

AustinEnergyNordic Group's subsidiary, Austin Energy, specialises in thermal and acoustic insulation, fireproofing, industrial coating and passive fire protection.
(Photo: Company)

Veteran banker Chang Yeh Hong, the Executive Chairman of Nordic Group Ltd, is an unflinching voice of prudence and objectivity.

His focus on discipline and risk management - a skill honed by nearly two decades in the financial industry - has played a pivotal role in the development of SGX-listed Nordic. The Group provides systems integration, precision engineering, scaffolding solutions, insulation and mechanical services to the oil and gas, petrochemical, pharmaceutical, as well as infrastructure industries.

"The cornerstones of our management philosophy at the strategic level revolve around prudence, and maintaining a sustainable performance for the Group. Our decisions are based on facts, figures and research, not gut feel," Chang said.

"Because of my banking background, I've seen many companies rise or fall on management decisions. At Nordic, every decision is calculated to build an organisation that can sustain a consistent and steady performance."

Between 1984 and 2002, Chang held various banking roles, including regional managing director of Asia Pacific with Citibank, and the global head of a product group with Standard Chartered Bank.

LQM000066Reading widely helps you gain a global perspective on industry trends and sharpens your decision-making processes.

- Chang Yeh Hong
Executive Chairman

Nordic Group

The Bachelor of Arts in Economics graduate from the National University of Singapore completed the Business Financial Management Programme with UK's Manchester Business School in 1995, and the International Executive Management Programme at INSEAD Fontainebleau, France, in 1998.

In 2004, he took on an executive role in Nordic, and was appointed to the Board of Directors six years later. Between 2002 and the present, he also held directorships in Technics Oil & Gas, Union Steel Holdings, Jackspeed Corporation, and System Access, which was subsequently acquired by SunGard.

For Chang, the moments that gave him greatest satisfaction came from managing crisis scenarios. "I tend to thrive on crises," he admitted.

He recalls the Asian Financial Crisis of 1997, which struck during his earlier career in the finance sector. He was able to reduce the bank's non-performing loan exposure by identifying risks at an early stage, ring-fencing the problem areas, and proactively managing them.

The Global Financial Crisis of 2008 was another case in point. "By then, I was in Nordic, and banks started to pull our lines. Fortunately, I was able to find a bank - my former employer Standard Chartered - which was willing to lend the company S$5 million, based on my previous track record and faith in my management abilities."

With the loan, Chang doubled Nordic's sales in that crisis year, building the momentum for the company's eventual listing on the Mainboard two years later.

Fast-forward to today, where numerous marine, oil and gas (MOG) players continue to grapple with the energy sector's worst downturn in at least three decades. "We're still growing despite the current crisis in the market," he pointed out.


Double Whammy

Nordic has a current market capitalisation of about S$165 million. In the 2017 year-to-date, its shares have generated a total return of 71.3%, outperforming the benchmark Straits Times Index's (STI) 17.9% and the broader FTSE ST All-Share Index's 17.0%.

Between FY2012 and FY2016, the company was able to grow its net profits at a compounded annual rate of 48%, largely because it diversified its geographical and currency exposure risks.

"Back in 2011, we foresaw the downturn in the oil and gas sector. The company was not in good shape then - 80% of our revenues came from Chinese shipyards, and we had a very high exposure to the US dollar," Chang recalled.

Chang Yeh Hong
LQM000066

Our M&A strategy revolves around at least one area of familiarity - either the target acquisition has the same customer footprint and a new product or service, or there is a different customer footprint, with the same product or service.

This way, we're not exposed to more than one risk at any time, and there's always a safety net to fall back on.


- Chang Yeh Hong
Executive Chairman

Nordic Group

(Photo: Company)

"That was a double whammy."

He focused on building alternative income streams and removing key risks.

In 2011, Nordic acquired a scaffolding company - Multiheight Scaffolding - that gave it a foothold in the petrochemical sector.

"Oil majors like Exxon, Chevron and Shell use scaffolding structures for their petrochemical complexes on Jurong Island, and entry barriers are naturally high, because safety concerns are always paramount," he noted.

"With this acquisition, we converted our cost and revenue bases to Singapore dollars, which became a natural hedge. We also moved into the downstream oil segment, which was faring better than upstream."

Nordic continued its acquisition spree to lay the foundations for growth. In 2015, it bought the Austin Energy Group, an insulation and fireproofing services specialist. This marked its entry into pharmaceuticals - a new industry segment.

Earlier this year, it added Ensure Engineering to its stable, cementing its expertise in the petrochemicals sector and opening up new revenue streams from Singapore's National Environment Agency and PUB, the national water agency.

The acquisition of the engineering services firm will also provide Nordic with a more stable income source, as almost all its revenues are derived from recurrent maintenance contracts that typically span one to five years.

"Our M&A strategy revolves around at least one area of familiarity - either the target acquisition has the same customer footprint and a new product or service, or there is a different customer footprint, with the same product or service," Chang said.

"This way, we're not exposed to more than one risk at any time, and there's always a safety net to fall back on."

Nordic's acquisitions have contributed profits from day one. "We buy companies not for their assets, but so that the Group's performance as a whole can be sustained. The key criteria we use to assess suitability include processes and systems, overall profits, future cashflows and order books," he added.

Integrating the Group's acquisitions properly is also a priority to reduce future risks. "We need to ensure these companies are aligned with the Group's processes and systems, and the next echelon of leadership is in place, as the owners may want to step aside after the sale is completed."

 

♦ For Rainy Days

No cash, no purchase is another mantra. Every dollar Nordic borrows is backed by a dollar of cash on its balance sheet, to prevent the Group from overleveraging.

"Shareholders often ask us why we hold so much cash. Our assets and liabilities are all managed very prudently - all this cash is for a rainy day, just in case the bank decides to pull our lines," he noted.

As at 31 March 2017, Nordic's cash and cash equivalents stood at S$32.7 million, up from S$32.3 million as at 31 December 2016. Total borrowings, excluding finance leases, amounted to S$25.6 million as at end-March.

"A lot can be said about management vision, but vision without action just conjures up big dreams," he said. "When you run a company, each strategy needs to be fleshed out carefully and systematically."

Looking ahead, the oil and gas industry will likely be mired in the doldrums for the foreseeable future. "Many of the big boys are still going belly up, and there's a long road ahead in terms of any recovery," Chang added.

While the US Energy Information Administration (EIA) has forecast crude prices to average US$53 a barrel this year given significant oil inventories, it remains hopeful the supply glut may ease sufficiently in 2018 for oil prices to stage a meaningful recovery.

Stock price  41c
52-week range 21c - 42c
Market cap S$161.2m
Price/Book 2.3 x
Price Earnings 12.3 x
Dividend yield 3.09%
Source: SGX StockFacts

"Only when market demand and supply reach an equilibrium, and oil prices return to a level where key players are willing to invest again, will we see a rebound in the upstream cycle."

In the meantime, downstream players are in a more stable position. "For these companies, their raw material is crude, and given the relatively low oil prices, their margins are strong. Industrial demand for downstream products is also robust," he pointed out.

In other words, Nordic is in a relatively good place. "Our growth from the downstream segment is strong, and mitigates our upstream exposure. We have also right-sized our organisation, and diversified our income sources by moving into different end-markets."

As at 30 April 2017, its order book - which doesn't include maintenance contracts - stood at S$35.7 million, while its latest contract win in May to provide scaffolding and equipment insulation work for customers in the petrochemical industry totalled S$38.9 million.

The Group's risk profile has changed. It now derives 45% of its revenues from maintenance contracts for petrochemical clients, with the remaining 55% coming from projects, Chang said.

"Maintenance contracts typically have a two- to three-year duration, and provide stable, recurring income. Previously, our revenues were all project-driven and extremely lumpy."



A Head Start

LQM 0094FFHave we achieved this target (20% annual growth in earnings) over the last six years? Yes. Do we have enough building blocks to do this for the next few years? I think so." 

- Chang Yeh Hong
Executive Chairman

Nordic Group

With these building blocks in place to ensure sustainable expansion over the medium term, Chang and the management team have set their sights on boosting market capitalisation and profits.

"Since our 2010 listing, our market cap has grown more than seven-fold - from S$22 million to S$165 million. We hope to double our market cap again in the next five years," he noted.

Management will also maintain its internal target to grow the Group's earnings by 20% annually. "Have we achieved this target over the last six years? Yes. Do we have enough building blocks to do this for the next few years? I think so."

Nordic, which moved to a semi-annual dividend distribution in 2015, is also maintaining its policy to pay out 40% of net profits as dividends.

And when he's not fine-tuning Nordic's strategies, Chang spends his time keeping abreast of developments in the oil and gas sector.

"Reading widely helps you gain a global perspective on industry trends and sharpens your decision-making processes. This gives you a head start over your peers, and lies at the heart of proactive management," he added.

The 57-year-old is a bundle of energy, eschewing golf for a game of soccer twice a week with school alumni and friends.

LQM000066We buy companies not for their assets, but so that the Group's performance as a whole can be sustained. The key criteria we use to assess suitability include processes and systems, overall profits, future cashflows and order books.

- Chang Yeh Hong
Executive Chairman

Nordic Group

"Golf is too slow for me right now - I will play golf when I can no longer run and kick the ball!" he grinned.

"I prefer active sports because it hones my reflexes and keeps my mind alert."

Not surprisingly, the father of a daughter, 22, believes in pushing boundaries and persevering to the end. "That's how I grew up - I didn't come from a well-to-do family, but I was willing to work hard to achieve my goals."

"My daughter is born in a different time, but certain values remain the same - I always tell her that the sky is the limit, and whatever she undertakes, she must stretch herself to the max, never give up, and never be afraid of failure," he added.

Integrity is another principle close to Chang's heart. In particular, he emphasises the importance of playing fair when it comes to dealing with customers, partners and staff.

"In the case of an M&A deal, I will always try to pay the fair value of the asset. I don't believe in shortchanging others just to make a quick buck," he said.

"You must be fair and equitable in your dealings with everyone, because your reputation is at stake and can disappear in an instant. This is the only way to build trust, honesty and integrity in an organisation."

Financial results

Year ended 31 December (S$ '000) 2016 2015 2014
2013
Revenue 81,921 80,491 72,424 66,220
Profit before tax 14,677 11,944 9,169 6,686
Profit net of tax 12,683 10,505 7,866 6,102



Quarter ended 31 March (S$ '000) 1QFY2017 1QFY2016
yoy chg
Revenue 19,923 19,810 0.6%
Profit before tax 3,452 2,773 24.4%
Net profit attributable to equity holders 2,810 2,315 21.3%

Source: Company data

 


Outlook & Risks
  • The Group is cautiously optimistic about its ability to maintain profitability despite the ongoing softness in the market.
  • Nordic's project-based order book remains healthy, and it sees recurring maintenance income and diversified income streams. As at 30 April 2017, its order book - which doesn't include maintenance contracts - stood at S$35.7 million. These orders are expected to be delivered within the next 24 months, and will generate sustainable revenue streams for the Group up to FY2018. However, these confirmed orders are subject to possible cancellation, deferment, rescheduling or variations by customers.
  • Given the continued downturn in the industry, the Group remains prudent and has exercised good cost controls, reduced operating expenses year-on-year, and maintains a strong balance sheet. It believes it will be able to seize new opportunities should the industry recover, given its track record of solid execution.



Nordic Group Ltd

Established in 1998, Nordic is a leading supplier of automation system integration solutions, vessel maintenance, repair and overhaul (MRO), precision engineering, scaffolding and insulation services, serving mainly the marine, offshore oil and gas, petrochemical and pharmaceutical industries. Headquartered in Singapore, Nordic currently has two production facilities located in Suzhou, China.

  • Designed to meet the demands of vessel automation, the Group's System Integration division offers integrated control and management systems for newly built ships, as well as ships already in operation, but which are in need of upgrades and conversions.
  • Under its MRO and Trading division, Nordic provides customers with a dedicated team of consultants who are responsible for any after-sales requests for maintenance, repairs and overhauls as part of its after-sales service.
  • The Group's Precision Engineering division designs and builds tooling systems, and provides turnkey production solutions to customers in the marine, oil and gas, aerospace, medical and electronic manufacturing services industries.
  • Multiheight Scaffolding Pte Ltd and its subsidiary front the Group's Scaffolding Services division, and is an established leader in metal scaffold works servicing the process, construction and marine industries.
  • In June 2015, Nordic acquired the Austin Energy Group, which specialises in comprehensive Insulation Services and Passive Fireproofing Services in the petrochemical, pharmaceutical, marine, as well as oil and gas Industries.
  • In April 2017, it also completed the acquisition of Ensure Engineering Pte Ltd, which is principally engaged in providing engineering repairs, maintenance, operations and plant turnaround services for public environment engineering installations, energy installations, marine and offshore industries, manufacturing, as well as oil and petrochemical industries.

 

For its 1st quarter results for the period ended 31 March 2017, click here.

The company website is: www.nordicgrouplimited.com.

The ccompany's Stock Facts page is here.


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