ZELAN GAINING MOMENTUM

ZELAN GAINING MOMENTUM
The Star Online 
Business News, 16th August 2014

Zelan Bhd has been a hot stock in recent times.

With investors willing to take a bet on the company's prospects, the engineering, construction and property group has seen its stock shoot up 68% to 42 sen from just three months ago, outperforming the 30-stock benchmark index, the FTSE Bursa Malaysia KLCI (FBM KLCI) which is down over the same period.

Trading volume has also ballooned several times over.

The group, which has faced some challenges in the past relating to its projects, has just completed a couple of major corporate exercises that helped remove its accumulated losses, according to its managing director Adnan Mohammad.

"We are looking forward to putting Zelan on a stronger financial footing,' Adnan, who was appointed to his position in March, tells StarBizWeek.

Previously managing director at property outfit Faber Group Bhd, he is banking on growth in the construction sector - Zelan’s mainstay - to remain "strong" as the country continues to be on a growth trajectory, suggesting a strong construction job flow domestically.

In his favour is the current healthy pipeline of jobs.

Analysts have brushed off worries about the slowdown in construction activities in certain recent quarters, attributing the hiccups to later-than-expected timing of job announcements.

Latest data meanwhile show that total value of construction work completed in the second quarter of this year was up 10.8% (year-on-year) to RM25.2bil.

Current orderbook

Zelan currently has an orderbook of about RM1.15bil.

"This will last us until the first half of 2017," Adnan says.

The company, which is 39.25% controlled by conglomerate MMC Corp Bhd, has a staff strength of a little more than 100 people, making it one of the smaller players in the industry.

Of the current projects on the plate, three are local, one of which is ongoing, with the other two about to commence soon.

Another two jobs were just obtained this month, of which the first is a contract from the East Coast Economic Region Development Council for the construction of a RM248.73mil drawbridge connecting Muara North and Muara South in the Kuala Terengganu city centre.

Additionally, Zelan is also one of the companies that was recently awarded a contract involving Petroliam Nasional Bhd's Pengerang Integrated Complex (PIC).

Under this, its job involves the basic design, detail engineering, procurement, construction and commissioning of the material off-loading facilities jetty at Tanjung Setapa, Johor.

Zelan's current overseas focus is a mixed development project in Abu Dhabi.

Notably, this is not a new contract as it was supposed to be completed some time back.

In April, the company reached an amicable settlement with Meena Holdings LLC, which is the owner of the Meena Plaza Mixed Use development project that Zelan was supposed to complete but didn’t due to certain disputes.

In the settlement, it was agreed that Zelan would continue work on the development project, slated to start next month in addition to being paid some RM107.4mil as part of the agreement.

The balance of its work on the Abu Dhabi project is worth some RM464mil and is expected to be completed within 15 months.

This "will certainly put Zelan on a firmer footing on its route of recovery and growth", the company has said.

Adnan does not divulge what kind of margins Zelan gets from carrying out its construction work but says that all the projects it has secured so far were based on "very competitive" tender pricing.

"Having said that, for each project we have tendered for, we ensure that the margin is at a comfortable rate."

Industry players meanwhile have put contract margins in the engineering and construction industry, specifically for jobs obtained from competitive bidding, at single-digit figures, razor-thin even - due to stiff competition and rising overall costs.

Adnan also chooses to be mum on the tenders that Zelan has submitted for fresh jobs saying only, "we have a couple more tenders submitted and are awaiting the results".

Net cash position

The company raised a total of RM327mil after selling its shares in IJM Corp Bhd in its recently concluded financial year ended March 31 (FY14).

Of the amount generated, Zelan has used some RM268mil to pay off its term loans while the remaining was used to help partially settle a loan as a result of the wrongful liquidation of the performance bond for the Meena Plaza project by Meena Holdings, according to its latest annual report.

Zelan also had a rights issue exercise which raised RM42.2mil.

"We have just completed the corporate exercises that have resulted in the elimination of accumulated losses and now we have a small amount of retained earnings at company level."

As for dividends to shareholders, the company has to first build up its retained earnings, Adnan says.

He says also on Zelan's plate is a plan to “reactivate” its property and development unit without losing focus on its immediate goal of re-strengthening its engineering and construction segment.

Its annual report reveals that this unit generated sales of RM800,000 in FY14, a small amount compared with the group's total revenue of over RM250mil.

Adnan says with the improved financial position of Zelan, it intends to explore opportunities in this segment.

Among Zelan's most recently completed work is RM179.3mil worth of jobs involving berth and back of wharf construction at Pelabuhan Tanjung Pelepas in Johor, a port controlled by MMC.

It is currently working on a RM391.6mil job involving the construction of the Centre for Foundation Studies (Phase 3) at the International Islamic University Malaysia in Gambang, Pahang which should be completed by January 2016 on top of two subcontract packages at Tanjung Bin’s coal fired power plant in Johor.

The other two projects that the company should soon start work on are the Gombak Integrated Transport Terminal, Selangor and the construction of the Integrated Immigration, Custom, Quarantine and Security Complex in Kedah.

"The challenge for us, specifically in the construction industry is to always ensure that we make attractive enough margins, there's no point accepting a project if it does not do anything for your bottom-line."

Zelan made a net profit of RM35.2mil or 5.77 sen per share in FY14. compared with a net loss of RM77.8mil for the same period a year earlier.