Zelan still recovering from pain of aborted UAE job

KUALA LUMPUR (May 29): Construction firm Zelan Bhd, in which tycoon Tan Sri Syed Mokhtar al-Bukhary-linked MMC Corp Bhd owns a 39.25% stake, is still recovering from the pain of the aborted development of the US$250 million (RM1.06 billion) Meena Plaza in Abu Dhabi, United Arab Emirates (UAE), in 2015.

“You can see the pain Zelan had to bear in the financial year ended Dec 31, 2016 (FY16). The wound is gradually healing, but talking about earnings recovery now — there is still a fair bit to go,” Zelan chairman Datuk Anwar Aji told The Edge Financial Daily after the group’s 41st annual general meeting last week.

In October 2015, Zelan, via Zelan Holdings (M) Sdn Bhd, announced it had terminated its contract inked in April 2008 with Meena Holdings LLC, which commissioned the Meena Plaza development, after the latter defaulted on some RM31.88 million worth of payments.

The absence of the contract to build Meena Plaza was one of the factors that dragged Zelan’s performance in FY16 as it had lowered the company’s annual revenue, said Anwar, who was also formerly the managing director of the country’s sovereign fund, Khazanah Nasional Bhd — a post he held till May 2004.

The group fell into the red in FY16 with a net loss of RM68.25 million from a profit of RM30.49 million in FY15, as revenue fell 46% to RM222.37 million.

“Predicting the exact timing of Zelan’s turnaround [in annual earnings] is a very sensitive matter, and not as simple as ABC. We are on the path to recovery but I cannot give any guidance yet, as the company is still waiting for a new captain to steer the ship,” said Anwar.

Still, the start of Zelan’s FY17 is not looking too bad: the company announced its first quarter ended March 31 (1QFY17) recorded a net profit of RM7.13 million, compared to a net loss of RM37.57 million a year ago.

The improved earnings were mainly due to lower discounting of trade receivables and lower unwinding of discounting on trade payables of RM800,000 (1QFY16: RM26.1 million), lower unrealised foreign exchange loss of RM1.4 million (1QFY16: RM9.9 million), and an RM11.6 million contribution from its Indonesian operations.

However, revenue slumped 45% to RM33.63 million from RM61.39 million, on lower contributions from its engineering and construction business due to the completion of several local projects.

Zelan has yet to appoint a new managing director after Adnan Mohammad, vacated the post last December to pursue other opportunities after having served in the role for nearly three years from March 2014. A month earlier, Zelan chief financial officer Juliza Jalil left the company.

On when Zelan will welcome its new captain, Anwar said “that is in the hands of MMC, as the largest shareholder”.

“Last year, we saw more than half of the key management people — especially at the first and second tier — leaving the company. Just a note, it was not an exodus, and we, at the board level, did not initiate any clean-up activities. [But] perhaps the time is now ripe for MMC to inject new blood into Zelan,” he added.

As to paying dividends, Anwar said Zelan will only consider doing so once it returns to a stronger financial footing, starting with the turnaround of its biggest business segment — engineering and construction — which plunged into the red with a net loss of RM61.22 million in FY16 from a net profit of RM39.3 million in FY15.

Zelan is also working to address a “perceived liquidity issue”, after it used up most of its cash to service debts and fund its operations. Its cash and cash equivalents slumped 92.34% to RM3.62 million as at end-2016 from RM47.29 million a year ago.

Zelan also turned into a net current liability position of RM138.9 million in FY16, due to an increase in borrowings and payables for the Meena Plaza project. Its debts ballooned 37.36% y-o-y to RM475.73 million, while its gearing or debt-to-equity shot to 360.4 times from 168.7.

“The receivables from our drawbridge projects in Terengganu and contribution from the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) project, which is expected to be completed in the third quarter of this year (3QFY17) should be able to mitigate the net liability position in FY17,” he added.

Anwar said Zelan had also restructured its performance and rectification bond from a bank guarantee facility to a term loan to ease its cash flow and allow for a longer period of settlement.

“We are servicing our debts accordingly. We are open to any methods to raise cash as and when needed,” he added.

This year, Anwar hopes Zelan will continue last year’s momentum of winning jobs. Among the more notable ones it bagged were the RM96.9 million contract to build the Langat Sewage Treatment, and the RM257.6 million deal to build part of SUKE. Zelan’s total order book currrently stands at RM266.3 million.

“I am optimistic about Zelan’s prospects in FY17, as it will continue to actively bid for new contracts and secure more engineering and construction works, particularly in areas where Zelan has the competitive edge and track records,” Anwar explained.

Zelan shares closed unchanged at 14.5 sen yesterday, giving it a market capitalisation of RM122.51 million. Year to date, the stock has climbed 20.83%.

This article first appeared in The Edge Financial Daily, on May 29, 2017.

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