KUALA LUMPUR (Nov 10): Construction and property developer Zecon Bhd, whose net debt widened 50.8% to RM292.6 million as at June 30, 2017, from a year ago, said it will wait for about a year before replenishing its order book so as not to stretch its financials.

“We have to be mindful about moving forward because getting more orders does not mean it is good for the company as it can become over-geared and stress the financing or limits. It is dangerous to the company’s progress,” chief executive Syed Muzakir Al Joofre said at a media briefing on the results of its financial year ended June 30, 2017 (FY17) yesterday.

He said Zecon is now content with its RM3.6 billion order book, which will last the group for three to five years, while it expects positive outcome from its negotiations with the federal government and Syarikat Perumahan Nasional Bhd to build affordable homes under the 1Malaysia Affordable Housing scheme.

“However, if any opportunity arises, we will evaluate it as we go along,” he qualified.

Meanwhile, he said work on the group’s Kota Petra mixed development that is sited on a 2,000-acre (809.37ha) tract in Sarawak, with an estimated gross development value of RM11 billion, is expected to begin in the fourth quarter of FY18 (4QFY18).

The project will feature 2,117 1Malaysia Civil Servants Housing double-storey terrace houses, a state and federal government administration centre, a resort, and medical and education hubs.

Zecon aims to maintain about 10% gross profit from its projects and bring in some RM100 million in lease and maintenance income per year over a 10-year period from the Universiti Kebangsaan Malaysia Permata Specialist Children’s Hospital development in Cheras from 2019 onwards.

Describing the project as a cash cow for the group, Zecon’s corporate finance and accounts vice president Jamil Jamaludin said, however, the group’s gearing level is likely to reach three times its current 1.36 times next year as the group hits the peak funding period for the project.

Jamil said the hospital is an in-house project undertaken on a build, lease and maintain concept over a 25-and-a-half-year concession period.

“It is based on a private finance initiative (PFI), meaning that we finance the project via a bridging loan, but it is ring-fenced by the government. As we draw down the loan about RM300 million to RM400 million, the interest increases. Next year is the peak funding period for the RM606 million project, which will be completed in November 2018,” he added.

Although the anticipated rise in gearing level seems alarming, Syed Muzakir said investors should not use it to judge the company’s liquidity because the nature of a PFI is such that revenue is only realised post construction.

“Gearing will reduce once the government is billed for the lease rental during the concession period,” Syed Muzakir added.

Jamil said while Zecon looks at maintaining an overall 10% gross profit margin, the group would be pleased to realise a 5% net profit margin, seeing that construction materials and labour costs are high.

On guidance on the company’s 1QFY18, the group expects to recognise construction revenue from the Pan Borneo Highway project with Kimlun Corp Bhd, and the children’s hospital.

“Both are in a mature stage where the quantum of recognition is greater. The highway is now 12% complete,” Jamil added. Zecon and Kimlun secured the RM1.46 billion contract to build and upgrade phase one of the Pan Borneo Highway in Sarawak last year on a joint venture basis.

“We are targeting a gross profit of about 10% to 12% from the project,” he added.

This article first appeared in The Edge Financial Daily, on Nov 10, 2017.

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