KUALA LUMPUR (Nov 9): Zecon Bhd’s auditor Messrs Crowe Horwath has highlighted a material uncertainty in the group’s financial statements for the financial year ended June 30, 2019 (FY19). As a result, this has cast doubt on the company’s ability to continue as a going concern.
According to a bourse filing yesterday, Crowe Horwath said the group recorded revenue and cost from construction contracts of RM221.46 million and RM236.90 million respectively for FY19.
The auditor said construction activities represent the largest revenue stream for Zecon.
“Significant management judgements and estimation are involved in the recognition of the revenue and its associated costs. Significant judgement and estimation are also required in determining the stage of completion, gross profit margin, provision for foreseeable losses and liquidated ascertained damages, if any.
“These estimations are subject to uncertainties that depend on the outcome of future events. We determined this to be a key audit matter due to the complexity and judgemental nature of these activities,” it added.
Zecon recorded revenue and cost from service concession of RM127.7 million and RM121.61 million respectively for FY19, according to the auditor.
Crowe Horwath also noted that significant management judgement is required in determining appropriate discount rates for the computation of concession income arising from construction of the UKM Specialist Children’s Hospital.
“The recognition of construction revenue, a component of the concession income and related expenses are computed based on stage of completion method. The determination of stage of completion requires management to exercise significant judgement in estimating the total costs to complete.
“In estimating the total costs to completion, the group considers the completeness and accuracy of its costs estimation, including its obligations to contract variations, claims and cost contingencies. The total costs to completion including sub-contractor costs, may vary with market conditions and may also be differently forecasted,” said the auditor.
The auditor also raises questions on the valuation of the company’s investment properties due to the complexities in determining the fair value of the investment properties. The investment properties carried a fair value of RM593.38 million as at June 30.
Nonetheless, Crowe Horwath also highlighted that Zecon is taking measures to mitigate the existence of material uncertainty ongoing concern and its obligations falling due within the next 12 months.
The measures consist of:
1. The group successfully placed out 13.1 million placement shares at an issue price of 25 sen per placement shares on July 17, 2019.
2. The group is in the process of formulating and implementing a proposed private placement of 30% of the total number of shares in which an additional 43.24 million number of shares at an issue price to be determined later.
3. The group had refinanced the existing term loan into a new facility agreement with a new lender. The first instalment of term loan will commence in 2021.
4. The group has filed the Arbitration claim amounting to RM207.22 million. The next hearing has been set for June 15, 2020.
5. The group is also looking at monetizing certain property assets of the group.
Meanwhile, the auditor said there are no major delays on its current on-going projects, consisting of the construction of Hospital Universiti Kebangsaan Malaysia (HUKM) and the Pan Borneo Highway.
HUKM has granted an extension of time until Feb 20, 2020, and Zecon is expected to generate cash inflows amounting to RM64.07 million within the next 12 months commencing on March 2020.
For the Pan Borneo Highway project, it noted that Serian section was granted an extension of time until July 9, 2020, while Pantu section was granted an extension of time until Jan 9, 2021.
Shares of Zecon closed unchanged yesterday at 36.5 sen, giving it a market capitalisation of RM52.60 million. The counter saw some 353,100 shares done.