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Zelan's woes continues

KUALA LUMPUR: Zelan Bhd's share price continued to fall sharply on Tuesday, Nov 23 as its latest 2QFY11 earnings numbers ended Sept 30 seem to indicate that the company's financial woes are far from over.

The company's net loss widened 153% year-on-year (y-o-y) to RM35.12 million. Revenue also shrunk 91% y-o-y to RM30.7 million.

The ballooning losses were mainly due to cost overruns in its overseas project, in particular the Middle East, as a result of material price escalation, under-budgeted items and additional costs arising from work delays but were offset gain on sale of its investments.

Zelan's core engineering and construction division incurred a pre-tax loss of RM64.9 million with revenue of RM17.8 million. The losses were offset by its investment division that achieved a pre-tax profit of RM30 million.

The stock price slid 6.9% or four sen to a four-month low of 54 sen on Tuesday. The counter was down 27% from the recent peak of 73.5 sen recorded on Nov 9. Year-to-date, the counter has declined 20%. Nonetheless, not all is gloom for Zelan. Its shareholding in IJM Corp Bhd, which share price has soared substantially, is expected to be the lifesaver for the group.

A rally in IJM Corp's share price would lift the investment value of Zelan's equity stake in the construction outfit. IJM Corp is in the midst of merging its property arm, IJM Land Bhd, with government-linked Malaysian Resources Corp Bhd.

Already, Zelan is selling its equity stake in IJM Corp. As at Nov 18, it sold 24.05 million shares for a total cash consideration of around RM125.1 million, with a total gain on sale of around RM25.5 million.

The group has obtained shareholders' mandate in September to sell up to 30 million shares, or a 2.2% equity stake, in IJM Corp. Zelan currently still owns 5.38% or 72.63 million shares in the construction outfit.

Based on IJM Corp's share price of RM5.69, Zelan's equity stake is valued at RM413 million. Proceeds from the share sale would be utilised to pare down borrowings.

Zelan's balance sheet shows that its short-term borrowings amounted to RM227 million. However, the group's trade receivables continue to expand while its revenue has been falling.

The group's trade and other receivables stood at RM622.02 million, up from RM610.8 million a year ago.

For the FY10 ended March 31, it incurred a net loss of RM274.92 million on revenue of RM1.02 billion. This represents the second year it is in the red. The heavy loss was mainly due to total cost overruns of RM217.4 million in two Middle Eastern projects and the coal-fired turbines in Rembang, and RM44.4 million impairment losses.

The group has had a tumultuous journey since the departure of its founder and former CEO Albert Chang Si Fock in 2008. MMC Corp Bhd is currently the single largest shareholder, with a 39.25% equity stake.

In August, Zelan formed a joint venture company with main stakeholder MMC to jointly bid for 10th Malaysia Plan tenders. It was reported that it is one of the 17 contractors pre-qualified for the multi-billion ringgit light rail transit extension project.
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