The Star Online 
Business News - Saturday, 13 June 2015

Company says will focus on local contracts for now.The construction sector is seen to be the key beneficiary of the 11th Malaysian Plan with over RM200bil marked for development expenditure. It stands to gain from projects rolled out in the next five years. Against a volatile backdrop, the sector growth is expected to average at 10.3% between 2016 and 2020. Industries like building material and cement, among others, will benefit as well. But, with the unprecedented volume of contract flows over the next few years, are contractors willing to sacrifice margins when faced with stiff competition?

Once favoured by fund managers for its projects in the Middle-East and India, construction and engineering outfit Zelan Bhd, in its efforts to turn around the company, says it intends to focus on local jobs for now."We are confident of securing more jobs here. But, as a contractor, the project owner has the bargaining power."Construction players must meet project owners’ expectations at competitive prices,” managing director Adnan Mohammad tells StarBizWeek in an email interview recently.Another obstacle in the industry, he says is the rise of new players local and abroad that are backed by large capital/investment.The price increase in building, supply and construction materials present continous challenge for the group, says Adnan, adding that it has to strive to be more innovative in the value of engineering to obtain reasonable margins from projects secured.But this doesn’t mean that we won’t be trying, he says, adding that the group has in the last two years tried to improve its financial standing.

Formerly the managing director of Faber Group Berhad (UEM Group), a position he held for seven years prior to joining Zelan in March, 2014, Adnan says:

"We have addressed outstanding issues on the overseas projects in Indonesia and Abu Dhabi with minimal adverse impact to the profit and loss accounts.

"The settlement with client and sub-contractor in Indonesia has resulted in a write back on costs of RM10mil, ” he points out, saying that was a positive impact to the bottom line.

The 55-year-old explains that for the Abu Dhabi project, the signing of second supplement agreement has enabled Zelan to recover AED121.6mil (RM123.53mil) (on the performance bond and outstanding payment) in the form of cash refund, as well as recommencing the project on revised terms and condition.And like other construction outfits, Adnan says it wants to build its order book. The group’s current order book stands at RM1.1bil, which will last till first half of 2017."We have gained the confidence of local clients by improving our financial standing."In July, last year, we secured two contracts locally with Petroliam Nasional Bhd’s Refinery and Petrochemical Integrated Development (Rapid) and East Coast Economic Region (ECER)."The total combined value of these two contracts is about RM500mil,” he says, adding that it will be on the lookout for opportunities such as Private Finance Initiative projects that will provide steady concession income to sustain.

He says Zelan is eyeing some of the Pengerang projects that was dished out a few months ago and confirms that the value of the projects are more than the RM248.5mil Material Off-Loading Facilities (MOLF) jetty project at Tanjung Setapa.Adnan, somehow didn’t want to disclose what type of projects it has bidded for, but says their core expertise lay in port, power plants, marine, infrastructure and building.On what are the strategies to beat price war, he says companies will have to be more innovative and creative in its value engineering. "We will continue to make smart partnerships with companies specialising on specific works." The tie-up will perhaps help us offer better pricing, apart from increasing our skills via technology and knowledge transfer,” he says, adding that it will be on the lookout for opportunities such as Private Finance Initiative projects that will provide steady concession income to sustain.Why local jobs and not overseas projects? - Adnan says Zelan has learnt from experiences in the past. The risks in local projects can be addressed systematically compared with projects abroad.Against the backdrop of a volatile climate, he says Malaysia is still politically stable with policies in order.

" In other words, no major surprises,” he adds.It is worth noting that the company held a 19% stake in IJM Corp in 2004, had been selling the shares steadily in recent years. The company raised a total of RM327mil after selling its shares in IJM Corp Bhd in the financial year ended March 31, 2014.Of the amount generated, Zelan has used some RM268mil to pay off its term loans while the balance 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. In its heydays in January 2007, Zelan traded at about RM6.35.The company was also backed by tycoon Tan Sri Syed Mokhtar Al-Bukhary via MMC Corp Bhd, which owns a 39.25% stake in Zelan at present.Zelan had benefited from projects awarded by MMC, especially the 2,100Mw Tanjung Bin power plant in Johor.

But somehow lost its lustre after incurring huge losses from cost overruns in its Middle Eastern projects during the global financial crisis. Its share price tumbled to a low of 45.5 sen in March 2009, and has been trading below RM1 since mid-2009. Zelan closed half sen higher or 1.43% at 36 sen yesterday, with 4.9 million shares traded.Adnan’s role in Zelan may perhaps make a difference. In Faber, the challenge then was to pare down its huge debts and grow the business, among others."Zelan’s legacy issues were mainly on past overseas ventures. "But now, we will deal, address and manage effectively operational matters, which are key to ensure delivery of the projects that we are currently undertaking,” says Adnan.

What analysts say

Zelan Bhd is not a stock covered by analysts. But, an analyst covering the construction industry says the reason why it wasn’t in its coverage list is the company is still undergoing some transition. While Zelan’s legacy issues are over, he believes the group is trying to move ahead with what they have in their books." But, for a company to be recognised, it should not go through cost overruns and deliver projects on time,” he said, adding that it needs to secure jobs every year to sustain.On profit margins, he says competition is expected with open tender jobs and likely to give lower margins.Another analyst says there is intense competition in industry now with many new players trying to make a name in the market. " Even smaller players can get jobs worth RM500mil. So, I think when the smaller ones are picking up, the bigger players will have to compromise their pricing, resulting in margin compression,” he adds.Unlike infrastructure, which requires speciality, he points out that building projects are likely to give lower profit margins and it’s tough, as everyone’s racing for jobs. While Zelan isn’t in the research houses’ scope, the analyst points out that Zelan’s order book is rising and their intentions to turnaround are obvious, with them cleaning up their balance sheet.

"Perhaps, when Zelan can deliver jobs on time and make profits, it would gain the trust from its parent company MMC Corp Bhd, as they are seen to be contributing as a subsidiary,” he says, adding that it will be intriguing to see Zelan move up the ladder.Masterbuilders Association Malaysia (MBAM) president Matthew Tee says the construction industry is ready for projects implemented under the 11th MP. But the industry players are hoping for the Government to resolve the longstanding pleas by them. He says it will be tough when bidding for open tenders and as service providers, they should be allowed to make profits." But, it’s not the case for all. So, a price war is expected,” says Tee.

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