Construction companies looking at stable concession income

TheEdge Wed, Dec 11, 2019 05:00pm - 4 years View Original


AS jobs dry up, more construction companies are looking at concession-type work involving the building of specific facilities for the government, which then leases the facilities from the builders for a fixed term.

Concession-type jobs allow companies to diversify their earnings base with more sustainable income, which, given the depletion of infrastructure and property development jobs, help provide an income buffer.

But are these jobs investment-worthy?

Construction companies listed on Bursa Malaysia with concession-type businesses include Crest Builder Holdings Bhd, Menang Corp (M) Bhd and Gagasan Nadi Cergas Bhd.

Crest Builder was among the earliest on Bursa to jump into the concession business. In 2010, its subsidiary, Crest Builder International Sdn Bhd, together with its partner, Umno-linked Detik Utuh Sdn Bhd, secured a 23-year concession from the Ministry of Education to build a new campus for Universiti Teknologi Mara (UiTM) in Tapah, Perak.

The campus was built at a cost of RM285 million over three years, and the concession was awarded on a build, lease, manage and transfer (BLMT) basis.

Eric Yong, group managing director of Crest Builder, tells The Edge that the UiTM Tapah concession has been lucrative, providing very comfortable margins annually.

“In terms of revenue, we collect about RM43 million every year, and the margin is about 10% to 15% on a pre-tax basis, which is very good,” says Yong, adding that the management contract for the campus has also been lucrative.

However, the Tapah campus remains Crest Builder’s only concession as such concessions for government facilities are hard to come by these days.

Since the financial year ended Dec 31, 2010 (FY2010), the company had only managed to register double-digit net profit margins in FY2013 (21.82%) and FY2018 (11.81%).

“The government is trying to reduce operating expenditure. Although giving out concessions to construction companies to build government facilities will reduce capital expenditure, it all depends on how the government wants to balance both sides,” Yong says.

This could explain Widad Group Bhd’s recent acquisition of Innovatif Mewah Sdn Bhd (IMSB) from Menang Corp Bhd and Tentu Selesa Sdn Bhd for RM122 million cash. Menang owns 71% of IMSB and the remainder is owned by privately held Tentu Selesa.

Since May 2010, IMSB has held the concession for the development of the UiTM Seremban 3 campus as well as maintenance works for the campus. There are another 14 years remaining on the concession, which ends in January 2034.

The announcement of the agreement, signed last Wednesday, did not specify the returns that Widad could get from acquiring IMSB. Widad and the vendors will come up with a definite agreement within 120 days of the signing of the agreement.

However, looking at Widad’s financial statements, one can surmise that the group will need financing for the acquisition given that, as at June 30, 2019, its cash and bank balances stood at RM2.24 million only, even though it had RM95.6 million in fixed deposits.

“All the lease repayments are based on a certain internal rate of return. I believe if Widad had to raise financing to acquire the concession, the bulk of the repayment would go back to bank payments, all the way into year 15. So, it will only become lucrative in the later years,” says Yong. “However, the cash flow will still be good.”

Crest Builder also raised financing when its joint venture with Detik Utuh was awarded the concession to build UiTM Tapah. The debt was refinanced at better rates in 2014.

The IMSB deal is not Widad’s first in the concession business. On Oct 17, the group announced that it had entered into an agreement with Prihatin Ehsan Holdings Sdn Bhd and Training Camp Aabata Sdn Bhd for the acquisition of 90% interest in Serendah Heights Sdn Bhd for RM95.9 million.

Serendah Heights owns YBK Usahasama Sdn Bhd (YBKU), which since May 2010 has held the concession for the development and maintenance of the UiTM campus in Jasin, Melaka. As with IMSB, YBKU has another 14 years to the concession ending 2034. The remaining period is worth about RM861.6 million.

Pursuant to the Oct 17 heads of agreement, Widad and the selling shareholders of YBKU will have to come up with a definitive agreement within two months of the HoA. Widad targets for the acquisition to be completed by the first quarter of next year.

 

Widad is overvalued

Apart from construction, Widad is also an integrated facility management (IFM) services provider, offering scheduled and ad hoc maintenance, upgrading and renovation, property management as well as mechanical and electrical services.

Arguably, its most lucrative contract is the IFM job for Istana Negara, which is worth RM519.4 million. However, the contract, which commenced in July 2016, is believed to be at the tail end.

“The chance for Widad to keep the contract to maintain Istana Negara is still there, although a few parties are eyeing it,” an analyst tells The Edge. Other locally listed IFM contractors include AWC Bhd, GFM Services Bhd and UEM Edgenta Bhd.

Widad’s share price has doubled this year to 51 sen as at last Thursday. At this level, the stock is trading at a trailing four-quarter (T4Q) price-earnings ratio (PER) of 55 times.

The analyst The Edge spoke to believes that at this level, Widad is somewhat overvalued as none of its peers are trading at such a high PER.

Among the construction companies that have concession business, Crest Builder is trading at only 4.68 times T4Q PER while Gagasan Nadi Cergas is valued at 8.84 times its T4Q earnings. Menang, which is selling its concessions to Widad, is the only one that is trading at a high PER of 70.5 times.

UEM Edgenta Bhd, the largest of the IFM companies, is trading at about 16 times T4Q PER. GFM is valued at about 13 times its T4Q earnings while AWC is trading at nine times its T4Q earnings.

“Furthermore, the rally in Widad’s share price is mostly because of its bid for PLUS Expressways Bhd and there are other bidders out there eyeing the same prize,” says the analyst, who prefers Kerjaya Prospek Holdings Bhd in the construction sector.

 

 

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