KUALA LUMPUR (July 12): AWC Bhd is confident of better times ahead, as the group bit the bullet to undertake a kitchen sinking exercise amid the start of the Covid-19 outbreak last year.

The group is banking on its new rail business to catalyse growth going forward, on top of the existing RM1 billion order book for its engineering jobs.

According to AWC chief financial officer Richard Voon, the group decided to undertake impairments as auditors took a more aggressive stance following the outbreak of Covid-19 last year, scrutinising the company’s receivables and assets in view of the challenging economic conditions.

“Many companies were subjected to aggressive auditing standards, as the auditors took into account potential issues arising from the pandemic, including the certainty in collecting trade receivables and the carrying value of assets.

“Revaluations were needed to take into account the challenging conditions due to Covid-19,” he told The Edge.

This resulted in RM21 million of impairments recorded by AWC for the financial year ended June 30, 2020 (FY20), which drove the group into a full-year net loss of RM18.8 million — its first ever annual loss.

As the group was already going to record a loss for the year, AWC took the opportunity to impair some of its intangible assets as well, and also decided to shut down its air conditioning (HVAC) operations under its engineering division, which posed a drag on the group’s performance since FY19.

Voon said the HVAC business was plagued by legacy issues, including the underscoping of works and generally poor management, which led to the decision to cease the HVAC operations.

“We had been working to resolve some of the issues through the entirety of the previous financial year. A lot of these issues were systemic, so the only way forward was to complete the existing projects under the division, bite the bullet and shut it down, which we did,” he said.

The decision proved to be a good move for AWC, as it reported a record net profit of RM23.18 million for the nine months ended March 31, 2021 (9MFY21), putting the group on track to achieve a record annual performance for FY21.

For comparison, the group posted net profit of RM20.1 million for FY19, and RM21.7 million and RM22 million for FY18 and FY17 respectively.

Rail business to drive growth

AWC is also banking on its new rail business to catalyse growth going forward, following the RM43.5 million acquisition of a 60% stake in Trackwork & Supplies Sdn Bhd in 2018.

Trackwork & Supplies has close to two decades of experience in the railway track industry, being involved in the supply and maintenance of track construction machinery, as well as specialised works including thermit welding and preassembly of turnouts.

The acquisition came about as the group was eyeing a piece of the big pie, amid the announcement of several mega railway projects such as the East Coast Rail Line (ECRL), Kuala Lumpur-Singapore High Speed Rail (HSR) and expansions to the Light Rail Transit (LRT) and Mass Rapid Transit (MRT) lines, albeit some of these projects have since been scrapped or renegotiated.

To date, the rail segment has not contributed much as it is currently fulfilling small orders. As at Jan 1, the segment’s orderbook stood at RM52.7 million — a minor portion of the group’s total orderbook of RM950 million.

In terms of revenue, the rail division contributed RM11.74 million or 4.8% of its total revenue of RM246.89 million for 9MFY21.

However, Voon is hopeful that contribution from the segment will grow as the rail business, which is currently involved in the supply of components, will be expanded to include maintenance works as well, going forward.

In the meantime, the group is comfortably supported by the strong order books of its facilities (RM601.1 million), environment (RM192.8 million), and its engineering (RM110.7 million) divisions.

Voon said the job prospects for the group are positive, as it has beaten its FY20 replenishment of RM250 million. Its outstanding order book now stands at around RM1 billion, which gives visibility to AWC’s earnings over the next three financial years.

He noted that AWC is in a relatively comfortable net cash position of RM58.12 million as at end March after deducting its total borrowings of RM29.15 million. This means that there is room for the group to raise borrowings to fund its projects.

Another driving factor for the group, Voon said, is the potential recovery in the construction industry as operations resume in full force once the pandemic is dealt with.

This would augur well for the group’s engineering and environment divisions, given that they rely heavily on the construction industry, namely for the installation of automated waste collection and rainwater harvesting systems in new buildings.

“As the construction industry recovers, we should see better days — not that our days are bad right now, but things will be better for us. Both our engineering and environment divisions should be beneficiaries of the recovery of the industry,” he said.

AWC’s share price climbed to a one-and-a-half year high of 73.5 sen on March 15; however, it subsequently retreated in the following months. It closed at 48 sen on July 12, giving a market capitalisation of RM154.11 million.