This article first appeared in The Edge Malaysia Weekly on October 23, 2017 - October 29, 2017
GRAND-Flo Bhd, a Main Market-listed homegrown tracking solutions provider that ventured into property development in 2013, plans to further diversify its earnings base via its foray into construction next year.
According to president and managing director Derrick Tan Bak Hong, the group will tap the expertise of its executive director Chuah Chew Hai — who has more than 30 years of experience in the construction industry and 15 years in property development — to build its track record as a builder.
“We are contemplating venturing into construction in the near future. It is one of our plans to leverage Chuah’s vast experience in the construction sector to ride the wave of growth of the industry in Malaysia,” Tan tells The Edge in an interview.
Grand-Flo’s traditional business is in tracking solutions, providing software and hardware used in automatic identification and data capture. It is the country’s largest enterprise data collection and collation system (EDCCS) player with a 40% to 50% market share.
Four years ago, Grand-Flo ventured into property development by partnering Chuah’s privately owned companies. They have completed two major projects, namely The Glades and Vortex Business Park (Phase 1) in Penang.
These successful joint ventures (JVs) have led to more partnerships between Tan and Chuah as Grand-Flo plans to diversify further into the construction sector next year.
Moving forward, the growth drivers of the group will be the property and construction segments, says Tan.
“Our EDCCS business will remain as one of the three core businesses. But there is no doubt that we will concentrate more on the property and construction businesses,” he says.
Currently, the property and EDCCS divisions contribute evenly to the group’s bottom line.
Tan, 54, is the founder of Grand-Flo with more than two decades of experience in the automation and tracking solutions business. His wife, Yap Li Li, also sits on the board as executive director.
It is worth noting that between end-September and early October, the couple halved their stake in Grand-Flo from 20.2% to 9.75%. Together, they are now the second largest shareholder in the company.
Meanwhile, the 54-year-old Chuah, who was appointed to the board in May 2015, is taking on a bigger role in Grand-Flo. He became the single largest shareholder in the company with an 18.3% stake early this month.
Chuah went into the construction business in 1993 and set up Metrio Development Sdn Bhd in 2002. Metrio is now one of the top developers in the northern region of Peninsular Malaysia.
Tan and Chuah were secondary schoolmates in the 1980s before they went on to study in Penang Technical Institute. Subsequently, Tan pursued his studies in mechanical engineering at Universiti Malaya while Chuah studied building technology at Tunku Abdul Rahman College (now TAR University College).
On Grand-Flo’s venture into construction, Chuah clarifies that the group is not planning to take up any stake in his construction firm at the moment. Instead, Grand-Flo Construction Sdn Bhd has been set up to bid for new jobs, starting with some in-house property projects, including those of Chuah’s companies.
Apart from that, it may also act as a subcontractor to Chuah’s construction firm, which is said to be among the most trusted builders for Sime Darby Bhd, Sunway Bhd, Sunsuria Bhd and I&P Group Sdn Bhd.
It is learnt that Chuah’s construction firm, which is mainly involved in high-rise and mixed-use developments, secures at least RM400 million worth of jobs every year. In addition, his JV company with a locally listed firm has an order book of RM300 million.
“Over the years, we have completed RM1 billion worth of construction jobs,” Chuah says.
On potential conflicts of interest given Chuah’s stake in Grand-Flo and his private business, he assures that he will abstain from making any decision concerning any projects related to him.
“However, since I have the experience in construction and property development, I will be able to help Grand-Flo grow these segments by bringing in new projects and a team of professionals. Thus, it’s a synergistic partnership, rather than a conflict of interest,” he adds.
The first job for Grand-Flo Construction is likely to be two blocks of affordable serviced suites with an estimated gross development value (GDV) of RM100 million. This project — the first block will be launched in the middle of next year — is located next to Vortex Business Park, a freehold commercial development in the industrial hub of Batu Kawan, Penang.
“Based on a GDV of RM100 million, the construction job could be worth some RM50 million. Human resources should not be a problem because the work can be outsourced by my construction firm. We (Grand-Flo Construction) have to find our own niche. If not, we will be neither here nor there,” Chuah says.
Ongoing property projects
To put things into perspective, Grand-Flo is negotiating a JV with a landowner in Batu Kawan to develop a business centre comprising three towers, tentatively called Vortex Business Centre.
Two towers with a total of 250 serviced suites and a tower with 200 hotel rooms will be built on three acres of commercial land.
The serviced suite blocks — of which the construction job is likely to be awarded to Grand-Flo Construction — will be undertaken on a JV basis between Grand-Flo and the landowner, whereas the hotel block will be developed by the landowner.
To recap, Grand-Flo in June delivered The Glades, a low-density, luxury residence project in Bukit Mertajam, which has a GDV of RM63 million. Seventy-six zero-lot bungalows and semi-detached houses were built on 3.3ha.
“We have achieved a take-up rate of 56.5% for The Glades and are now waiting to sell the rest. Our build-and-sell strategy has proved itself in the soft market — we are getting more genuine buyers and the financial institutions are [more willing] to lend based on the completed units,” says Tan.
The three-phase Vortex Business Park, with a GDV of RM220 million, is an ongoing project.
Phase 1, which has a GDV of RM116 million and consists of commercial and light industrial units, was completed in July. Despite the soft property market, 86% of the units are sold.
Tan reveals that Phase 2, which has a GDV of RM53 million and features 22 four-storey light industrial units, will be launched in the first quarter of next year and completed within two years.
A further two acres for Phase 3 is available for future commercial development with an estimated GDV of RM51 million, but its launch date will depend on the performance of Phase 2.
“We will kick-start Phase 3 once the sales of Phase 2 exceed 50%,” Tan says.
Eyeing market cap of RM500 million
Given the significant profit contribution by its property and construction segments in the future, Grand-Flo aims to grow its market capitalisation to RM500 million within five years, he says.
“Our market cap should hit RM500 million by 2022. By then, we would be making RM30 million to RM40 million profit a year. That’s our new aim. Our current market cap is too small for a property developer-construction firm. We need to grow bigger,” he adds.
Last Tuesday, Asia Analytica Data Sdn Bhd’s proprietary algorithm identified Grand-Flo as a stock with momentum for the sixth time this year.
Year to date, Grand-Flo has risen 47%. It closed at 27 sen last Thursday — near the counter’s 52-week high — giving it a market capitalisation of RM126 million.
Grand-Flo’s net profit jumped almost 152 times year on year to RM4.86 million in its second quarter ended June 30, thanks to a gain on the disposal of shares in Simat Technologies PCL.
Grand-Flo has been gradually divesting itself of Simat, a Thailand-listed company that started as a tracking solutions provider before venturing into fibre optic high-speed internet services.
To recap, Simat, with a current market capitalisation of about THB1.19 billion, was appointed the main contractor to build internet infrastructure and lease it to the Thai government for five years, in return for monthly rental payments.
The Thai government, however, could not take delivery of the project, which was completed in 2013, due to political uncertainties. This led Simat to go directly to the consumer, thus becoming a telecommunications company.
As the synergy between Grand-Flo and Simat declined in recent years, it is no secret that management of the former intended to unlock the two groups by gradually disposing of its investment in the latter.
Last Thursday, Grand-Flo said it has signed a sales and purchase agreement with a Thai investor to dispose of its remaining 12.31% stake in Simat for a cash consideration of THB132.02 million (RM16.79 million).
It is worth noting that Simat is suing the Thai government for about THB650 million for its failure to take delivery of the internet infrastructure project.
Following the share disposal, Grand-Flo will not get compensation if Simat wins the suit.
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