This article first appeared in The Edge Malaysia Weekly on September 25, 2017 - October 1, 2017

MERCURY Industries Bhd’s move into the construction business two years ago seems to be panning out. The group, which used to make automotive paints, posted a higher profit and paid a better dividend for the financial year ended Dec 31, 2016 (FY2016), and in the six months ended June (1HFY2017), it turned net cash.

Completing the transformation in June, it acquired a building materials firm, sold off its automotive paints business and exited the auto refinishing industry.

Managing director Datuk Tiong Kwing Hee says the group plans to acquire an interior design (ID) house next year as it seeks to strengthen its construction business.

“We have identified a target ... they are very good at what they do. Now, we want them to show us the numbers and hit a certain profit target. If all goes well, we will buy the ID company by the end of next year,” he tells The Edge.

Tiong, 59, is the single largest shareholder of Mercury Industries with 17% equity interest. He was appointed executive director in August 2000, before being redesignated managing director in July this year.

It is estimated that Mercury Industries would have to fork out not more than RM10 million to acquire the ID house. Tiong says the deal could be a combination of cash and share swap. The ID firm will be asked to give a profit guarantee of RM3 million per annum.

“The owner is keen to sell. His problem is the banking facility. As a privately held company, it is difficult for them to get a loan, whereas for us, as a public-listed company, it is much easier,” he says.

Two years ago, Mercury Industries began its journey to become a construction player. In August 2015, it acquired a 70% stake in non-listed builder Paramount Bounty Sdn Bhd from Tiong for RM42 million.

In June this year, Mercury Industries paid RM7 million cash to buy a 100% stake in construction materials firm Andaman Marketing Sdn Bhd, to complement the construction business.

Subsequently, Mercury Industries disposed of its entire automotive paints division to Tiong for RM50 million in cash. The disposal was also completed in June.

In a nutshell, Tiong injected the construction business into Mercury Industries before taking the car paints business private. He is also expanding the group’s revenue stream by acquiring construction-related companies.

“My goal is to transform Mercury Industries into a pure construction play with earnings visibility. We want it to enjoy a good set of numbers,” he says.

Excluding earnings from the car paints division, Mercury Industries reported a net profit of RM6.6 million, on revenue of RM70.8 million in FY2016.

In comparison, the group made a net profit of RM4.8 million, on revenue of RM46.5 million in FY2014, when it was still mainly involved in the car paints business.

Mercury Industries registered a significantly higher net profit of RM11.6 million in 1HFY2017, thanks to the RM9 million gain from the sale of the automotive paints division.

The group achieved a net cash position of RM10.5 million as at June 30 this year, compared with a net debt position of RM23 million as at Dec 31 last year.

Excluding the gain on disposal, says Tiong, Mercury Industries is expected to make an annual profit of RM10 million in FY2017 and FY2018 — RM7 million will come from the construction division and the remainder from building materials.

Moving on to FY2019, Tiong expects Mercury Industries’ net profit to grow 50% year on year to RM15 million, assuming he  successfully acquires the ID house.

“Going forward, I think the construction division will contribute RM10 million, building materials will account for RM2 million to RM3 million, and the ID division will make up another RM3 million,” he predicts.

Based on Mercury Industries’ earnings of RM4.8 million in FY2014, the numbers could double to RM10 million in FY2017 and FY2018 and triple to RM15 million in FY2019.

While the venture into construction has put the group on a stronger footing, investors do not seem to recognise Tiong’s hard work.

At the closing price of RM1.26 last Wednesday, Mercury Industries was only valued at RM50.6 million, which is about the same as its market capitalisation two years ago.

On a positive note, the company may seem attractive given its low forward price-earnings ratio (PER) compared with peers in the same industry.

Based on its current market capitalisation of RM50.6 million, Mercury Industries is trading at a forward PER of five times for FY2017 and FY2018 and 3.3 times for FY2019, if it achieves its internal profit targets of RM10 million and RM15 million. Sunway Construction Group Bhd, IJM Corp Bhd and WCT Holdings Bhd are trading at forward PERs of 17 to 19 times.

“Today, Mercury Industries is a rather small but well-run company. I can make it bigger and stronger,” Tiong says confidently, adding that he may raise his stake in the company to up to 20%.

To improve Mercury Industries’ share liquidity and share price performance, Tiong says the company is considering a bonus issue or share split exercise as early as next year.

“We intend to undertake some interesting corporate exercises in the near future. All these things are in the pipeline. I still need to discuss further with my investment bankers the best way to restructure our balance sheet and, more importantly, add value for our shareholders.”

It is worth noting that Tiong is also the group CEO and executive director of property developer EcoFirst Consolidated Bhd, which was known as Kumpulan Emas Bhd until 2006.

Tiong had previously told The Edge that EcoFirst has been facing legacy issues, mainly inherited from Kumpulan Emas, an ailing, debt-laden company that was taken over by the Teoh brothers — Datuk Dr Patrick Teoh Seng Foo, Datuk Kenneth Teoh Seng Kian and Teoh Seng Aun — in the 1990s.

Interestingly, Tiong initially bought a 70% stake in Paramount Bounty from Seng Aun while Mercury Industries’ 100% stake in Andaman Marketing was purchased from Seng Kian and Seng Aun.

Tiong, however, refuses to blame the “Teoh brothers effect” for the lacklustre share price performance of Mercury Industries.

“To be fair to them, the Teoh brothers are not involved in Mercury Industries at all. I don’t think our share price performance is affected by the perception issue. I would like to think that we are not in a very sexy industry, so investors don’t see us as a sexy stock,” he says.

Paramount Bounty has an outstanding order book of RM477 million. Its ongoing projects include EVO Bangi, where the company is building commercial retail and small office/home office units at Hulu Langat under a RM122.7 million contract.

In February this year, Paramount Bounty bagged another construction job worth RM238 million for EcoFirst’s mixed-use development in Ulu Kelang, Selangor.

Its previous projects include residential developments such as The Arc @Cyberjaya, a job worth RM160.9 million in 2014, Casa Residensi Phase 2, (RM96.2 million) in 2013, and Cova Suites, (RM41.7 million) in 2009.

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