This article first appeared in The Edge Malaysia Weekly on July 13, 2020 - July 19, 2020

AS if the economic fallout from the Covid-19 pandemic were not enough to contend with, some companies are finding themselves caught in a widening corruption probe.

An investigation by the country’s anti-graft and tax authorities into the controversial Penang undersea tunnel project has put the project in limbo and affected companies involved in it. Bursa Malaysia-listed Vertice Bhd and Ewein Bhd may be the worst hit by this.

Construction firm Vertice holds a 12.05% stake in Consortium Zenith Construction Sdn Bhd (CZC), the main contractor of the Penang mega infrastructure project (PMIP) — a project mooted by the DAP-led Penang government. Other shareholders of CZC include Zenith Construction Sdn Bhd (78.49%), Manhattan Premier Sdn Bhd (8.78%) and Juteras Sdn Bhd (0.68%).

The RM6.3 billion project comprises four construction work packages, including three toll-free highways on the island and an undersea tunnel between Butterworth and Gurney Drive. In August 2018, Vertice secured one of the work packages worth RM815 million for the construction of a bypass linking Bandar Baru Ayer Hitam to Lebuhraya Tun Dr Lim Chong Eu (Package 2 of the PMIP).

“Given its relation to CZC, it was assumed that the remaining three work packages were already in the bag for Vertice, thus providing it strong earnings visibility going forward,” a source close to the company tells The Edge.

When announcing its fourth-quarter 2020 financial results on June 30, Vertice said Package 2 of the PMIP commenced in November last year, but that major construction works had been delayed due to the pandemic and the Movement Control Order (MCO) until the second half of this year. It had expected work on the project to span over 36 months thereafter. However, the probe into the undersea tunnel project has thrown a spanner in the works.

In its fourth financial quarter ended March 31, 2020 (4QFY2020), Vertice was already suffering, with construction revenue down 63% year on year to RM16.5 million due to the progress of its projects being delayed when the MCO came into effect on March 18. As a result, the group reported a widened full-year net loss of RM24.35 million from RM5.36 million in the previous year, while revenue dropped 47% y-o-y to RM62.13 million.

Still, besides PMIP, another project in the group’s outstanding order book of some RM1 billion as at March 31, 2020 — which is expected to see work momentum picking up in the coming quarters — is a RM100 million subcontract job to construct the Light Rail Transit Line 3 from Bandar Utama to Johan Setia.

Vertice’s share price has risen 75% from its all-time low of 12 sen on March 19, amid a selldown in global equity markets as fears deepened in the wake of the Covid-19 outbreak. Year to date, however, the stock has declined 76% to close at 21 sen on July 8, giving it a market capitalisation of RM39.64 million.

Ewein is suffering the same fate as Vertice, and for similar reasons. On July 1, the Penang-based property developer had terminated its joint venture (JV) with CZC entered into on Nov 30, 2019, to jointly develop a 4.34-acre parcel of reclaimed land in Bandar Tanjong Pinang, Penang, for RM159.75 million. Bandar Tanjong Pinang entails 110 acres of reclaimed land that was to be alienated to CZC by the Penang government as compensation in kind for the construction of PMIP.

Ewein said then that it had chosen to abort the JV as it has yet to obtain shareholders’ approval to enter into a JV agreement with CZC in an extraordinary general meeting that should have been convened by March 31.

According to people familiar with the matter, the decision to abort also had to do with the ongoing probe into the undersea tunnel project. Ewein did not immediately respond to The Edge’s request for comment.

However, the proposed site was crucial for the development of Ewein’s next phase of growth, known as City of Dreams 2, which would have a gross development value (GDV) of RM1.2 billion. With it, Ewein would have a steady revenue stream.

The going has been good for Ewein in the last two years. In the financial year ended Dec 31, 2019 (FY2019), the group recorded RM239.14 million in revenue, up 20% from FY2018, mainly due to contribution from its property development business, which accounted for 80% of total revenue.

However, the company reported lower net profit of RM53.72 million in FY2019, as construction of the RM800 million GDV City of Dreams luxury condominium project nears completion. The maiden project — which was also Ewein’s first joint development project with CZC — has attracted buyers from Singapore, China, Indonesia, Europe, Hong Kong and Taiwan, and the group was expecting to replicate the same success with City of Dreams 2.

Ewein’s net profit for the first quarter ended March 31, 2020 (1QFY2020) fell 66% y-o-y to RM4.46 million, while revenue was also down 28% y-o-y to RM48.3 million. As the construction of City of Dreams nears completion, lower revenue was recognised compared to last year.

Year to date, shares in Ewein are down 45%. The stock closed at 30 sen last Wednesday, giving the company a market capitalisation of RM84.98 million.

Still, it is not the first time that Ewein has dealt with setbacks. Construction progress on its City of Dreams project stalled in 2016 due to protests from residents of the adjoining Seri Tanjung Pinang property, who filed an appeal with the Penang Appeals Board over concerns about the density and height of the project. It took three years before the project could kick off.

In the meantime, the group would have to depend on its traditional manufacturing business in the electrical and electronics industry as well as recurring rental income from Menara IJM Land in Penang and management of the historical site of Fort Cornwallis. Contribution of its e-commerce segment, which deals with the operation of coffee and beverage vending machines, to the group’s overall revenue is still insignificant as of now.

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