This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

SARAWAK-based engineering and construction firm Zecon Bhd’s market capitalisation of RM83.9 million belies its outstanding construction order book of RM3.6 billion as at June 30 (see table).

Chief executive Syed Mohd Muzakir Syed Hussin Al-Jofre is of the view that Zecon is a hidden gem among construction counters.

“We have never really had exposure. Save for the Pan Borneo Highway project, I don’t think many investors are aware that we have secured projects worth billions of ringgit,” he tells The Edge.

Zecon and its joint-venture partner Kimlun Corp Bhd won the RM1.46 billion Pan Borneo Highway Sarawak Phase 1 contract in March last year.

Muzakir, 44, was appointed to the company in February this year. Before this, he was the CEO of SMRT Holdings Bhd.

To recap, Zecon Kimlun Consortium Sdn Bhd, in which Zecon has a 70% stake, received a letter of award last year from Lebuhraya Borneo Utara Sdn Bhd to develop and upgrade Phase 1 of Pan Borneo Highway Sarawak, from the Serian roundabout to the Pantu junction. The contract is expected to significantly boost Zecon’s revenue for the next three to four years.

The group is also building a specialist hospital for children in Cheras, Kuala Lumpur — dubbed Hospital Pakar Kanak-Kanak, Universiti Kebangsaan Malaysia — through a public-private partnership on a build, lease, maintain and transfer concept. The contract sum is RM606 million and work commenced in May 2014, with a targeted completion date of November next year.

Sustained by its strong job flows and contract wins, Zecon will have clear earnings visibility over the next five years, Muzakir foresees.

“For the financial year ending June 30, 2018 (FY2018) and FY2019, we will recognise substantial profits from the Pan Borneo Highway project. Subsequently, we will see a long-term exponential growth when our hospital project in Cheras is completed,” he says.

He adds that Zecon is expected to receive an annual concession payment of about RM100 million once the hospital — which will have 243 beds and 54 apartments, and provide family-centric medical care — is ready.

“This will be a steady [and] fixed income, or rather, a cash cow for us for the next 25 years. We will provide electrical, biomedical, cleaning, laundry and clinical waste services to the hospital, before surrendering it back to the government.”

Zecon’s net profit declined 55% to RM14 million in FY2017 from RM31.3 million a year ago, mainly due to one-off fair value gains on investment properties amounting to RM150.9 million that was recognised in FY2016.

Year to date, shares of the Main Market-listed company have risen 16%. The counter settled at 64 sen last Wednesday.

Muzakir believes there is still plenty of upside potential for the share price.

“We think that our stock is undervalued. The market should get more excited once it notices that we have such a strong order book,” he says.

When asked if Zecon will gain investor interest in the run-up to the general election, Muzakir remarks that the group’s performance is not politically-driven as its operating profit is backed by its strong order book.

“Yes, Zecon has been perceived as a politically-linked stock but the fact is that our performance is fundamentally-driven. No one can deny our efforts or attribute our performance to [the] political [factor]. We don’t want investors to look at us only when there is an election. We need to set the right tone,” he stresses.

It is worth noting that the company completed a private placement exercise in September that raised RM6.388 million, after issuing 3.181 million shares at 55 sen apiece and 8.092 million shares at 53 sen apiece.

Currently, Zecon is undertaking a renounceable rights issue of redeemable convertible unsecured loan stocks (RCULS) at an issue price of 50 sen each, on the basis of five RCULS for every three Zecon shares. The proposed rights issue of RCULS is expected to raise gross proceeds of between RM24.87 million and RM109.18 million.

A back-of-the-envelope calculation shows that after the RCULS conversion, the company’s market capitalisation should reach about RM200 million, says Muzakir.

Zecon’s gross gearing ratio (total debts over total equity) has reduced marginally from 1.85 times at end-FY2016 to 1.63 times at end-FY2017. Its net gearing ratio (net debts over total equity), however, has increased marginally from 1.18 times at end-FY2016 to 1.36 times at end-FY2017 due to the mobilisation of available cash reserves to fund the company’s various construction and property development projects.

It ventured into the property sector recently after acquiring about 2,000 acres of prime land situated strategically within a 6km radius of the Kuching city centre. The proposed Kota Petra mixed-use development will be the group’s largest property project, with a total estimated gross development value of RM11 billion, and will be carried out over the next 15 years.

Housing projects under the proposed Kota Petra master plan are Perumahan Rakyat 1Malaysia (PR1MA) and Perumahan Penjawat Awam 1Malaysia (PPA1M) units which, once completed, will provide about 4,331 houses to qualified public and civil servants.

Zecon’s other ongoing construction projects include the 300-bed Petra Jaya Hospital project in Kuching. The contract commenced in May 2013 and has a target completion date of June next year. The RM495 million project was awarded by Jabatan Kerja Raya, with Zecon acting as the turnkey contractor.

Meanwhile, Zecon is also constructing the Mydin Supermall at Vista Tunku in Phase 8 of Petra Jaya in Kuching. With a gross floor area of 778,000 sq ft, the supermall will have about 1,500 parking lots, including 780 basement parking spaces. The project was awarded by Lembaga Tabung Haji’s property arm.

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