HEITECH Padu Bhd, which returned to the black in the financial year ended Dec 31, 2015 (FY2015) after two years of losses, sees grim prospects ahead as the government cancels or defers public information technology (IT) projects as part of belt-tightening measures.

The spending cuts will further pressure the earnings of HeiTech Padu, which derives 80% of its business from the public sector.

President and CEO Harris Ismail says the group is bracing for a challenging year as some ongoing tenders have been put on hold or cancelled, while several public IT projects it had clinched have been postponed.

He says while the government continues to spend on technology, the investments are not as huge as before.

Although the government’s IT spending increases by 8% to 10% a year, it is mainly for maintenance or equipment replacement, he adds.

“As spending was cut under the recalibrated Budget 2016, we are affected as most of our business is from the public sector,” Harris tells The Edge in an interview.

“There are many things the government would like to do in terms of transforming of the public services, but the current economic conditions do not permit it so some projects have to be deferred,” he adds.

HeiTech Padu posted a net profit of RM923,000 in FY2015, compared with a net loss of RM10.47 million in FY2014 and RM32.74 million in FY2013. It attributed the losses to escalating development cost, stiff competition and the rising costs of doing business.

The company posted a net profit of RM456,000 in the first quarter ended March 31, 2016 (1QFY2016), but slipped back into the red in 2QFY2016 with a net loss of RM680,000.

The lacklustre results seem to have affected investor confidence. HeiTech Padu’s shares, which were trading at more than RM1 in 2012, closed at 58 sen last Thursday, giving it a market capitalisation of RM58.71 million. The counter hit its five-year low of 51 sen last month.

Harris says HeiTech Padu has been struggling to grow its business, spending RM100 million a year on building its IT infrastructure.

“During FY2013 and FY2014, while we had [secured] projects, the costs escalated. Now, projects are being held back or cancelled but we still need to incur the costs.”

He explains that unlike its counterparts, HeiTech Padu is unable to generate as much profit due to the complexity of its system software services, which have higher risk.

For FY2016, Harris expects the group to break even or do slightly better than in the previous year, underpinned by other segments. It is bracing for fewer contracts and is banking on contribution from the overseas market and private sector to offset the public sector spending slowdown.

It expects to seal a contract with an African country to implement identity management and civil registration systems soon.

“We are continuously exploring opportunities there, which could result in something significant. So far, we have seen positive feedback,” Harris says.

Despite the political uncertainties in parts of Africa, Harris sees great potential in the continent as more countries move towards greater stability.

“We have been there for some time. We know about the issues of war there... it is unpredictable, but once they get themselves sorted out, I think it will be a great place to do business,” he adds.

The group is also working on a deal with the Myanmar government to build a system for foreign workers to renew passports.

The group has a market presence in 15 countries, including most Asean countries, China, Ghana, Saudi Arabia, Sri Lanka, the United Arab Emirates, the UK and Australia.

On the faulty Malaysian Immigration System (myIMMs), Harris says this has not affected the group’s ability to secure contracts from the public sector.

The First Series of the Auditor-General’s Report 2015, released in May, found weaknesses in the myIMMs system. HeiTech Padu was the main supplier of the system.

“The matter has been settled. The Immigration Department has cleared the air and said it had nothing to do with us. In fact, we are looking forward to having a stronger relationship with them,” Harris says.

HeiTech Padu’s acquisition of a 51% stake in Duta Technic Sdn Bhd from Tenaga Nasional Bhd in August last year also seems to have paid off. The unit has won two contracts totalling RM63 million from the national utility company.

Last month, Duta Technic was awarded a RM37.29 million contract by Tenaga to carry out engineering design works for the Klang Valley Mass Rapid Transit (MRT) Semantan project.

Harris says the job will be spread across the next two years, accounting for about 10% of the group’s contract amount for the year.

HeiTech Padu’s order book currently stands at RM400 million, which is expected to sustain the group for another two years.

“This will be a year of consolidation and focus on cost control,” says Harris, adding that his task is to make sure HeiTech Padu rides out the storm.

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