IT is the “big jobs and big-scale” high-rise segment of the construction sector that Fututech Bhd wants a piece of. Now, Datuk Tee Eng Ho, controlling shareholder with 72.5% equity interest, is giving the company what it wants.

It took “a bit of convincing” but on Feb 6, Tee, who is also Fututech’s executive chairman, finally entered into exclusive negotiations to inject two of his family-owned construction companies — Kerjaya Prospek (M) Sdn Bhd (KPSB) and Permatang Bakti Sdn Bhd (PBSB) — into the listed entity.

The indicative total price of Tee’s prized possessions is RM380 million, to be satisfied via the issuance of 280 million new Fututech shares at RM1.16 apiece and RM55.2 million cash.

In exchange for the price and a dilution of the company’s share base to 370.3 million, Tee made a daring promise to the shareholders of Fututech (fundamental: 2.55; valuation: 0.6) — the company will inherit KPSB’s order book of RM2.25 billion for the next three years. Along with that comes a profit guarantee of RM150 million for three consecutive financial years — FY2015 ending Dec 31, FY2016 and FY2017 — on a cumulative basis.

Some of the projects in KPSB’s order book are Eastern & Oriental Bhd’s Seri Tanjung Pinang development (RM410 million), Eco World Development Bhd’s EcoSky development (RM463 million) and S P Setia Bhd’s Setia Sky 88 development (RM463 million). KPSB is also building for Tee’s private property development company on three sites — Residensi Setia Wangsa, Residency V and 100 Residency.

Ceteris paribus, the profit guarantee means that Fututech will grow its earnings almost sixfold to more than RM60 million compared with the RM15.1 million achieved in FY2014.

“In the next three years, Fututech cannot be making less than RM150 million. Even if you say Fututech doesn’t do very much, it will still be doing something. Fututech can easily have RM200 million (in profit over the next three years),” Tee tells The Edge confidently.

Short-term earnings visibility aside, it is KPSB’s expertise and 20-year proven track record as a “premium contractor” of high-end properties, its vast network of suppliers and loyal and exclusive clientele that Fututech will gain most from.

KPSB is well known in the construction business, having built high-rises for some of the best property developers in Malaysia. Its three biggest clients are E&O, S P Setia and Eco World. PBSB, meanwhile, is Tee’s own construction management firm.

KPSB seems to have no baggage. In fact, it has insulated itself from the usual construction sector-related problems — money, machinery and manpower.

Filings with the Securities Commission Malaysia show that KPSB has been profitable for the last five years. In FY2013, it registered a profit of RM33.3 million, three times the amount Fututech managed in the same period. It has no borrowings.

Tee says KPSB owns all of its construction machinery and equipment and has a workforce of 3,000 at any one time, allowing it to speed up or slow down construction work as needed.

“We don’t have any cost of funds. KPSB does not pay rent, hire purchase or interest and people can come to us any time for a job. We engage workers directly and don’t depend on subcontractors. In other words, we have total control of the construction site,” he says.

With the injection of KPSB, Tee says Fututech will be able to “reach the next level” and have the capacity to support larger-scale tenders and projects as a mid-tier contractor. The injection will also allow Fututech to command KPSB’s premium profit margins in the high single digits compared with other contractors.

“KPSB is in the correct segment. The construction business is very wide. If you build houses, you face terrible competition because there are too many contractors. Anybody can be a contractor for houses. Building high-rises is different, not everyone can do that.

“To move into that (high-end high-rise) segment is difficult. In fact, last year, when I used Fututech instead of KPSB to bid for high-rise projects, we were rejected by our clients. A single high-rise project is worth RM300 million to RM400 million and clients were not interested in taking a risk with Fututech because it has no track record in the segment,” says Tee.

“Now, whatever KPSB does is also credited to Fututech. It will add much more value to Fututech’s shareholders and this is reflected in our share price.

There will be no more doubts as to where my interests are. I will only have one construction business.”

Indeed, investors have reacted with excitement to the asset injection proposal, even if the acquisition will dilute existing shareholding. On Feb 9, just a trading day after the announcement of the proposed injection, Fututech’s share price soared to a record high of RM1.46. Year to date, the counter has gained 45.45%.

Tee’s asset injection will not be the first time he is breathing new life into Fututech, which had largely conducted its construction and manufacturing of kitchen cabinetry and lighting businesses under the radar.

Recall that Tee and his brother, through their private vehicle, Egovision Sdn Bhd, had first emerged in Fututech in March 2011. The family bought a combined 27.71% stake in the company from E&O for just RM8.78 million or 50 sen per share. E&O had sold its stake at a loss of RM1.16 million after an initial investment cost of RM27.34 million.

Prior to Tee’s entrance, Fututech had been loss-making for six years — between FY2005 and FY2010. Although the company’s losses had narrowed to RM2.5 million by FY2010, Tee is often credited with leading Fututech, which was new to the construction sector, and restoring its profit-making track record in FY2011.

As at Dec 31, 2014, Fututech registered a net profit of RM15.1 million on revenue of RM62.25 million, surpassing FY2013’s net profit of RM11.5 million. During the period, the company remained in a strong net cash position of RM28.63 million with zero borrowings.

Fututech’s other core business — the manufacture of lighting and kitchen cabinets — will also receive a boost from the growth in its construction division. The company provides kitchen cabinets and other furnishings to all its and E&O’s projects. The division typically contributes less than 5% to Fututech’s top line but Tee says the company can still squeeze “fair margins” while adding value to customers’ developments.

It is worth noting that Tee’s contribution to Fututech could extend beyond the construction sector.

The company made its debut in the property development space last year and plans to launch two projects this year — one in Gohtong Jaya and another in Shah Alam. The projects have a combined gross development value of RM500 million. Fututech has aspirations to grow its property development arm but it has neither additional landbank nor plans to purchase more until FY2017.

Tee also owns Kerjaya Prospek Property Sdn Bhd, a property development company with a long-standing record and reputation for quality and timely delivery. It would be a second “marriage of convenience” for Tee and Fututech should he inject Kerjaya Prospek Property into the company.

When asked if this would become an eventuality, Tee says, “I would not discount it (in the future) but there are no plans (for more asset injection) at the moment. We will do things step by step and there is no point in rushing it.”

For now, Tee’s attention is fixed on helping his soon-to-be-enlarged construction arm settle and deliver on its promises.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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