Gunung to forgo six months of income from NS contract

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KUALA LUMPUR: Gunung Capital Bhd will have to forgo six months of income from its National Service (NS) trainee programme contract that involves providing bus transportation services during the programme, its management told The Edge Financial Daily.

This follows the recent government announcement on the deferment of the 2015 NS programme, as part of the revised Budget 2015 that has sought to save a total of RM5.5 billion from trimming the government’s operating expenditure. The NS programme deferment is estimated to save the government RM400 million this year.

The six months of income forgone would cover trainee batches two and three of the programme, but not batch one which is currently ongoing until the end of February, according to Gunung executive director Iskandar Ibrahim.

“Thus for the financial year ending Dec 31, 2015 (FY15), Gunung will still derive three months of income from [the ongoing batch one] but will have to forgo [earnings from the batches that were deferred],” he said in an email response to The Edge Financial Daily.

Gunung (fundamental 3; valuation: 0.6) received the NS contract, with the value of RM164.95 million, on Dec 26, 2014 from the Ministry of Defence for the provision of bus services for the NS programme. The tenure of the service is three years, from December 26, 2014 to December 25, 2017. 

The scope of the contract saw Gunung providing the bus services for 82 NS camps, over nine months per calendar year, which would comprise three different batches of NS trainees for a three month stint each. 

Chartering NS trainees isn’t something new for Gunung, as it had acquired GPB Corp Sdn Bhd in 2011, which also provides transportation services, and at that time the latter company had an existing NS contract for five years ending December 26, 2014.  

“Basically the recent NS contract awarded is an extension of the [GPB] contract which had ended on December 26, 2014. There are only some differences to the scope of services provided, and a lower monthly charter to the NS,” said Iskandar.

He explained that the lower charter fee was because GPB had nearly completely redeemed its financing facilities for the entire fleet of buses and hence does not incur interest costs. Meanwhile, since the buses have been substantially depreciated over the initial five-year contract, the cost savings were passed on to the NS programme.

On whether the deferment would put a damper on Gunung’s plans, Iskandar reiterated that the remaining tenure of the contract in 2016 and 2017 would still be ongoing.

“The government has announced that the NS programme will commence again in year 2016, as such we expect the income from the contract to underpin Gunung’s prospective earnings,” he said.

Investors had sold down Gunung shares a day after the NS programme deferment was announced on Jan 21, pushing its stock 8.5 sen or 10.12% lower to 75.5 sen on Jan 22. The stock is currently hovering at this level, with a market capitalisation of RM107.7 million.

Gunung’s chairman and chief executive officer (CEO) Datuk Syed Abu Hussin Hafiz Syed Abdul Fasal is the largest shareholder in the company with a 18.72% stake, followed by Erayear Equity Sdn Bhd, a private vehicle controlled by former Gunung CEO Low Bok Tek, that has a 11.79% stake.

Syed Abu Hussin was the former deputy head of Umno’s Bukit Gantang division from 2001 to 2005. He had retired from politics and ventured into several businesses such as the supply of halal food products and medical supplies before joining Gunung in 2010.

For the nine months of FY14 ended Sept 30, 2014 (9MFY14) the group reported net profits of RM11.5 million, which was slightly higher than the RM11.45 million net profits reported in 9MFY13. Revenue was flat at RM63.49 million compared with RM64.19 million in 9MFY13.

On the actual effects of the deferment on Gunung’s FY15 financial performance, Iskandar said that the NS department will be briefing all the stakeholders of the programme on the implications of the deferment in due course.

“This will allow us to more accurately determine the actual effects on [the group’s] FY15 performance,” he said.

Gunung’s core business activities remain as the bus transportation services it provides for the NS programme. Its venture into a small hydropower operation in Perak has yet to contribute meaningfully to the group during 9MFY14.

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This article first appeared in The Edge Financial Daily, on January 27, 2015.