This article first appeared in The Edge Financial Daily on June 28, 2017

KUALA LUMPUR: Eyebrows were raised when the earnings of MClean Technologies Bhd’s 55%-owned unit DWZ Industries Sdn Bhd fell short of the profit guarantee granted.

MClean’s earnings took a beating as a result of a lower contribution from DWZ Industries. For the financial year ended Dec 31, 2016 (FY16), the company’s net profit declined substantially to RM1.85 million from RM5.89 million the year before, although revenue came in higher at RM59.3 million compared with RM57.3 million in FY15.

This has raised concerns over the prospects of the subsidiary that MClean acquired from Decor Industries Pte Ltd two years back.

Its share price skidded the days after the release of the first-quarter financial results. It fell from a six-year high of 34 sen to 22 sen in late May. Nonetheless, it has regained some lost ground of late to end last week at 28 sen.

The shortfall of the profit guarantee isn’t quite a concern for MClean’s management as it is confident of earnings recovery in the second half of the year.

“We (DWZ) are aiming to be back to profit by the second half of the year, due to the fact that [the industry] is seasonal, and the trend is that we see improvement in the second half,” said MClean’s chief financial officer Loh Weng Yew.

“Usually, we see an increase in volume of sales during the second half of the year, so we are expecting to see that,” he told The Edge Financial Daily.

DWZ’s audited profit after tax (PAT) for FY16 was RM2.34 million, resulting in a shortfall of RM2.3 million in its profit guarantee.

MClean then served a letter to the vendor, Decor, in May, for the settlement of 55% of the shortfall amount as MClean owns a 55% stake in DWZ.

Loh added that MClean received the full amount it was owed in shortfall on June 7, amounting to RM1.27 million.

MClean bought a 55% stake in DWZ, which specialises in surface treatment and finishing for electronic and electrical industries — a move to diversify its existing business, which is provision of precision cleaning, washing and assembly services to hard disk drive and semiconductor industries.

Under the share sale agreement, Decor was to provide an earnings guarantee that DWZ will achieve PAT of RM3.9 million and RM4.6 million for FY15 and FY16 respectively.

MClean paid RM14.09 million for the controlling 55% stake in DWZ through issue of new shares to the vendor, which is now the single largest shareholder of MClean.

It was a double-whammy year for MClean.

Besides lower earnings, Petroliam National Bhd (Petronas) in February 2016 served DWZ with a letter of demand for damages to the tune of RM46.75 million relating to the alleged discharge of “noxious and toxic effluents” from DWZ’s piping structure, which allegedly caused damage to Petronas’ pipelines.

For the legal case with Petronas, Loh said it is currently pending an injunction hearing, which is scheduled for today.

Moving forward, Loh reveals that MClean is currently mapping out a plan to restructure its operations in Singapore.

“We are restructuring our business in Singapore in order to make way for future initiatives by MClean, which will see the deployment of DWZ’s businesses to other areas in the region,” he said.

Meanwhile, Loh noted that MClean will make its first foray into Thailand by year end.

“We will be setting up an [operation] hub in Thailand, to be near to our key customer [Seagate Technology], so that we may leverage on some of their key businesses,” said Loh.

Currently, MClean has a presence in China, Malaysia and Singapore.

“When everything has been confirmed, we will make the announcement as now it is still in planning stages,” said Loh. “Seagate has its base in China and Thailand, so we want to be closer to their centre of operations,” he added.

Loh could not reveal the amount of capital expenditure allocated for the expansion as the arrangements are still in their preliminary stages, but said that the group will fund the expansion through a mixture of internal funds and bank borrowings.

“We should [complete the construction of the hub] by the end of the year,” he said, adding that the group expects to see profit contributions from the new operation hub in Thailand to come in starting mid-FY18.

For its first quarter ended March 31, 2017, MClean’s net loss narrowed to RM404,000 from RM1.63 million in the same period last year, while revenue grew 8% to RM13.77 million from RM12.75 million a year ago due to an increase in all surface treatment and precision cleaning services.