This article first appeared in The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

HAVING being affected by the various movement restrictions during the pandemic, Rohas Tecnic Bhd is looking to grow its recurring income and green business to reduce its reliance on manufacturing. More specifically, it aims to shore up its mini hydropower plant and water treatment plant (WTP) businesses, as well as the telecommunication tower division, so that within three years, their total contribution to revenue and bottom line will be increased to 50% and 30% respectively (from 20% at present).

“If you go back to the days before we got listed in 2017, 90% of our revenue was from our Malaysian business,” CEO Leong Wai Yuan recalls in an exclusive interview with The Edge. Any upheaval in Malaysia would affect Rohas Tecnic’s revenue, 95% of which was derived from the manufacturing business then.

“If there’s any changes in the Malaysian government, or for example, what happened in the last two years with the Covid-19 pandemic, and you are not allowed to operate, then the revenue and profitability will fall. So I don’t like this,” Leong says.

When Rohas Tecnic’s manufacturing and engineering, procurement, construction and commissioning (EPCC) businesses were not allowed to operate because of the movement control orders, it was the recurring income businesses — which are more self-sufficient — that kept the group afloat.

For instance, there are minimal manpower operations at its mini hydropower plant in Acheh, Indonesia, and its WTP in Vietnam. So, even when both countries were under some form of lockdown, the businesses continued to generate income.

“For example, we have a mini hydro now in Indonesia that has been contributing so well, whether there’s a pandemic or no pandemic, there won’t be much issues with the operation. If there is a labour shortage, would it be a problem to the businesses? No.

“If, let’s say, there is a change in government in Indonesia, would there be any changes to our mini hydro power plant there? I doubt so. The river will still be flowing. So what I’m saying is, I don’t want revenue stream that I have to ‘work’ for,” says Leong, laughing.

“It is all automated, water is supplied, water is consumed, I get paid. Simple. It is not like in manufacturing — you have to get a directive from the government on when can you reopen, and you can only operate at 50% of your workforce,” he adds.

This strategy of diversifying its revenue and income base away from the manufacturing and EPCC businesses has been in place since the company’s relisting in 2017. During the pandemic, the viability of this strategy to the overall financial health of the group became much more apparent.

In the financial year ended Dec 31, 2021 (FY2021), Rohas Tecnic reported a net loss of RM15.88 million, after its operations were affected by the MCOs and the floods in the fourth quarter. It was the biggest loss the group had had in the six years it has been listed, and the second one after FY2020 when it saw a net loss of RM2.83 million.

In FY2021, Rohas Tecnic recorded RM9.16 million in share of profits of associates, compared with RM2.37 million in the preceding financial year, as a result of contributions from its mini hydro power plant in Acheh, which was completed in March last year, and the Vietnam WTP.

Rohas Tecnic has a 49% stake in PT Century Abadi Perkasa, which owns the mini hydro power plant in Acheh, and a 30% stake in Phu My Vinh Construction and Investment Corporation, which owns and operates the Vietnam WTP.

The much bigger net loss in FY2021 was also due to the RM13.97 million impairment losses on receivables during the final quarter. Rohas Tecnic was advised by its auditors to impair the receivables as it has been in the receivable books for around six years.

While the group was certainly hit by the challenges of 2021, including the MCOs and widespread flooding, its operating loss before working capital changes was only RM977,000. This means that the majority of the losses during the year were because of the impairment on receivables that was recognised in 4QFY2021.

Contributions from the recurring income and green businesses are going to grow this year, as the Vietnam WTP’s capacity to produce treated water would be enlarged this year, says Leong. “We are going to have new capacity by June, from 40 million litres per day (MLD) to 80MLD. The moment we have the capacity, the water gets consumed, then the contribution increases.”

Rohas Tecnic also holds a 75% stake in Global Tower Corporation (Cambodia) Pty Ltd (GTC), a telco tower company. According to Leong, GTC has also seen traction in getting orders for tower infrastructure in Cambodia.

He explains that the Cambodian government is taking the path of separating the roles of the telco service providers and telco infrastructure providers, akin to Malaysia’s 5G development via the single wholesale network (SWN) approach. Therefore, telco infrastructure providers develop telco infrastructure that will be leased to the service providers.

Rohas Tecnic has had a good start in 2022 so far, riding on the RM85 million contract from the Selangor government it secured in late December, as well as orders for telco poles and towers under the Jaringan Digital Nasional (Jendela) initiative.

The contract with the Selangor government requires Rohas Tecnic to construct pumping stations at two retention ponds and lay water pipelines to transport the water to the Semenyih WTP intake.

According to Leong, the Malaysian Communication and Multimedia Commission (MCMC) had ordered more than 100 telco poles and towers from Rohas Tecnic for the Jendela initiative. Such orders have also come in from DNB, he reveals.

All in, the order book that the group has secured so far amounts to about RM160 million. Orders in hand for the EPCC segment amount to more than RM450 million and for the manufacturing segment, it is RM200 million, says Leong.

The group targets to secure RM600 million in replenishment orders this year.

With the government pushing for the SWN model for the 5G infrastructure under DNB, and potential participation of telcos in its shareholdings, the 5G network rollout is expected to intensify.

In tandem, demand for telco poles and towers is projected to increase, benefiting companies such as Rohas Tecnic, which has the capacity to produce 5,000 tonnes of poles and 30,000 tonnes of lattice towers a year.

Increasing orders will result in better economies of scale and lower unit costs. Leong says the group’s gross margins jumped fourfold in 4QFY2021 on the back of orders for tower poles from MCMC.

“For Jendela, I will tell you that Rohas Tecnic got half of the orders for the poles. There are competitors but the biggest challenge for them is capital. If you do not have the scale, it is really hard for you to be competitive.

“If you just produce 1,000 tonnes, then the gross margin is definitely going to be very thin. But if you can produce 3,000 tonnes using the same number of workers you had, your gross margin will jump,” says Leong.

Rohas Tecnic closed at 24 sen last Thursday, valuing the group at RM113 million. Over the last one year, the counter has lost 33.33% of its value.

Hong Leong Investment Bank Research has a “hold” call on Rohas Tecnic with a target price of 29 sen, after pegging its forecast FY2022 earnings per share to nine times price-to-earnings.

Its research analyst Edwin Woo writes in a March 1 report that Rohas Tecnic’s estimated outstanding order book for the EPCC segment translates into 2.1 times cover ratio of the segment’s FY2021 revenue, while the tower fabrication order book represents around two times cover ratio on the segment’s FY2021 revenue.

“Going forward, management is expecting a better year, aided by the Jendela rollout, but expects profit contribution to be sluggish until later in 2022. Its associates in Vietnam and Indonesia could also provide stronger earnings contribution this year,” says Woo.

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