Emmanuel Samarathisa | 22 Mar 2019 00:30

Diversifying one’s investments to hedge against volatile market fluctuations is sage advice. It appears that this strategy has benefited fast-expanding construction company Vizione Holdings Bhd to the hilt. It posted back-to-back profits over six quarters. Its share price, currently at 97 sen, has yielded a return of 13.45% year to date.

But how long can this company, a potential inductee to the RM1 bil club on Bursa Malaysia, sustain its successful streak? Since Pakatan Harapan (PH) formed the government in Putrajaya after a stunning victory over Barisan Nasional, it immediately embarked on a review of mega infrastructure projects. To a certain degree, the move to review the projects, unnerved investors.

Under such circumstances, Vizione is driven to seek new ways of doing business. “That’s why we are always trying to think outside the box,” Vizione managing director Datuk Ng Aun Hooi tells FocusM. “If the government has no contract to offer, what should I do? We have to try and innovate. We can never stop.”

Ng is looking to diversify into other sectors such as affordable homes, student hostels, healthcare and renewable energy, among others. These would provide options for Vizione to not only bid for a wide range of public and private tenders but to also play the role of developer as well as concessionaire.

Recently, the company made the headlines mainly for two reasons. Firstly, the fulfilment of its profit guarantee of RM82.59 mil after buying into Wira Syukur in 2017. “We actually achieved RM85.9 mil, so that’s an extra RM3.3 mil,” says Ng.

Recall that in 2017, Vizione bought into Wira Syukur, which was founded by Ng and his two partners in 1996, for RM280 mil. The deal came with a profit guarantee of RM82.59 mil for two financial years, ended Dec 31, 2017 and ending Dec 31, 2018. Last year, Ng met 34.6% or RM28.57 mil and he has successfully fulfilled the rest this year with a surplus of RM3.3 mil.

Also, at the time of writing, Vizione’s orderbook stands at RM3.95 bil with earnings visibility till 2022. It has a combined completed orderbook of RM1.89 bil and a RM2.4 bil tender book.

Secondly, Vizione’s involvement in the huge Penang Transport Masterplan. The company has been tasked to undertake construction works for Package 2 of the mega project worth RM815 mil through a joint venture with Vertice Bhd called Buildmarque Sdn Bhd. Vizione and Vertice each have a 50% stake. The project is for the construction of a 5.7km bypass from Bandar Baru Ayer Itam to Lebuhraya Tun Dr Lim Chong Eu.

But the integrated infrastructure project, which consists of three packages and an undersea tunnel amounting to RM6.3 bil, has been controversial from day one. Most recently, a series of postings by a controversial blogger Raja Petra Kamaruddin alleged corruption on the part of the project delivery partner Consortium Zenith Construction (CZC) Sdn Bhd, which is 13.21% owned by Vertice Bhd. But CZC executive director Datuk Zarul Ahmad Mohd Zulkifli, on March 4, denied the allegations as “pure fiction and clearly concocted to deceive and defame me, my company and the Penang state government.”

This is not the first time Zarul had been linked to allegations of corruption. Last year, the Malaysian Anti-Corruption Commission (MACC) had held Zarul for 11 days in a graft probe. “Besides me, my entire company was called for questioning, spending a total of 40 days in and out of the MACC office, cooperating with every single aspect that was being investigated. This includes close scrutiny of our accounts,” he said.

Shortly after Raja Petra’s blog posts went viral, MACC announced it had opened investigation papers on the Penang project. “Following a recent investigation into Penang’s undersea tunnel case, the Malaysian Anti-Corruption Commission has confirmed that [sic] the opening of six investigation papers on the matter,” MACC said in a March 4 statement.

However, Ng says it is business as usual for Vizione. “Package 2 is still in motion and the government is quite firm about it,” he says. The groundbreaking ceremony is slated for Aug 31 and “we have already prepared the details and are discussing with the state and various consultants on the project. So far, everything is smooth.” In fact, Vizione is already eyeing Phase 1 as well. “We have not been awarded the tender yet but Zenith (CZC) is finalising the layout and we are hoping to bid for that too,” says Ng.

To be sure, such external threats are par for the course for a company that is exposed to public infrastructure projects such as Vizione. Right after PH took over the country’s administration and when it began reviewing infrastructure projects, Vizione had three projects worth about RM200 mil cancelled. “Luckily these were small projects,” says Ng, adding that he has sent a letter of enquiry to the Housing and Local Government Ministry on the three projects as these are in limbo at the moment. “The authorities said they will consider our appeal. So, hopefully, we can have some good news where we can proceed with these three projects.”

Indeed, the scrapping of big infrastructure projects have put the spotlight on construction counters. The aggregate net profit for the entire construction sector saw a sudden 37% yoy plunge in 4Q18 due to the government’s cost-cutting measures as well as review of large-scale projects.

“Progress billings for major infrastructure projects such as LRT3 and Pan Borneo Highway Sarawak were either slow or stopped altogether.

“Construction companies with property projects generally saw weaker sales and lower profit margins in 4Q18 due to the sustained weak property market conditions,” wrote research house Affin Hwang Capital in a March 8 note. Affin Hwang also observed that some of the companies under its coverage such as HSS Engineers and WCT Holdings Group Bhd reported earnings below expectations. But “it is positive to note that the construction earnings downgrade cycle since 2017 seems to be bottoming and market expectations are aligned,” said the research house.

MIDF Research also notes that near-term challenges will eventually gravitate toward the execution stage. “The conversion from PDP to turnkey structure means contractors will need to bear the execution risk. Managing it well will likely translate to better margin, derived from the work progress completed. The extension period given for LRT3 should provide headroom for contractors to better allocate and spread out their resources. Upside risk to the sector could potentially be the revival of the East Coast Rail Link (ECRL), should a meaningful portion be shared with local contractors. However, the project’s fate remains uncertain as negotiations could still be prolonged due to challenges on reaching friendly agreement between the stakeholders. We recall that previously local contractors could be allotted at least 30% of the civil works, as subcontractors, worth about RM16.5 bil,” it said in a March 18 note.

Some analysts have also pointed to Sarawak as the brightest spot for immediate prospects, a market that Ng is eyeing as well. The state government recently announced a record budget of RM9.1 bil for development where accordingly, the amount will fund a few large-scale projects, including the Coastal Road, Second Trunk Road and Water Grid Project. About 67% of the RM9.1 bil allocation for development expenditure (DE) will go to the development of rural areas.

Note that the RM9.1 bil allocated for DE is the largest in the history of the state’s budget since budgets for 2017 and 2018 allocated only RM2.98 bil and RM3.06 bil respectively. From the RM6.04 bil for rural development, RM1.53 bil will go to Projek Rakyat, RM500 mil for Rural Transformation Projects (PTP), RM243 mil for Minor Rural Projects and RM72 mill for housing repairs for the poor.

There’s also the Ministry of Finance’s Economic Outlook 2019 where it expects the construction sector to improve in 2019 by 4.7% yoy on the back of an increase in newly planned supply of affordable homes. More recently, the government also announced its ambition to build one million affordable homes within the next 10 years. As expected, this has tantalised many developers and construction players, including the likes of Vizione.

For Ng, he predicts that some upside would be available from the second quarter. “Initially things were slow but the government needs to stimulate the economy, to pump out more projects and to make the property/construction industry more active. So, we are expecting things to be better,” he says.

The only way to move forward, according to Ng, is to maintain a 50:50 ratio of public and private projects. “To be frank, I don’t think there will be large-scale projects from the government. So we’ll have to think creatively and the 50:50 ratio plays well with our philosophy of not taking that many high-risk investments but not being too conservative also,” he says. To ensure he maintains that balance, Ng wants to diversify.

“For example, healthcare or hospitals. There are two sides. We tendered for government hospitals but at the same time we are venturing into the sector as a concessionaire, that means we own the building and then lease it to reputable hospitals to operate,” he says. “At the moment we don’t have the licence to operate a hospital, so we will sign a concession with a reputable hospital operator for a few years.” The aim is to receive recurring income, adds Ng.

Vizione is currently working on building a 300-bed private hospital in Semenyih, Selangor. “And we are also looking to university hostels where, again, we act as a concessionaire and build these units for the universities and lease them for a number of years.”

An analyst covering the stock lauds Vizione’s diversification plans. “Since our initiation report on Oct 29, 2018, the group continues to deliver favourable results, despite the challenging construction sector,” Rakuten Trade analyst Yong Jun Ting wrote in a note. “The management has also indicated it is looking to expand into the concession business, property development as well as renewable energy to attain more recurring income. With current net cash position of RM29.3 mil, we believe the healthy balance sheet provides ample room for further expansion, especially in the concession business. Net earnings for FY19 are expected to more than double on the back of higher earnings visibility.”

Aiming to be a RM1 bil company Vizione was formerly known as Astral Supreme Bhd. It was mainly involved in the manufacturing, assembly and export of electronic products and components before venturing into infrastructure building.

Then, Ng was appointed an independent non-executive director of Astral Supreme in March 2014 before being re-designated managing director in May 2015. He managed to turn around the loss-making company in 2016 by disposing of its legacy business. The company was renamed that same year.

In its latest financial results, Vizione posted a profit of RM19.44 mil for the second quarter ended Nov 30, 2018 compared to RM6.5 mil in the preceding year. Revenue was RM165.74 mil compared to RM147.29 mil. “The increase in revenue and profit before tax were mainly attributed to the construction works which were undertaken during the quarter by Wira Syukur,” the company said in its Nov 30 Bursa filing. “Recently, we met with Vizione’s management, and while there are some concerns about the viability of some of the projects, the overall sentiment was not as bad as initially thought,” says an analyst tracking the stock. “While pipeline is strong, valuation does not look compelling. That said, share price re-rating catalyst could come from more job wins and stronger results ahead.”

Ng, too, believes that all they can do at the moment is to continually deliver the results and “show to shareholders that we have a practical plan to move forward.” If these are in place, Ng is confident the share price will go up and he will also be on track to fulfil his goal of growing the company to a market capitalisation of RM1 bil. “Our target to break into the RM1 bil club was set last year. We are actually working to achieve this by FY20. Now the market may seem slow but we’re confident of meeting our target. That’s why we are venturing into other segments and trying to walk that fine balance of being a developer, builder and concessionaire.”