KUALA LUMPUR: Digistar Corp Bhd chief executive officer Datuk Lee Wah Chong (pic) says the 33% fall in the group’s first-quarter (1Q) net profit is within expectations as earnings are only expected to pick up from the 3Q from ongoing projects.

The group, which returned to the black in the previous financial year following three straight years of losses, is on course to record profits again for the current year ending Sept 30, 2017 (FY17), said Lim.

“I believe FY17 will be another positive year and hope it will be the same in the years ahead,” said Lee, adding that earnings will be anchored by the group’s systems integration and hospitality businesses, which are expected to continue to generate recurring income.

For the hospitality business, Digistar currently operates Imperial Heritage Hotel, a four-star boutique hotel in Melaka. The hotel currently generates 5% of its annual revenue, and Lee is expecting this to increase by 30% in FY17, after it renovates the hotel to create a spacious ballroom that will have the capacity to seat 500 people.

“We are in the design stage of creating a ballroom. Renovation can be done in a matter of one to two months. Once completed, we can offer meeting, conference and wedding packages which will further increase the hotel’s income,” he said.

With the new ballroom, Lee also noted that the hotel’s occupancy rate, which currently stands at 50% to 60% on weekdays and 70% to 90% on weekends, will also increase in the long term.

“The hotel is a stone’s throw away from the Unesco (United Nations Educational, Scientific and Cultural Organization)-recognised heritage area, and the demand is very positive,” he added.

Besides the hospitality segment, Lee said Digistar is also bidding for two projects — a total security solution for a government agency and an infrastructure-related project along with other related system integration jobs, which he estimates to be worth a total of RM2 billion.

“I cannot reveal beyond that as they are in a negotiation stage. We are not new in providing security solutions, as this is reflected by the central monitoring system products and services that we offer,” he said, adding that these two anchor projects, if won, will replenish its depleting order book, following the completion of Malaysian National Technology Advancement Centre (NTAC) in Alor Gajah, Melaka.

“Our order book now stands at RM30 million. Given our previous track record, we are hoping to increase the contracts at hand every now and then,” said Lee, adding that the recovery of oil price will boost government revenue, thus increasing market expectations that there are still ample government construction contracts that are up for grabs.

Lee said Digistar is also mulling the payment of a dividend to shareholders in FY17, to be carried out by restructuring its RM280 million bond held by its 40%-associate, Indera Persada Sdn Bhd. Digistar has not paid any dividend to its shareholders since FY10.

“The way we will restructure the bond is that we will be bringing the profit that we will get in the last three years of the bond period forward and share the cash profit with our shareholders,” he added.

Rated “AA1” by RAM Rating Services Bhd, the fixed-rate serial bond, arranged by United Overseas Bank Malaysia Bhd, was issued in September 2013 and will mature in 2028.

“The next coupon payment is RM60 million and will be due in August 2018,” Lee said, as he expects the government to provide a lump sum payment of RM66 million from the works ministry by July this year. The payment is in relation to the construction of NTAC, which it completed last year.

Lee was quick to add that Digistar will also consider other factors such as its cash flow position prior to declaring any dividends.

At the moment, Lee said Digistar is sitting on a comfortable cash pile of some RM70 million, while borrowing was relatively optimal at RM306.48 million.

“Our operating cash flow was negative because we were paying bond interest while incurring no revenue during the construction of the NTAC. But going forward and since the project has been delivered ahead of its schedule, we anticipate this to be positive,” he added.

Meanwhile, Lee said Digistar is ramping up its effort to increase its non-recurring income segment, particularly from its hospitality business, which currently generates 5% of its total revenue.

Listed in 1982, Digistar shares closed at 18.5 sen last Friday, giving it a market capitalisation of RM109.5 million.

“I still personally believe that the company is undervalued,” Lee said. “To increase the value, what we will be doing is to maximise our sales effort and pay better dividend to keep our shareholders happy.”

In a November 2016 note, Mercury Securities has an “outperform” call on Digistar, with a “buy” recommendation based on a fair value of 28.5 sen.