This article first appeared in The Edge Malaysia Weekly on December 16, 2019 - December 22, 2019

QUALITY Concrete Holdings Bhd, a smallish ready-mixed concrete producer based in Kuching, has been attracting attention lately, after a typographical error on the value of its road maintenance contract in Sarawak saw its share price go through the roof last Tuesday and Wednesday.

While some might dismiss the rise in the share price because it was due to an error — there is a huge difference between RM34.639 million and RM34,639 million — the more pertinent question is, will the contract help turn around the loss-making company?

Group general manager of finance and administration Paul Chiam Tau Keen tells The Edge that the contract will help the group diversify its earnings and support its businesses in ready-mixed concrete and sawmilling.

However, he would not say whether it will lead to overall profitability for the group in the years ahead.

“This is our first venture into road maintenance. We hope to achieve 10% to 15% net profit margin from this contract, barring uncertainties,” he says.

Last Monday, Quality Concrete announced that its 70%-owned subsidiary, QCCE and Asas Ulung JV Sdn Bhd, had received a letter of acceptance from the Sarawak government for a 10-year contract to manage and maintain state roads in the Sri Aman and Betong divisions.

The contract — for a total of RM34.64 million a year — covers 1,152.34km of roads in the two divisions.

While the length is only a small portion of the more than 30,000km of state roads in Sarawak, the contract win shows that Quality Concrete is another player that stands to benefit from the construction boom there.

It is worth noting that the contract is performance-based, meaning that a contractor will have to meet prerequisite quality indicators before it gets paid by the Sarawak government.

Quality Concrete has been loss-making over the last 15 quarters, except for the quarter ended July 31, 2018, when it made a net profit of RM333,000. The last time the group reported an annual profit — RM5.58 million — was in the financial year ended Jan 31, 2016 (FY2016).

When asked about its financial performance over the last few years, Chiam says the losses were due to the stiff competition among ready-mixed concrete producers in Sarawak and the unfavourable location of its plants there to cater for projects such as the Pan Borneo Highway.

“It all depends on logistics. Some of our plants are not close to the construction sites of the Pan Borneo Highway and, therefore, we couldn’t cater for the project. Requirement for concrete also depends on the level of construction of the projects,” he says.

“Sometimes, we have to send the ready-mixed concrete to road construction sites that are far away in the rural areas. Sometimes, there are not enough concrete mixing trucks.”

While Quality Concrete could invest in more trucks, such investments must commensurate with the demand for ready-mixed concrete in Sarawak and the returns that the group can get from them, he adds.

Rising 67.7% from last Monday’s close of 80.5 sen to Thursday’s close of RM1.35, Quality Concrete is valued at RM78 million. At that level, the counter is trading at 0.78 times its net asset value per share.

Quality Concrete’s largest shareholders are Datin Ha Ai Ing, Tiang Chiin Yew and Tiang Ching Kok with a combined 31.07% stake. Ching Kok is group managing director.

The who’s who of Sarawak is also on the shareholders’ roll of Quality Concrete. Among them is Datuk Raziah @ Rodiah Mahmud, the sister of Yang Di-Pertua Negeri of Sarawak Tun Abdul Taib Mahmud, with a direct interest of 0.45%. Datuk Amar Abdul Hamid Sepawi, Taib’s cousin and second largest shareholder of Naim Holdings Bhd, is also on the list with a 0.17% stake.

There is also Cahaya Besi (Sarawak) Sdn Bhd with a 14.06% stake. It is not known who the real owners of the company are.

Other winners of Sarawak road maintenance contracts

Besides Quality Concrete, the incumbent road maintenance company of Sarawak, Cahya Mata Sarawak Bhd (CMS), and Protasco Bhd also announced that they have been awarded road maintenance contracts in the state.

Sarawak’s largest conglomerate, CMS, says its 51%-owned subsidiary, PPES Works (Sarawak) Sdn Bhd, was awarded a contract to manage and maintain 3,300.65km of roads in the Kuching, Serian, Samarahan, Kapit, Sibu and Sarikei divisions for 10 years, starting Jan 1 next year.

The contract to PPES Works is worth RM99.22 million per annum, excluding any additional works, according to the announcement.

The contract signifies a reduction for CMS as over the last 15 years, the group has been maintaining more than 6,000km of roads in Sarawak. Plus, the previous contract was awarded to CMS Roads Sdn Bhd, which is a wholly-owned subsidiary of the group.

The smaller contract has led to AmInvestment Bank Bhd trimming its projections for CMS’ earnings for the next two financial years by 5% and 2% respectively. The bank’s target price for the group has also been reduced by 5% to RM2.03 with a “hold” call.

Meanwhile, the award to manage and maintain state roads in the Mukah Division for 10 years, starting Jan 1 next year, was awarded to Protasco’s 30% associate company, PJP Barisan HCM JV Sdn Bhd, the group announced on Dec 9. This contract is worth RM24.6 million per annum, which is subject to review every three years with a maximum increase of 7.2% per revision, according to Protasco.

The group is no stranger to road maintenance in Sarawak, although its previous contracts have only been from the federal government.

In February last year, Protasco announced that its 30% associate, DAL HCM Sdn Bhd, had been awarded a contract to manage and maintain 751km of federal roads in Sarawak on a 15-year concession, starting Sept 1, 2018.

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