The healing continues


  • Business
  • Saturday, 11 Jan 2003

ABDUL Rahman Ahmad and Shahril Ridza Ridzuan, were uneasy when they were thrust into the corporate limelight back in October 2001. They probably still are.  

But they have coped with the attention the best way they know how – by spending as little time as possible in the glare of publicity.  

Keen to get off to a good start in the year however, and as the final leg of the restructuring draws closer, both men share with BizWeek what they have done so far to revive a once high flying, low yielding entity and its future plans. 

BizWeek: To recap. It has been 15 months since you announced the massive revamp plan for MRCB. How has it been? 

Rahman: We have basically achieved quite a lot over the period. Internally, we carried out a 3R strategy – to restructure, rationalise and rejuvenate. 

In terms of restructuring and rationalisation, quite a bit has been done. We have divested assets of RM1.8 billion through the sale of the stake in Rashid Hussain Bhd, Sepang Power Sdn Bhd, Fibrecomm Networks Sdn Bhd and Zelleco Engineering Sdn Bhd. In terms of rationalisation, we closed down a number of so-called dotcom companies. 

It's common knowledge that with the completion of the RHB sale, we can complete the restructuring within the first quarter of 2003, pending shareholder approval and KLSE (Kuala Lumpur Stock Exchange) placing out the circular. More importantly, in terms of rationalisation, one thing the market is not aware of is that we have aggressively improved operational efficiency and have turned around profit before operations even excluding exceptionals.  

MRCB has turned around from loss-making to profitable operations of some RM30 million (for financial year 2002). We did that by really cutting cost and we reduced corporate overhead by over 40 per cent and reduced headcount. When we came in, there were 900 staff and now we've got 550. In a span of one year, our cost base is the right size for our particular organisation.  

But we knew just restructuring and rationalisation were not enough. We needed to move forward hence the rejuvenation side of our strategy. We've made considerable stride in terms of hitting our order book targets – we have announced one major project (in March 2002, MRCB's 55 per cent-owned Transmission Technology Sdn Bhd being part of a consortium formed with Syarikat Permodalan Kebangsaan Berhad, was awarded the RM425 million Sabah East-West Project) and a couple of letters of intent (LOI) which we hope will be converted to letters of award within this year. We're on our way. 

 

What was the status of MRCB's order book when you first came in? 

Shahril: Then, it was basically zero. The only project was the Labuan College, which was being completed that year (2001), so the future order book was practically zero with no new projects coming on line. 

As you know, the order book cycle – it takes some time to tender or to get contracts. We were very aggressive in the first few months to get projects. The first was Sabah East West but that was also after two years of negotiations. We have work projects coming in already as announced and they include the RM250 million Ipoh-Lumut Highway, KLNEE and obviously other large civil industry projects and education- and health-related projects. Our target is to maintain and keep an outstanding order book of RM1.5 billion at any given time and that will provide a steady stream of earnings. 

Assuming other LOIs we are negotiating right now come in (expected after Chinese New Year), the target is achievable this year. We expect to make a few announcements after the festive period. We have bid for projects totalling RM5 billion-6 billion now. 

 

Rahman: If we can consistently have a RM1.5 billion order book and assuming these projects take roughly about three years, MRCB will get a revenue of RM500 million which will be renewed every year. That is a sustainable substantial base.  

The best construction companies such as Gamuda Bhd has over RM2 billion and IJM Corp about RM1 billion ... that is the level I think good premier leading construction companies expect to have and we would like to position ourselves similarly. Anything more people will say we want to get all of it and in the Malaysian context, that's not acceptable. 

 

More is always better? 

 

But that should be good for the company right ... trying to get as much as you can? 

Shahril : It's a matter of capacity as well. Obviously you don't want to over expand and as you know the construction sector is cyclical. You want to have sustainable growth. So, we're not looking at just Malaysia but also to grow our business overseas especially in transmission networks that we specialise. We have started tendering for jobs in the Middle East and other Asian countries and hopefully it's a learning process and we can adapt to overseas market. We'll start by getting one or two projects in the course of the year. 

 

The plan is to turn MRCB into a strong prominent construction group. Do you think this will take shape fully? 

Shahril: MRCB has a very good construction division. The Labuan College was completed on time and within budget. We have very good project execution. The issue is that because there was a lull in terms of order book in 2001 for new orders, our construction division is now working full time to catch up and get those projects 

 

Rahman: One of the issues is that MRCB has always been a conglomerate and the media side has always outshined the rest like engineering and construction. But in terms of track record for engineering and construction, I believe MRCB's is better than anybody's. 

This is something the market will only start to realise with the de-merger as MRCB becomes purely an engineering, construction and property company.  

We believe the energy side has considerable opportunities particularly with Bakun and it will put us on good stead given our historical track record. Also the energy business is a lot less competitive compared to the construction. 

 

Has it been difficult to go out there and secure contracts given the weak perception of the previous management? 

Rahman: MRCB has a good track record in terms of delivering projects. So really the issue is not so much convincing the client on its technical capability but putting together the correct package, correct bid and really making a compelling case on financial side. It was already there but it needed to be more aggressive.  

For example, TV3 now is far more aggressive in terms of going out to market, to advertisers, to viewers. We want to inculcate a culture whereby we are more responsive to what the market wants and that is not just for television, but also for construction and property. 

 

On the aggressive asset disposal 

 

As for MRCB's asset disposal, it clearly had to be done. So, you had no choice right? 

Shahril: I think having to do it and achieving it in a falling market like over the past 12 months are two different things. 

 

Rahman: For us to be able to execute deals of RM1.8 billion at or above market value I think is a considerable achievement.  

Personally, that has been very, very satisfying to us. I think it's good that we moved fast because you must remember 12 months ago, there was some upside in terms of capital market so we struck most of our deals very fast earlier on. Of course completion took a bit of time, but at that point of time we avoided making deals when it turned to a selling market. 

 

Granted you have managed to do quite a bit rather speedily. But for some thing such as the sale of stake in RHB, it was somewhat delayed wasn't it? 

Shahril: Not delayed but under Bafia, Bank Negara needed to ensure that the merger takes off first before we can complete the sale. 

 

Rahman: When we launched the scheme in Oct 2001, we thought we could complete the disposal but we had to wait for the RHB Utama-merger first. But that's the only thing that to a certain extent took some time. When we announced disposal of (our stake in) Commerce-Asset Holding Bhd, we did it in two weeks. Similarly, with Sepang and Fibrecomm, it was all very fast. 

 

Lack of investor interest 

 

Unfortunately, up to now, investors are still not quite interested in MRCB. Why do you think? 

Rahman: I don't think there's a lack of investor interest. I mean MRCB's shares have been (in the) top 10 volume for the last nine months. The question you are posing is why the share price has not performed. We have to accept two things about MRCB. It is basically a high beta stock that translates into a speculative stock whether you like it or not. It's always basically been like that. So, when market is up, it tends to over shoot and when it is down, the price tends to go down. If you look at MRCB share price when the market was performing it was RM1.90. When we came in it was RM1.20 then it went up to RM1.90 and now it's gone down to 85 sen.  

The second part, which most people don't realise, is the foreign shareholding in MRCB that is a lot. At its peak, we had 20-22 per cent foreign shareholding when the KLSE peaked in April 2002. This fact exaggerates it even further. Which comes to my next point – when foreign investors decided to underweight Malaysia on the whole, they tend to underweight those stocks that they hold on to, so it was only natural that MRCB experienced what it did. If you look at other stocks similar to ours, they too have experienced similar pattern.  

But to us, effectively as professional managers, we are here to create long-term value to shareholders and our job is to articulate that what we are doing is right. If you look at then and now, there's no reason why our share price should not perform. Before, to be very honest, we were on the brink of insolvency, our debts were huge at about RM4 billion and now effectively we are left with RM1.9 billion.  

 

On de-merging 

 

But the de-merger should attract some interest right? 

Rahman: People don't realise that our de-merger exercise is equivalent to a bonus or dividend issue. What we are doing is instead of giving shareholders dividend in terms of cash, we give them dividend in terms of Newco shares. Under our de-merger, with 3 MRCB shares you get back 2 MRCB shares and 1.3 Newco shares. If one calculates at par, the Newco is still undervalued and the amount of upside people can get at this particularly time is still considerable. I'm a great believer of our stock at this particular current value and the market at the end of the day will understand and value it accordingly.  

 

When do you expect that to happen really? 

Rahman: I think at the end of the day, probably in this type of restructuring, the market is still unfamiliar with it. When we announced the de-merger, we were the first. Now you have EON that is basically de-merging from others in the group. But EON's de-merger is quite clear as it involves giving cash back to shareholders.  

In instances where the de-merger is slightly more complicated, the market is probably not familiar with it. But once de-merger happens, and value reflects on Media Prima, the newco and we look back at current prices, I bet you, people will see the creation of value or the impact of under valuation at this particularly juncture. 

 

On property 

 

MRCB clearly has big plans for its property business. Is now the right time to do it given that the market is rather soft? 

Rahman: Basically, the property market moves in cycle. At the moment it is soft but we think such a market offers significant opportunities for us to expand. It is basically like any other asset-cycle, you always want to expand presence at the low point of the cycle and catch it when it goes up. So, we will move into property strategically as well in that manner. That is what drives us in terms of making sure that we can catch it when the market picks up. But the key issue is acquiring. In any property investment, the question is value – if we can get a good enough value and yield, then it's worth the investment. In terms of construction and engineering, the question is to get order book going but in property, it is really about getting the economies of scale at good value.  

 

Shahril: We have substantial property interest that provides big asset backing for the group and our key asset is KL Sentral. Obviously, we are keen to be viewed as a major player in urban property development. We also have township development (Seri Iskandar township development) and are keen to pick up more property in the Klang Valley area. 

 

Rahman: For construction, it's a matter of getting new contracts. For property, we need to look at how best to expand our property assets and create additional value to that and that is our focus. One key area we are looking at is to add to the land bank. 

 

Staff reduction  

 

What about trimming headcount? 

Rahman: The key issue in any restructuring whether external or internal, it should be fast and we did ours within six months. Unfortunately, MRCB's staff layoffs were not picked up (by the media) even though it was bigger than what TV3 is going through now. 

For TV3, it undertook a voluntary separation scheme (VSS) in 1998 but immediately two years later, it increased its staff. The issue is basically to do it by knowing what is the right size and making sure that the right size is always maintained and controlled. Whatever increases thereafter should be backed by new business that is generated. 

 

How much did MRCB save from the exercise? 

Rahman: In terms of staff cost, we slashed up to 15-20 per cent and that's how we turned around operationally.  

 

Shahril: The key focus is return on investments. After 7-8 months following the staff reduction, the benefits will filter down to earnings.  

 

There is perception out there that MRCB got a lot of help from the government, for example in securing new contracts and that things would have been more difficult without that help. Is that fair comment? 

Shahril: That perception comes about because people fail to see that it is a really competitive market – to secure projects and contracts. For every project, there are four to five companies trying to get it. The key point is the government needs to get the right people from the capabilities point of view as well as financial package. In that sense, we are not any different from Gamuda, Road Builder in getting the contracts. Similar to other construction companies, if your client is the government, then really that is the only client you need to work for.  

 

Rahman: The engineering and construction works are driven by the government. The government is our client. But at the end of the day, it is unfair to say that. It's a very, very competitive market and we've been able to secure that job by having a good track record and by giving a good value proposition to client. 

 

Can we now move on to TV3 and NSTP. What's the progress at that end? (see separate stories) 

What are your plans for the Newco? That should be interesting. (Under the de-merger, TV3 will transfer its listing status to Newco, which will ultimately hold the shares of TV3 and NSTP that are now owned by MRCB. (A shareholder of 1,000 MRCB shares will end up with 670 MRCB shares and 430 newco shares after the de-merger exercise.) 

 

Rahman: The Newco will have the synergy of TV and print. Already, both are working together with their clients and are developing distribution channels for advertising. We are also combining the management and cost structure. The key point is that the Newco is the only combined media play in terms of broadcast and print.  

In terms of operational synergies, the Newco will be in an ideal position to see what other media platforms can be tapped. In terms of growth, the idea is to increase the advertising medium, whether through print, broadcast, outdoor advertising or event management and try to find new revenue stream.  

 

When you first came in, what were the major problems in MRCB you needed to address, what have you addressed and what is left to do? 

Shahril: The main drag was debt burden and that had an impact on not only balance sheet but also operations due to high interest payments. Obviously that was the first key issue addressed and we feel we have via asset disposal. With that, MRCB for this year will make an interest savings of some RM30 million. 

 

Rahman: We had to address four key problems and we have (for more read main piece) 

 

Anything left to do? 

Rahman: We need to move forward, get contracts in and do the contract work for engineering and construction and satisfy our clients. On property side, we will effectively expand and secure good and value assets. 

 

Personally, how has it been for the two of you? You seem somewhat more comfortable? 

Shahril: We are now more comfortable as opposed to earlier with all the expectations. What we weren't prepared for I guess is the media limelight and expectations. We did not expect that amount of attention. But there is still pressure. It's actually been quite an exciting roller coaster ride for us. But I think we are still not used to the limelight. 

 

Rahman: I suppose MRCB is a high profile company and that explains all the attention it got. What we tried to do is our best to address the problems in the company. But objectively, I think, we'd rather resolve the issues than go out there and do PR (public relations). 

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