MANY an analysts were wearing smug smiles last week. It's tough making the right call all the time, but on Dyna Plastics Sdn Bhd, they had been spot on.
About two-and-a-half years ago, soon after Gamuda Bhd announced it had acquired a 44 per cent interest in Dyna Plastics, a veteran analyst when asked what she thought of the purchase, said that as far as she was concerned, the investment was as good as written off.
Belatedly, Gamuda, which paid RM68 million for the polymer lithium ion (PLi) rechargeable batteries maker, has reached the same conclusion. It is now in talks to sell its stake in Dyna Plastics.
Gamuda was and still remains a favourite of many foreign and local fund managers. That is why its decision in 2000 to take on Dyna Plastics which had nothing to do with its core operations, went very much against the grain.
Some would argue that the resultant hue and cry in the investing community and ensuing ruthless destruction of more than RM600 million of the company's market capitalisation over the next few days as investors fled the stock, could have been foreseen.
“I'm just interested to know who would buy the company,” says the same veteran analyst now. What continues to boggle her mind is this: “Most of us (analysts) could see that it wouldn't work. So why couldn't they (Gamuda)?”
Another analyst says the company has already been punished for the unpopular buy. “I think Gamuda was definitely serious about Dyna Plastics from the start, and like everyone else got carried away with the tech wave,” he says.
Gamuda has already made provisions of RM30 million for the investment, and is reportedly attempting to flog off its Dyna Plastics stake for more than RM30 million.
It had not ploughed more into the company after its initial RM68 million expenditure – RM28 million for the stake and RM40 million as seed capital – perhaps sensing as the months dragged on that Dyna Plastics was not as charged up as it had initially believed.
Analysts say that Gamuda has indicated it will not be seeking to enforce profit guarantee provided by Dyna Plastics' founder Dr Sulaiman Saad, despite Gamuda's managing director Datuk Lin Yun Ling stating a year ago that “we will call on the profit guarantee if we have to.”
Sulaiman had provided a profit guarantee of RM15 million for the financial year ended June 2001 and RM20 million for the following year.
Analysts say Gamuda thinks that there is little point in pursuing the profit guarantee as it thinks there is little chance of recovery.
Dyna Plastics' losses were not big, amounting to RM1 million to RM2 million yearly, says one of the analysts. But while the company's output levels are still unclear, it was clearly short of the company's earlier projections that ranged from a monthly production of 600,000 units by mid-2001, to Sulaiman's four to five million cells a month eventually.
Lin blamed a delay in rollout plans for 3G phones for suppressing polymer battery demand, but making the grade commercially was always going to be a big challenge.
Interestingly, Gamuda's rationale for buying into Dyna Plastics was to sustain earnings growth beyond the next three years, given the cyclical nature of its core businesses of infrastructure and construction.
“What will complement us well is another new leg where product demand is plugged into a global grid,” Gamuda's Lin said in defence of the deal, adding Gamuda could help create an “internationally competitive manufacturing outfit.”
But as Dyna Plastics' failure illustrates, manufacturing has never been Gamuda's forte (In addition to Dyna Plastics, Gamuda is believed to be planning to also dispose of carbonised paper maker, Gamuda Paper Industries).
Since the early days until present times, the all time undisputed champion divisions of the group, remain civil engineering and construction works.
The divisions continue to power the group forward even if Gamuda has tagged on water concessionaire, Syarikat Pengeluar Air Sungai Selangor Bhd (Splash).
Splash is to be listed on the Kuala Lumpur Stock Exchange in the second quarter of the year, allowing Gamuda, which holds a 30 per cent stake, to realise some value on its investment in the company.
Online financial advisory portal Surf88 says Gamuda's involvement in Splash puts it in a good position to secure further water-related projects, either in construction or a concessionaire capacity.
Splash and its property division currently contribute about 13 per cent to Gamuda's pre-tax profits. Its toll roads division accounts for some 23 per cent, but the bulk or 52 per cent is from construction.
The construction giant is targeting RM2 billion worth of contracts this year, the emphasis, most believe, being on roads.
Gamuda's outstanding construction order book is a hefty RM3.7 billion – its largest contract being the RM2 billion Stormwater Management and Road Tunnel (Smart) project in which it holds a 50 per cent interest.
Surf88 said it expects the concession agreement for SMART to be signed within the next few weeks and that Gamuda's early start on the project, at the government's request, underscores the urgency.
Most analysts are bullish about Gamuda's prospects. Gamuda is expecting to repeat last year's feat – breaching the RM1 billion turnover mark. For the year ended July 2002, it achieved a 25 per cent growth in net profit to RM239 million. The consensus forecast for the current financial year is RM269 million.
“In summary, we see Gamuda's earnings as virtually secured over the next two years on the back of its healthy construction order book and unbilled property sales. The planned listing of Splash could well be a nice feather in the cap,” said Surf88, which has projected Gamuda's earnings per share to grow by 23 per cent to about 35 sen in July 2003, translating into 16 times price earnings.
Added Surf88: “To maintain such rapid growth even at its current size is indeed impressive and speaks well of management.”
Investors who bought into the company on the premise that management would continue to impress, will want to count on Dyna Plastics-type of investments as being a one-off.
RM68 million may well be small change to a heavyweight such as Gamuda. However, not only is the amount a lot of money to many, many others, but the episode has left an unfortunate blot on the company.
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