Opcom rides on broadband growth

  • Business Premium
  • Saturday, 04 Aug 2018

But TM contract win draws attention for the wrong reasons

A CONTRACT win by a well-connected company will oftentimes attract public attention.

Such is the case for Opcom Holdings Bhd.

The Ace Market-listed company, helmed by Tan Sri Mokhzani Mahathir, the eldest son of Prime Minister Tun Dr Mahathir Mohamad, came under the spotlight over the week after disclosing it had won a contract from Telekom Malaysia Bhd (TM) just five days after the 14th General Election (GE14).

Some have come under the impression that the particular contract win had something to do with the victory of Pakatan Harapan, led by Dr Mahathir, in GE14 on May 9.

But looking at Opcom’s track record, there is nothing peculiar about TM awarding the contract to the company.

Opcom has after all been one of the key suppliers of fibre optic cables and telco-related services for TM.

And it had in past years bagged contracts of higher values from TM.

What’s odd, though, is that it took Opcom about 2½ months to disclose that its 70%-owned subsidiary Opcom Cables Sdn Bhd had won the RM11.16mil contract for Unifi service installation and restoration.

The “Rakan Unifi” contract was awarded by TM on May 14. But announcement was only made on Tuesday.

According to one fund manager, the late disclosure of the contract win is of concern on transparency grounds.

“While the contract win is not strange, given the long-term supplier-client relationship it has with TM, the delay in disclosure is rather odd, and raised question about informational advantage that some could have over other market participants,” he explains.

Under the Listing Requirements of Bursa Malaysia, immediate public disclosure of material information is an obligation.

“In relation to an award of contract, a listed issuer is required to make an immediate announcement of any contract awarded to it if it reasonably expects the contract to have a material impact on its financial performance or operations and consequently to a have a material effect on the price, value or market activity on any of its securities; or investor’s decision in determining his choice of action as noted above.

“In determining the materiality of a contract, a listed issuer should assess the value of the contract relative to the annual revenue of the listed issuer,” Bursa Malaysia explains.

“In the event the contract is reasonably expected to have a material impact on listed issuer, therefore, the listed issuer must make an announcement immediately upon receipt of an award of the contract. In the case of Opcom, the exchange will investigate into the matter before commenting further,” it adds.

Opcom’s shares, along with other Pakatan-Harapan-linked stocks, started soaring after the coalition led by Dr Mahathir swept into power on May 9.

The counter closed at 95.5 sen yesterday.

That’s more than double in just three months.

At current price, Opcom’s shares are traded at about 23 times earnings and 1.75 times book value.

Contract win

In responding to StarBizWeek’s question, Opcom says in a statement: “The announcement of Opcom’s successful bid, which is deemed to have an impact on Opcom’s financials, was subject to TM’s approval, which has only just been given.”

Opcom, whose core business is in the manufacturing of fibre optic cables and cable-related products, is co-founded by Mokhzani, who now sits on the board of the company as chairman and executive director.

He is also the chief executive officer of the company, which also provides integrated engineering service for the fibre optic cable market in Malaysia and overseas.

His co-founder brother, Datuk Seri Mukhriz Mahathir, is one of the main shareholders of Opcom.

Mukhriz, who is now Kedah Mentri Besar, owns a 23.3% stake in Opcom under his own name. His wife, Toh Puan Norzieta Zakaria, has an indirect stake of 14% in the company through M Ocean Capital Sdn Bhd.

Opcom says it has always conducted itself in a professional manner since its inception in 1994, and it will continue to do so regardless of the composition of its board of directors, management or shareholders.

“Opcom does not see any conflict of interest of any kind arising, from bidding for projects from government-linked companies or otherwise.

Opcom, just like any other company with products and services to offer, will actively bid for projects and contracts that Opcom has been invited to participate via open tenders, negotiated tenders, request for proposal or other such commercial arrangement in line with established industry practices,” the group says.

“We hope that our track record, Malaysian expertise and experience in this fibre optic field, combined with competitive pricing and Malaysian manufacturing base will place us in good stead with our existing and future customers,” it adds.

Meanwhile, in clarifying the “Rakan Unifi” contract award to Opcom, TM over the week said, it was done through an open tender process that took place in January, with the evaluation process ending in April.

TM said Opcom was only one of the 19 contractors that were awarded the 17 month-long contract, commencing from July 2, 2018.

To that, Opcom points out that TM’s announcement has clarified what that contract is about, its value, and that it was awarded through an open tender process.

“Indeed, under the “Rakan Unifi” project, many other contractors won various packages in other parts of the country,” it says.

According to Opcom’s filings on Bursa Malaysia, the last contract it won from TM was a RM28.03mil deal in December 2016.

The contract was for the provision of supply and delivery of plastic-based materials for TM for a period of three years to December 2019.

Prior to that, the group in 2015 managed to secure at least three contracts, with a combined value of RM282.24mil, from TM. The contracts came with tenure ranging from one to three years.

Nevertheless, in the year leading to GE14, Opcom was seen to have fallen out of favour with the-then ruling Barisan Nasional government, and had at one point been raided by the Inland Revenue Board.

The company also became a target of political campaign last year, with accusations of it having obtained a contract worth RM214.2mil from TM in 2003 without going through a tender process.

Demand growth

Overall, Opcom seems well-placed to ride on the growth of high-speed broadband, which remains a key priority under the Pakatan Harapan-led Government.

With the current administration pushing hard for cheaper and faster broadband offerings, which require better infrastructure, demand for fibre optic cables in the country is set to increase.

This bodes well for Opcom, says a broker.

“Some investors are taking notice of the company,” he says.

“Political connections aside, Opcom’s long-time relationship with its key customers, which include TM, will put it in a good position to secure strong orders. So, the prospects appear quite positive for the company,” he explains.

In its recently released annual report, Opcom says it expects to see domestic demand for fibre optic cables to rebound after experiencing a slump through much of last year and early part of this year.

“With a better economic outlook for the second half of 2018, we hope to see an increase in the demand for fibre optic cables domestically, especially with the Government’s call for doubling of broadband speed to Malaysian consumers,” Opcom says in the report.

“The current supply shortage of optical fibre is expected to ease, and should the Malaysian ringgit recover vis-a-vis the major currencies, we could see a better operating results from our fibre optic cable business,” it adds.

At present, about 50% of its revenue come from the fibre optic cable business. This compared with just five years ago, when the segment accounted for the group’s entire revenue.

Opcom has managed to reduce its over-reliance on its fibre optic cable business in recent years by diversifying into engineering services, engineered plastic materials and thixotropic gels.

Opcom says it will continue to diversify its segmental business revenue to achieve a more balanced revenue profile, while aiming for exports to comprise a target of 50% of its turnover over the next three years.

It expects its 90%-owned engineering services subsidiary, Opcom Engineering Services Sdn Bhd, to add new business mandates to the current order pipeline this year.

Opcom says it remains on the lookout to acquire niche technology businesses overseas as part of its expansion strategy.

Despite higher revenue for its financial year (FY) ended March 31, 2018, Opcom’s net profit fell 7.4% year-on-year (y-o-y) to RM6.66mil. This was due mainly to higher operating expenses and lower contribution from its fibre optic cables business.

Domestic demand for fibre optic cables declined 7.1% y-o-y on weak orders from its key customers, especially during the second half of FY18.

During the year in review, Opcom’s earnings per share fell to 4.13 sen from 4.46 sen previously. Its total revenue rose 11.4% y-o-y to RM104.06mil in FY18, thanks to export growth in its thixotropic compounds business. Total net dividends declared for FY18 were two sen per share.

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