Mesiniaga’s RM1.9bil job under the microscope

nvestors buy Mesiniaga shares after it secures EM-IIG project

But CEO gives assurance that all is in order

Mesiniaga Bhd’s first billion-ringgit contract has gone under the microscope, with some quarters questioning its validity.

In a move to address the concerns, Mesiniaga Bhd has assured investors that the RM1.9bil project awarded by the little-known Xiddig Cellular Communications Sdn Bhd is intact and viable.

Mesiniaga’s contract is part of the RM5.45bil Enhanced Malaysia International Internet Gateway (EM-IIG) high-speed broadband project, developed by Xiddig.

Mesiniaga, which is 18.77%-owned by Permodalan Nasional Bhd, will undertake the commissioning of the core, metro distribution and access network for the EM-IIG project. The contract is effective from Jan 18, 2019 to March 31, 2020.

Group chairman and chief executive officer Datuk Wan Mohamed Fusil Wan Mahmood tells StarBizWeek that Mesiniaga has done its due diligence on Xiddig and its business plan, prior to bidding for the project.

“We are satisfied with Xiddig’s capabilities. The Contract and payment milestone have been agreed upon and are fair to both parties,” says Wan Mohamed Fusil.

The contract from Xiddig will easily be Mesiniaga’s biggest revenue contributor over the next 15 months and will likely raise the group’s turnaround by multiple times.

Mesiniaga is an enterprise solutions integrator focused on turnkey projects that requires specialised information technology skills and project management.

At the same time, its business is sustained by recurring multi-year maintenance and services contracts.

According to Wan Mohamed Fusil, the contract will be financed by using the group’s internal resources and bank facilities.

“We have spoken to our bankers on the required facilities. We are expecting our payment based on the agreed payment milestone,” he says.

As of Sept 30, 2018, Mesiniaga is in a net cash position of RM16.9mil. Its cash and cash equivalents are worth RM31.05mil, against total borrowings of RM14.14mil.

The EM-IIG project came under scrutiny recently after Deputy Prime Minister Datuk Seri Dr Wan Azizah Wan Ismail denied saying that the government would extend its full cooperation to the project, three days after Mesiniaga announced the contract.

In astatement, the Deputy Prime Minister’s Office also said Wan Azizah had not approved the text of the speech that was delivered on her behalf during the launch of the EM-IIG project on Jan 22.

The statement eased the exuberance on Mesiniaga’s shares, which hit limit-up on Tuesday after surging 34 sen or 29.31% to RM1.50 – the highest in four years.

The recent sharp jump in share price lifted the company’s market capitalisation to RM102mil currently, with a price-to-earnings ratio of 8.22 times.

Yesterday, the Malaysian Communications and Multimedia Commission (MCMC) clarified that Xiddig Cellullar Communications Sdn Bhd is a licensee under the Communications and Multimedia Act 1998 (CMA). However, the telecommunications regulator says it is not involved in Xiddig’s EM-IIG development, as the project is a commercial endeavour.

“A licence issued under the CMA is not equivalent to an endorsement by MCMC. Any party intending to collaborate with any licensee under the Communications and Multimedia Act 1998 is advised to conduct its own due diligence,” states MCMC.

The financial viability of the EM-IIG project has also come under scrutiny, given’s Xiddig loss-making status and the lack of clarity over the nature of funding for the high-speed broadband project.

Checks on the Companies Commission of Malaysia show that Xiddig, an alternative mobile communication line provider, posted an after-tax loss of RM2.38mil in FY17, against a meagre revenue of RM55,137.

The company’s total assets in FY17 stood at RM10.09mil, marginally higher than its total liabilities of RM9.5mil. Its issued share capital is RM10mil.

Datuk Seri Abdul Rashid Abdul Rahim, who owns a 96% stake in Xiddig, is the brother of Baling MP and former Tabung Haji chairman Datuk Seri Abdul Azeez Abdul Rahim.

Directors Musa A Rahman and Ahamad Basheer Mohd Hussain hold a 1.5% stake respectively, and Terengganu state government-linked company Eastern Pacific Industrial Corp Bhd owned the remaining 1%.

When contacted by StarBizWeek, Abdul Rashid stressed that the EM-IIG project is viable financially and operationally.

He says the project will be undertaken on a private finance initiative basis. Abdul Rashid also claims Xiddig has secured the support of “a group of investors”, who will provide the key funding sources.

“We have enough funding, but we cannot disclose much information on it due to our non-disclosure agreement with the investors. We target to recoup our investments and break even in four years,” he says.

Several industry observers remain sceptical about Xiddig’s potential to undertake the project, considering its lack of successful track record.

They have also voiced concerns over the company’s ability to find adequate financing for the EM-IIG project.

However, an optimistic Abdul Rashid believes that the project can be undertaken as expected, enabling Malaysians to enjoy the fastest Internet access speed in the region at low prices. He adds that the country will gradually be “5G-ready”, beginning from November 2019. “We have just procured our fibre-optic submarine cables and we would start laying them beginning the middle of March this year, connecting Hong Kong’s international Internet hub to Sabah, Sarawak and Peninsular Malaysia. So far, we have spent about RM200mil out of the total estimated cost of RM5.45bil.

“From mid-2020, we will start our second phase, connecting Malaysia all the way to Jeddah, Saudi Arabia. The cost for the second phase is estimated at RM20bil,” he says.

On the involvement of Mesiniaga in the first phase development, Abdul Rashid says the company will be the system integrator of the EM-IIG.

“We chose Mesiniaga as the contractor via an open tender system. Five companies took part in the tender but Mesiniaga offered us the best price,” he says.

The RM1.9bil contract secured by Mesiniaga is its second job award from Xiddig, in relation to the EM-IIG project.

On Dec 28, 2018, Mesiniaga won a four-month contract worth RM27.4mil that involved the delivery of lab equipment and site preparation for the EM-IIG project’s service testing and verification.

The contract, which ends on April 27, is expected to positively affect Mesiniaga’s earnings per share in FY18.

Wan Mohamed Fusil says Mesiniaga has started work on the four-month contract and the payment will be according to the agreed milestone. He adds that Mesiniaga’s involvement in the EM-IIG project is in line with its objective to diversify its business operations into other growing areas.

“After conducting our evaluation, we find ourselves to be in a very good position to be part of this project, both technically and financially. Mesiniaga is all geared up for a successful EM-IIG deployment.

“We would certainly need to make some adjustments on how we run and operate our business moving forward to accommodate the EM-IIG. With our years of knowledge and experience in the Malaysian market and specifically on large-scale network projects, we are confident we will be able to deliver the EM-IIG successfully without losing foresight on our other line of business,” says Wan Mohamed Fusil.