Short Position: What's next for UEM Edgenta?


  • Economy
  • Saturday, 01 Feb 2020

Apart from suitors, there have also been reports of UEM Edgenta looking into a management buy-out of the company. Nevertheless, nothing has happened so far. In fact, UEM Edgenta’s managing director, Datuk Azmir Merican(pic), has now moved on to head Sime Darby Property Bhd. The suitors are probably still keen on UEM Edgenta.

WHEN Khazanah Nasional Bhd decided to divest companies that were not part of its transformation plan post-May 2018, UEM EDGENTA BHD was among those that were to be sold.In the last two years, there have been suitors for UEM Edgenta, whose earnings anchor on providing support services to hospitals and maintenance works for highways under PLUS Malaysia Bhd.

The suitors were keen on UEM Edgenta because of its concession agreement with the Health Ministry to provide support services to some hospitals, and its long-term relationship with PLUS that saw it land most of the work for maintenance of the highways.

The bulk of UEM Edgenta’s earnings come from the two divisions, which has enabled the company to declare attractive dividends.

Apart from suitors, there have also been reports of UEM Edgenta looking into a management buy-out of the company. Nevertheless, nothing has happened so far. In fact, UEM Edgenta’s managing director, Datuk Azmir Merican, has now moved on to head Sime Darby Property Bhd.

The suitors are probably still keen on UEM Edgenta.

Even though its work with PLUS has come under some scrutiny, the company is still an attractive proposition, considering that it has the track record of undertaking maintenance works for PLUS.

Critics of PLUS feel that it is paying too much for the maintenance of its highways, and hence the scrutiny on UEM Edgenta. The critics feel that they can maintain the highways at a lower price and would be able to translate the cost savings into reduced toll rates.

There were four private bidders for PLUS, but the government decided that PLUS would remain with Khazanah and the Employees Provident Fund (EPF), but with a reduced toll rate of 18% effective today.

Since the private bidders could not land PLUS, which is a valuable infrastructure and should remain with government entities, the other option is to fork out some hard cash to buy UEM Edgenta. Logically, the private bidders should be able to make more money in UEM Edgenta since they claim that the highway can be maintained at more efficient rates.

Urgently needed – economic stimulus

Even without the outbreak of the coronavirus, the Malaysian economy was in need of a boost to rejuvenate it. Now that the coronavirus has been declared a global epidemic, the country certainly needs some economic stimulus - and fast.

Finance Minister Lim Guan Eng is right in stating that it is too early to revise the economic growth forecast of 4.8% for this year.

However, he may be wrong in assessing that the country would need to hasten the planned economic stimulus programmes only if necessary. The impact of the coronavirus cuts across all segments of the economy, from travel to trade and manufacturing activities.

Copper, which is the bellwether of global economic activity due to its wide usage in various manufacturing processes, is down to about US$5,600 per tonne, a low of more than two years.

Copper rods are seen at Truong Phu cable factory in northern Hai Duong province, outside Hanoi, Vietnam. Reuters filepicCopper rods are seen at Truong Phu cable factory in northern Hai Duong province, outside Hanoi, Vietnam. Reuters filepic

In the commodities market, even oil is unable to hold at US$60 per barrel despite major oil-producing countries looking at the possibility of reducing supply.

Nobody knows for sure how long it will take before the coronavirus is contained. Based on past experience of other such epidemics such as the SARS, Swine Flu, Zika virus and Ebola, it takes normally three months for the authorities to bring the situation under control. From then on, it can take a few years before the danger from the spread of the virus can be eliminated.

The coronavirus has hit China hard. Factories have shut down, shopping malls are closed and streets are empty. People are not spending. China’s economy is expected to be less than 6% this year, according to some reports.

China, which is the world’s second-largest economy, has a big influence on the economic direction of Asian countries, particularly those in South-East Asia. For instance, the 11 million Chinese tourists frequenting Thailand annually are the reason why the baht has been strong in the past few years.

As for Malaysia, China is a major trading partner and buyer of commodities such as crude palm oil. So, when China is sick, it will impact Malaysia.

Whether we like it or not, the government has to hasten its economic stimulus programmes. Projects that are supposed to be rolled out later this year could be expedited.

In the last two years, public spending on infrastructure projects has come down. It’s time to loosen the purse strings quickly.

The Razali effect on DatasonicDatasonic Group Bhd has attracted a swathe of investors drawn to it for reasons not entirely clear yet.

The stock has almost tripled over the last six months, although it shed 11 sen on Friday’s selldown of the market due to the coronavirus outbreak.

Still, at its close on Friday at RM1.46 a share, the stock is trading at a historical price earnings multiple of a massive 40 times. This puts it as the highest-valued stock among those providing e-government services.

The most significant change to the company in recent times was that a little-known individual, Datuk Razali Mohd Yusof, emerged as a substantial shareholder of the company last December.

And as speculated, Razali has since taken the helm of the company. On Friday, the company said Razali would take over the role of managing director, following the retirement of long-time boss Datuk Abu Hanifah Noordin.

Following the entry of Razali, Datasonic seems to have gotten a new lease of life.

All those observing the current government’s stance on the issuance of any new government contract would know that the process is no longer as simple as before. The issuance of new contracts go through laborious checks and due diligence processes. In fact, there has not been any issuance of any new large government IT contract.

But on Dec 15, just days after Razali’s entry into the company, Datasonic said it had won a contract to supply passport chips for five years, or 12.5 million chips, starting from Dec 1,2016 until Nov 30,2021 for RM318.75mil.

On Friday, Datasonic said that it had now accepted a slight revision of that deal from the Home Ministry. It will now supply 11 million passport chips, reduced from 12.5 million chips. But in addition, it has received a new scope of works related to hardware and software that amount to RM38.25mil. This means that the total contract sum first announced, of RM318.75mil, will remain unchanged.

Clearly, the Razali effect on the company is noteworthy. Now, all eyes will be on whether Datasonic manages to clinch the much-sought-after multi-billion-ringgit Integrated Immigration System (IIS) tender.

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