Zelan ... Nov 2008

Zelan Bhd shares were heavily sold down after its chief executive officer Chang Si Fock @ Chang See Fock disposed of most of his shares in the mid Nov 2008. Chang’s 30%-owned Noble Gem Sdn Bhd has disposed of 30 million shares since Nov 11 2008, reducing its stake in Zelan to 0.33% from 5.72% previously.

The Employees Provident Fund, however, raised its stake to almost 8% from 7.3% before. MMC Corp Bhd is the major shareholder with over 39%. Zelan is involved in the construction sector with a niche in power plants.

Zelan’s board had allowed the contract of Chang, the company’s founding member, to lapse on Jan 31, 2009. Last week, Zelan chairman Tan Sri Abdul Halim Ali resigned from his post. It is learnt that the Zelan board has renewed the contract of chief operating officer Khoo Boo Seong. He will be heading the management team temporarily upon Chang’s retirement.

Based on previous changes in businesses owned by tycoon Tan Sri Syed Mokhtar Al-Bukhary, it was likely that one of his associates would be appointed for Chang’s job.

Although it is possible that Zelan’s board may appoint an existing member of the senior management, it does seem like Syed Mokhtar prefers to have his key people to lead the team.

Going forward …

Speculation is that Chang has lost out in a tussle with MMC Corp Bhd. MMC controls a larger 39.25% stake in Zeland compared with Chang and partner’s holdings of 14.74%.

There have been disagreement between Chang and MMC over whether Zelan should be run separately as an associated company of MMC or absorbed into the conglomerate.

With Zelan not renewing Chang’s contract, it seems obvious that MMC will now be taking over management control of Zelan, though the founder is likely to stay on the board, given his substantial stake.

This could lead to two possibility. One isfor MMC to privatise Zelan through a general offer, while another is to inject MMC Engineering group Bhd into Zelan. Both exercises will increase MMC holdings in Zelan.

Considering that Zelan’s share price has since plunged, there is a motivation for MMC to take Zelan privatise or to inject MMC Engineering into Zelan.
Zelan’s expertise in building power plants, apart from general construction, will come in useful as MMC builds its presence in the infra sector.

The timing also sems rights, giving the distressed stock market which makes it cheaper to take over companies by making general offers or injecting assets for shares.

Financial Health …

Zelan’s net cash and short term current investments amounted to RM115 million as of Sept 2008, after deducting its total debts of RM93 million. On top of that, it holds 82 million shares or 9.57% stakes in IJM. The stake was worth Rm205 million based on closing price of Rm2.50.

Zelan’s net cash, its current investments and the IJM stake amounted to RM320 million or about 57 sen per share. The company does not have warrants or convertible loan stocks outstanding that could dilute its share price.

Essentially, investors were valuing Zelan’s core businesses in engineering and construction, property development and others at less than rm70 million (assume Zelan is at 87 sen).

Zelan’s engineering and construction division, which alone has an order book worth RM3.8 billion. Assuming a gross margin of 6% for these outstanding jobs, there is a gross profit margin of about Rm230 million to be made in the next two to three years. At less than 90 sen per share, investors are practically buying Zelan for free.

However, the downside is that while building material prices have receded, there are some concerns that Zelan would not be able to replenish its jobs fast, given the global credit crunch. Meanwhile, certain management issues many arise without Chang as the CEO and this may disrupt the execution process in the company.

But the upside would seem greater than the downside. MMC as a major shareholder of Zelan would try to add value to the company and make sure than the latter continues to perform well.