Have a Close Look at Zelan below 76 sen

Zelan, formerly Tronoh Mines, continues to be uncertain of its dividend policy. The project book value,skewed towards the Middle-east, may also be affected by the on-going global recession.

AMResearch did a piece on Zelan and did not expect it to pay a final dividend in its fourth quarter of financial year 2009 (4QFY09) as the company remained non-committal on its dividend policies going forward as well as the massive losses racked up by its construction division in 3QFY09 and a dwindling cash pile.

“As such, we are leaving Zelan’s FY09F DPS (dividend per share) forecast unchanged at five sen/share. But, we have cut our FY10 to FY11 DPS assumptions to one sen each from two sen previously on a dividend payout ratio of 7%-11%,” the research said in its recent note after a visit to the company.

Over the past three years, Zelan’s DPS ranged between 7.5 sen and 14 sen, which translated into a payout ratio of 46% to 48%. For the first nine months of FY09 ending March, the group has paid an interim DPS of five sen.

The company’s balance sheet remained strong with a net cash position of RM53 million as at Dec 31 last year on the back of its 9% stake in IJM Corp Bhd valued at RM377 million (RM0.67/share) or 86% of the group’s market capitalisation of RM436 million.


Nevertheless, AmResearch said its immediate concern remained with the company’s murky order book outlook and further execution risk for its Middle Eastern contracts.

“Zelan’s management revealed that the group is not aggressively bidding for new contracts at this juncture — instead its main focus is on delivering outstanding jobs worth an estimated RM2.4 billion.

“More so, as the current roll-out of power plant projects — Zelan’s niche — has been put on hold due to the deepening global recession. We have assumed RM500 million worth of new contracts each for FY10 and FY11, compared to the record RM2.5 billion achieved in the 14 months ended March last year,” the research house added.

Zelan’s exposure to Middle Eastern contracts are 86% of its outstanding order book.

“We have lowered our FY10 to FY11 construction margin forecast to 3% to 6% (previously: 8% to 9%) compared to the average of 18% achieved for mainly higher-margin engineering, procurement and commissioning (EPC) jobs undertaken over the last five years,” the research house added.

The company’s foreign shareholding has fallen below 10% from its peak of 33% to 34% in 2008.

Hence, AmResearch maintained its hold call at 76 sen with a lower target price of 85 sen, after pegging the stock at an unchanged 40% discount to its revised sum-of-parts value of RM1.41 per share to account for its earnings downgrade as well as a rollover of valuation base to FY10.

Zelan is now trading at about 81 sen as of today (7 July)

As IJM continues to hog the lime-light with its super profits, could its good fortune also spillover to Zelan?