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Friday, December 29, 2017

Caution - LFE

'Caution' - LFE (Concerns Slip Into PN17 AGAIN !!!)  
It may have to wait longer for the planned injection of a property business into the company, mainly due to the slowdown in the sector. For now (Dec 2017), the company will focus on its existing businesses – mechanical, electrical, plumbing (MEP) and construction – to help it return to the black.

LFE MD Liew Kiam Woon said that plans for the property business to be pumped in by the major shareholder may not materialise in the near term given the unfavourable state of the real estate industry in the past one to two years.

When the company was lifted from its Practice Note 17 (PN17) status in January 2017, investors were optimistic about its prospects. LFE counts Shapadu Capital Sdn Bhd as one of its major shareholders with a 31.58% interest. Shapadu Capital is in turn controlled by Shapadu Group of companies which was founded by the late Datuk Shahrani Abdullah in 1972.

The entry of the Klang-based diversified group into LFE via a rights issue and private placement exercise two years ago (2015) was a much-awaited move by shareholders.

Shapadu had wanted to inject its property projects into LFE, which will remain as a construction player. The diversified company planned to award its other property projects under development to LFE following completion of the share placement.

LFE’s regularisation plan also involved capital and share premium reduction, a rights issue and part debt settlement. The regularisation plan lifted LFE out of its PN17 status, which was triggered when the company’s shareholders’ equity for the financial year ended July 31, 2012 (FY12) fell below 25% of its issued capital.

The uptick in the property sector will be a much-needed boost to LFE’s flagging construction business.

It plunged into the red with a net loss of RM1.7 mil in the financial year ended July 31, 2017 from a net profit of RM935,589 in the previous year on the back of lower revenue of RM13.38 mil versus RM22.86 mil.

The loss was a result of three one-off expenses amounting to RM3.82 mil in total, write-off and impairment of advances given to associate companies, and writeoff of trade receivables. It also attributes the unsatisfactory financial performance to several factors. The decrease in revenue was due to near-completion of projects in Johor Bahru and Terengganu as well as the refurbishment work on Campbell Complex in Kuala Lumpur.

It was further impacted by the delay in commencement of a mixed property project dubbed as Shapadu Putrajaya Heaven at Precinct 2, Putrajaya. The RM600 mil development which occupies 0.93ha is Shapadu’s first large-scale integrated project to date.

The project was launched in March 2017 and would comprise a community mall, high-end residential units, a five-star hotel and office block in the initial stage. However, the project faced some hiccups as it was discovered that the construction cost of the hotel component would be very high in comparison to its anticipated GDV. Hence, Shapadu is revising the plan, reviewing the hotel design as well as exploring alternative commercial use of the building to enhance its viability. It is unsure if Shapadu will keep the hotel component.

LFE faced another blow during the year when in March 2017, London’s Local Authority rejected a planning submission by Shapadu on the redevelopment of Days Hotel in Waterloo, London. Shapadu had bought the land along with the hotel for £27 mil in 2013. It intended to demolish the premises and redevelop into a hotel which doubles its capacity to 300-odd rooms.

Meanwhile, other projects like the construction of three units of detached houses and MEP works for office and retail units in Bukit Jalil were also stalled due to unfavourable market conditions.

Apart from property, Shapadu Group is also involved in oil and gas services. It is also the concessionaire for the North Klang Straits Bypass toll expressway which runs from Bukit Raja to Port Klang.

Observers believe LFE’s lifeline hinges on support from Shapadu Group and the jobs it is able to secure and execute. Should the above projects kick-start as soon as possible, hopefully LFE will experience improved performance.

LFE is bidding for nine jobs valued at RM570 mil. Meanwhile, the jobs in hand which are pre- dominantly MEP works are valued at RM50 mil. These should keep the company busy for another one-and-a-half years. LFE has secured MEP works valued at RM15 mil for a hotelcum-service apartment project known as RUMA in Kuala Lumpur.

Compounding the situation, the company continued to record unfavourable results for the first quarter ended Oct 31, 2017. It posted a bigger net loss of RM1.07 mil from RM524,000 a year ago mainly due to the high cost of sales while revenue shrank to RM2.66 mil from RM3.35 mil.

There are concerns that LFE would slip into PN17 status again should the tough operating environment prolong but many believe it is still in a comfortable position to turn its fortunes around.

LFE’s equity stood at RM43.74 mil as of Oct 31, which is well above the requirement of 25% of its paid-up capital of RM55.47 mil. Moreover, the company is not financially distressed as its bank borrowings come up to only RM248,000. These factors should buy more time for the company.

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