Building a mini conglomerate

By Khairie Hisyam

While construction remains Bina Puri’s major income source today, it has also diversified into other businesses over the years to improve earnings amid static construction margins. In a chat with group executive director Matthew Tee Kai Woon, KiniBiz looks at some of its business ventures.

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Some 39 years after its founding as a BX class licenced contractor, construction remains Bina Puri’s major revenue source, making up over 80% of its total turnover. But the company had been venturing into other sectors as well to boost income.

Over the years Bina Puri had gone into, among others, property development, quarry and ready mix concrete, polyol manufacturing and power generation.

At present some 92.2% of the company’s FY13 revenue came from construction, taking into account both external customers and inter-segment income. In contrast its property arm only contributed about 6.7%. Eventually the company intends to reduce its dependency on construction turnover to 40%, eyeing property development to contribute another 40% and other recurring income to make up the rest.

Iron ore mining

Dubbed a mini conglomerate by a research house recently, Bina Puri’s latest diversification is iron ore mining in Laos, which Tee expects to start contributing to group earnings this year. “We got some orders from China in 2013, so for sure (will register in income sheet) in 2014.”

Bina Puri is aiming to break even on its outlay of RM7 million by the end of this year after about one year of setting up its operations in Laos near the Thailand-Laos border, where the company entered in late 2012.

While there are no clear numbers yet on how much its Laos mining operations is expected to contribute by year-end, the focus, said Tee, is generating positive cash flow. The company was supposed to start exporting in early 2013 but this was delayed to late last year as Bina Puri had to manage the technicalities of setting up a new mining operation — earthworks, access roads, power and water supply and so on.

“To do the access, to do the electricity connection etc, sometimes the plant only costs 30% of the total investment costs that you put in,” said Tee to KiniBiz. “It’s not so straightforward, otherwise everybody can get rich.”

The company has five years to work on its land area which measures more than 100 acres but the company does not intend to take that long, preferring to mine as fast as possible. Next on the agenda is to increase production, said Tee.

“You don’t take your own sweet time to mine but mine as fast as possible then move on to the next one,” said Tee. “If we can increase production then can increase plants.”

But Laos isn’t Bina Puri’s first toe-dip into the mining business. According to Tee, Bina Puri’s shareholders — have been into mining as far back as the 1980s and now they wanted Bina Puri to be more active in this sector for the recurring income.

“It is a more straightforward type of business,” said Tee, adding that “if you get the right product at the right value, it’s like hitting a gold mine.”

“Out of the Fortune Top 100, how many are mining companies? A lot,” said Tee. “It’s a commodity play — there’s always demand for commodity, only at what price (is the question).”

Closer to home, Bina Puri also received approval from Felcra Bhd — the Federal Land Consolidation and Rehabilitation Authority — to do iron ore prospecting in Kuala Lipis, Pahang in December last. Subject to state government approval, Bina Puri’s iron ore exploration and production activities will cover an area spanning 281 acres.

“We’re also looking at the same product (with the Felcra land), so if we can start production as soon as possible then this will add to our bottomline also,” said Tee to KiniBiz.

A delayed start with property

Compared to mining, however, Bina Puri’s property division is a different story — there were “hardly any launches” over the past few years leading up to 2013, which Tee attributed to a digestion period.

Despite its eventual aim of a 40% revenue contribution from property, in FY13 Bina Puri’s property arm only made up RM71.03 million of Bina Puri’s RM1.05 bilion total turnover, which translates into about 6%.

“Normally when you buy a piece of land, for you to actually digest and fruits to come about normally takes at least two to three years,” said Tee to KiniBiz. “A simple example is when we bought a piece of land in Kebayan, Sabah in December 2010 but still haven’t gotten our developer’s licence till now.”

Similarly Bina Puri’s Jalan Telala land purchase about two years ago, which came with a conditional approval from the Kuala Lumpur City Council (DBKL) also took almost 20 months for Bina Puri to get the development order, added Tee. “So it takes a very long time.”

That is set to change though. Bina Puri has lined up development projects worth more than RM3 billion in gross development value (GDV) over the next five years, adding on to the six projects it launched in FY13.

The largest of Bina Puri’s lineup of projects is RIVO City, a mixed development project on a 4.61-acre site in a public-private partnership with Syarikat Prasarana Negara Berhad. Totalling RM1.29 billion in GDV, the project will comprise 1,660 Small Office Versatile Office (SOVO) units in three towers along with 22-floors of service suites, a three-storey commercial podium and sky bridge.

“We hope to launch RIVO by the second half of this year,” said Tee to KiniBiz.

Overall, Bina Puri’s property projects are scattered across the Klang Valley with a sprinkling in Kota Kinabalu, Johor Bahru, Miri and Kota Bharu — there is also its Marina Bangkok Resort and Spa worth RM200 million GDV in Bangkok.

However Bina Puri is noticeably absent in Iskandar Malaysia despite the “gold rush” in recent years as the special economic corridor took off. According to Tee, Bina Puri was once in Medini Iskandar under a 70:30 joint venture with Iskandar Investment Authority but later exited at a profit of RM3 million, selling to a foreign party.

However with talk of a looming property bubble in recent years, is there concern on Bina Puri’s side about that? Responding to this question, Tee’s positivity again came to the fore.

“Since everybody is talking about bad times, we have to be positive,” said Tee to KiniBiz. “If we’re just following the herd, then it’s nothing special — that’s herd mentality.”

With goods and services tax (GST) coming up for implementation in April 2015, Tee thinks that developers will eventually pass on the initial GST rate of 6% to end-buyers. Consequently buyers who do not buy now will feel the pinch later, argued Tee.

“So we have to look at the upside,” concluded Tee, adding that “more people will rush to buy before GST is implemented.”

Power-ful margins in Indonesia

Mining and property aside, one particular venture that had been especially lucrative in terms of margins for Bina Puri is power generation in Indonesia, yielding profit margins of more than 30% in FY11 and FY12 after setting-up operations in FY10.

It must be noted however that despite strong margins, power generation makes up less than 1% of Bina Puri’s turnover in FY13.

Across FY11-12, Bina Puri averaged RM6.8 million in annual turnover from power generation, from which it raked in an average of RM2.5 million in pre-tax profits annually. However its margin dropped to 8.7% in FY13, which Tee attributed to a forex loss due to the depreciation of rupiah.

“But cash flow-wise it is still positive to us,” said Tee. “We have surplus every month.”

At present Bina Puri has six power plants across Toboali, Mentok, Sei Pakning, Bengkalis and Bantaeng in Indonesia with a total capacity of 14MW. Powered by micro diesel supplied by the Perusahaan Listrik Negara (PLN) — Indonesia’s equivalent to our own Tenaga Nasional Berhad (TNB) — the plants are on a five-year concession renewable yearly.

Commenting on Bina Puri’s power generation business, Tee said that it is a relatively low-risk and simple venture for the company. “Do a warehouse, then buy Komatsu machines — commissioning takes two to three months and then you can immediately supply (power) to PLN.”

With PLN supplying the diesel to Bina Puri as per the power purchase agreement (PPA), the company is insulated to fluctuations in fuel prices too, adding more stability to its power generation earnings.

“Basically our task is to man the generators and make sure the connection to the grid is consistent,” said Tee to KiniBiz. “At the same time we have also gone into hydro power with a 4.2MW plant.”

Having commenced construction in September 2013, the mini hydro power plant in Bantaeng, South Sulawesi will be ready by end-2015, said Tee, adding that compared to the micro diesel concessions its hydro power concession period is much longer at 21 years.

Relatively successful in its power generation venture across the Straits of Malacca, is Bina Puri eyeing our local power sector too somewhere down the road?

Tee firmly said no to such a prospect. “I think Malaysia’s power sector is too competitive already.”

Clarifying further Tee opines that the power sector in Malaysia is getting crowded, with even TNB bidding along with other players for tenders. Consequently the rates on offer are getting lower and lower too.

“So I think our industry here is more matured compared to Indonesia,” added Tee. “There is more room for expansion (there) as only 60% of the population has access to electricity.”

Overall, Bina Puri’s various ventures make quite a list. While the results of its diversification may take a while to materialise, Bina Puri is certainly not lacking in terms of effort.

What remains to be seen is how well these efforts turn out in the end — Bina Puri as a conglomerate is still a work-in-progress.

Yesterday: A bottomline stuck in Neverland