BACKGROUND
KTech Construction Public Company Limited ("KTech") was established in 1997, eighteen years ago, as a building contractor. KTech prospered to the point where it was listed on the Stock Exchange of Thailand in 2004. Following listing, KTech continued to expand, achieving an annual turnover of Bt 4,050 million by 2006.
In 2007, KTech came under financial pressure due to the bankruptcy of two clients and a tightening construction market. This resulted in the collapse of KTech such that the company was bankrupt by April 2008.
KTech was financially restructured under Section 90 of the Bankruptcy Act, with the Court approving its Plan of Business Reorganisation on 13 September 2011. A critical element to the Plan of Business Reorganisation was necessity to attract new investment in the company, which was effected through an investment memorandum entered into in April 2012.
Since 2012 to date, KTech has achieved remarkable success, evidenced by the following:
Employee numbers have increased from 25 to 2,050
Annual turnover has increased from Bt 0.00 in 2011 to Bt 1,500 million;
Backlog of work has increased from Bt 0.00 to Bt 3,200 million in 2014;
The company has invested in new replacement construction equipment.
Further, in 2012 management determined that in order to protect KTech in the future from potential negative effects of political instability, economic decline, downturn cycles in the property market (and construction industry), KTech should expand its construction activities into new markets, and should diversify into civil infrastructure work. As a consequence,
Operations have expanded geographically to Myanmar where currently its first project is under construction;
The company is expanding the nature of work, moving into civil infrastructure through the current acquisition of a railway construction company.
CURRENT SITUATION
Whilst the background of KTech has been remarkable, currently the company is facing a number of challenges, which are of such significance that they have the potential to threaten the continuing viability of the company in its current state and operations. These challenges include the current economic situation in Thailand which is placing pressure on the construction industry, to the internal financial strength of the resources of the company which is causing issues in competitive delivery of product.
These challenges are discussed more fully below, and their existence is cause to review the strategic direction of the company for the next couple of years.
SWOT ANALYSIS
To better appreciate the current situation, a SWOT analysis of KTech is discussed below.
Strengths
The current strengths of KTech include:
An irreplaceable track record of building construction. KTech was recognised as a market leader in building construction and the ability to sell its presence as a competent and capable building contractor is founded on this track record;
The brand "KTech" continues to generate goodwill in potential clients;
Support of suppliers who have provided supplies and credit facilities. Most notable of these being POverseas, the supplier of steel reinforcement and owned by Khun Janya Sawangjit. POverseas has taken a significant shareholding in KTech, holding 3.6% of the issued shares;
The back office staff of KTech have a good mixture of old and new staff, which thereby ensured a reasonable transition to corporate systems that satisfy regulatory authorities;
The company has established its presence in the market, having posted three consecutive years of profits and having exited its Plan of Business Administration two years ahead of schedule, and
A head office that is modern and attractive and of a size that gives clients confidence that they are dealing with a company of quality.
Weaknesses
The current weaknesses of KTech are discussed below. These views are subjective but are considered relevant:
The company is not yet approved for recommencement of trading on the Stock Exchange of Thailand. This is causing a lack of ability to secure bank credit facilities and is very distracting for senior management. It appears SET approval has been achieved, and the projected timing for all regulatory approval is October 2015. However, the new investor on-sold approximately 65% shares of their private placement shares to other parties without silent period commitment. Subsequently, it has been determined that insufficient shares are available for a 55% lock up of share trading. It is considered some considerable time will be required to negotiate past this and this is expected to extend the time for recommencement of trading until December 2015;
The capital structure of KTech is currently reliant on equity capital. Of Bt 1,140 million raised for the company, Bt 530 million (46%) was spent on creditors to exit the Plan of Business Administration, Bt 150 million (13%) has been spent on investment in the Dr K subsidiary, Bt 327 million (29%) is held in project bonding, retentions and withholding tax. The remaining is barely sufficient to service current project requirements, particularly in view of further pressure due to performance default and delinquent clients.
This issue is further compounded as the major investor has advised that there will be no further financial support for the company;
KTech is yet to be fully recognised as having returned to the construction market. This has resulted in limited opportunities to tender for projects, which is compounded by a “below average” performance in securing these. Refer Annexure 1 for a detailed analysis of KTech’s historical performance in tendering and securing contracts.
Whilst the ‘back office’ functions are performing adequately, the driver of the business income, being the operations side, is inadequately staffed and is lacking significantly in capability, as evidenced by poor performance in terms of costs and quality of workmanship. This has been compounded by the departure of a significant number of senior construction personnel in the past 3-4 months;
In turn, this has caused senior management to adopt functions for which they have inadequate training and is skewing the workload such that the company is operating in a manner that is prohibitive to future growth;
Staff are currently concerned and nervous as to the company future and management intentions, and generally the company is having difficulty in fostering a contented environment. This is compounded by the fact that for old staff salaries are still outstanding from 2011 even though the company has exited the Plan of Business Administration and no payments have been made to staff for debts under the Plan.
It is considered the inadequate working capital and the lack of experienced operations staff are critical items requiring urgent attention.
Opportunities
Current opportunities, that KTech may be able to capitalise on, include the following:
• The Government remains committed to the upgrade of Thailand’s railway network and KTech has signed a Memorandum of Understanding with a large Chinese contractor, Sinohydro Bureau 14, to establish a joint venture with the view of tendering for government contracts in the railway sector. The Joint Venture agreement is expected to be executed before the end of September 2015.
• The Government has a number of projects available for regional infrastructure and KTech has signed a memorandum of Understanding with a large Chinese contractor, CTMCC, to establish a joint venture with the view of tendering for these government contracts, with CTMCC having the financial capability of bringing G-to-G funding. The Joint Venture agreement is expected to be executed before the end of September 2015.
• KTech is negotiating with a large Chinese contractor, 14MCC Company Limited, to establish a joint venture with the view of tendering for general contracts. An Memorandum of Understanding is expected to be executed before the end of September 2015.
• KTech established an associated company (17.5% shareholding) in Myanmar, GLKTech Construction Co Ltd, in 2014, the company has commenced operations. To date the company has secured two projects and is tendering for a number more. It is expected to secure these and to be able to grow its activities in Myanmar significantly in the coming years. This forecast is predicated on the November 2015 general government elections proceeding successfully. Margins on these projects are appearing to be higher than construction projects in Thailand.
• KTech has the opportunity to establish operations in the Middle East and Africa. These projects carry inherent country risk and “new market” risk. However, margins are substantially higher than in Thailand and the work is plentiful.
• KTech has invested in Dr K Construction Co Ltd, establishing a track record in railway work. The value of this company lies in its project record only as assets are limited. However, KTech will need to invest significantly if it is to be a stand-alone player in the industry.
Myanmar represents the most immediate opportunity to secure new business for KTech. However, current management procedures need to be improved to better service and grow this business.
Exploiting the new joint ventures will take some time and it should not be expected that these will yield any projects of substance within six months of the joint venture formations. The establishment of operations in the Middle East can yield projects quickly, within 2015. However, it is questionable whether KTech has the financial and technical capability now to capitalise on this.
Threats
The threats facing KTech are real and substantial. These include:
• The political situation in Thailand has resulted in significant fall in investment, which is generally acknowledged as contributing to a slowdown in the economy. This slowdown is already affecting the construction industry, manifesting itself through intensifying competition