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BACKGROUND OF THE CASE
Johor Corporation is spoilt for choice when it comes to unlocking the value of its assets
to settle the RM3.6 billion debt that matures in July 2012. The state-owned group has many
options at its disposal, with RM2.1 billion worth of assets available for sale, to meet its debt
obligations. There has been much speculation lately that Johor Corporation may be looking to
sell its prized assets including Kulim (M) Bhd to address its debt woes.
Its new president and chief executive Kamaruzzaman Abu Kassim says the RM3.6 billion
debt burden is unsustainable and the group aims to bring it down to RM1 billion to RM1.5
billion, which means it is looking at settling as much as RM2.6 billion of the amount due. The
group already have 70% of that amount planned, which works out to RM1.82 billion and the
remaining 30% will come from sales from its stable of local and foreign assets.
The RM3.6 billion in bonds coming due next year has fuelled speculation that it would
sell assets to settle the debt. Indeed, last November, three offers were made for KFC Holdings
and QSR, all of which were turned down. JCorp had engaged CIMB Investment Bank and
Maybank Investment Bank as advisors in the debt restructuring. Kamaruzzaman notes that the
bankers have shortlisted assets that the group should sell or keep. He stressed that JCorp will
select and keep assets that can be developed to generate recurring income for the group.
JCorp may even list some of the businesses within the group, but the objective of any
listing would not be to raise capital to settle its debts but for these entities to meet their own
financial needs. Among the businesses slate to be listed is EA Technique (M) Sdn Bhd, a
shipping company held by Sindora Bhd, Kulim main market-listed 75.2% subsidiary.
Kamaruzzaman acknowledges that there have been a number of related party transactions
within the group, but points out that that JCorp has many land holdings in strategic locations and
the KFC restaurant business has targets to meet in terms of the number of new outlets to be
added each year under its franchise agreement with YUM! Brands Inc. JCorp also owned a vast
land bank comprising industrial, commercial and residential lands as well as hotel properties in
Johor. It have industrial property valued at RM1.3 billion, classified as assets held for sale and
commercial land valued at RM2.5 billion.
JCorp aims to unlock the value or develop these lands to generate income for the group.
It believes its close relationship with the state government will be an advantage, especially in
obtaining approvals to develop the land as its objectives are aligned with the state. The group
were spoilt for choices where there are many things can be chose from and which in short, JCorp
must continue in its developmental role with the state government as the group were now
become the prime FDI agent for the state.
As for Ekovest Bhd, an industry source say the group are interested to bidding on Kulim
which were controlled by Johor businessman, Datuk Lim Kang Hoo. The bid are curiously been
issued, considering that Ekovest is a small company attempting to acquire another many times
larger capitalization. As for now, the market capitalization for Ekovest was RM606.11 million,
compared to Kulim’s RM4.43 billion.
Lim, who controls 25.4% of Ekovest, also sits on the board of two other listed companies,
namely Knusford Bhd and PLS Plantations Bhd. Another substantial shareholder of Ekovest is
one Khoo Nang Seng, who has a direct 10.23%. When queried by Singapore's Business Times
on his interest in PMP, Ekovest's Lim had reportedly replied, `I'm a businessman and if I see a
good investment opportunity, I will invest.'
Is it possible for Ekovest Bhd to take over Kulim? What are the benefits that Ekovest will
get from the acquisition? How does Ekovest plan to fund the takeover?
EKOVEST BERHAD
Ekovest, the name synonymous with building construction and civil engineering works
was formed by a group of highly enterprising and self-motivated individuals and highly qualified
experienced professionals.
On 2nd January 1985, the founders started Ekovest Bina Sdn. Bhd. and this signaled the
involvement in bigger and more technically demanding engineering projects. This name was
later changed to Ekovest Sdn. Bhd. Following its conversion to a public listed company and
listing in KLSE on 28th August 1992, it assumed its new name – Ekovest Berhad. Since then,
Ekovest Berhad has emerged as one of the leading construction companies in the country
involved in major civil engineering and building works such as turnkey, design and build
projects and project management.
KULIM (M) BHD
Kulim (Malaysia) Berhad, through its subsidiaries, engages in oil palm plantation,
investment holding, and property investment businesses in Malaysia. The company’s plantation
operations comprise oil palm planting, crude palm oil processing and plantation, and
management and consultancy services. It also manufactures and sells oleo chemicals and rubber
products; operates quick service restaurants, such as Pizza Hut and Ayamas outlets; engages in
sea transportation, parking management, sale of wood-based products, and bulk mailing and
printing services; and involves in property investment business, which include property letting.
In addition, the company assembles mechanical and agricultural equipment; produces oil
palm clones by plant tissue culture technology; trades and distributes tropical fruits; operates
palm oil mills and plantations, and rubber estates; cultivates sugar cane, pineapples, and other
agricultural products; conducts in-house and external training programs; breeds and sells cattle;
manufactures biodiesel; produces oil palm seeds and sells germinated oil palm seeds; and trades
a granular synthetic bone graft, GranuMas.
Further, it offers facilities maintenance, and project and construction services; field
clearing, earthwork, road construction, and resurfacing services; and landholding services, as
well as manufactures esters, soap noodles, and palm wax. The company also trades parking and
related transportation equipment, and wood products; and processes and sells sawn timber and
timber doors, as well as operates as a forwarding agent. It has operations in Papua New Guinea,
Indonesia, Malaysia, the United States, China, Japan, and the Netherlands. The company was
incorporated in 1933 and is based in Johor Bahru, Malaysia. Kulim (Malaysia) Berhad is a
subsidiary of Johor Corporation.
EXHIBIT 1 CORPORATE STRUCTURE OF EKOVEST BERHAD
EXHIBIT 2 PROJECTS COMPLETED BY EKOVEST BHD
Item Projects1 Labuan Financial Park2 Fitting out of Petronas Twin Tower3 Universiti Malaysia Sabah4 Office Buildings at Putrajaya and infrastructure5 Office Buildings for Petronas Carigali in Lutong6 KLIA Central Terminal Areas Road and Structure7 Danga Bay8 KL Central Station and related infrastructure9 Universiti Tun Hussein Onn Malaysia (UTHM)10 DUKE Highway
EXHIBIT 3 CORPORATE STRUCTURE OF KULIM (M) BHD
EXHIBIT 4 FINANCIAL INFORMATION OF KULIM (M) BHD
Ratio Performance
2009 2008 2007 2006Profitability RatioReturn on Equity 4.326 10.809 17.458 5.246Return on Total Assets 1.806 5.306 9.283 2.745
Investment RatioP/E Ratio 15.989 3.913 5.268 10.824Dividend Yield 2.384 3.275 1.887 1.923Dividend Payout 0.381 0.128 0.099 0.208
Liquidity RatioCurrent Ratio 1.305 1.375 1.699 1.088Quick Ratio 0.928 1.011 1.487 0.816
Financial Leverage RatioTotal Debt Equity Ratio 0.506 0.451 0.355 0.336Debt Ratio 0.891 0.723 0.623 0.758
Performance/Market RatioGross EPS (Sen) 47.22 117.04 150.91 48.04Dividend (Sen) 18.00 15.00 15.00 10.00
Income Statement (RM’000)
2009 2008 2007 2006
Sales Revenues 5806205.0 3989338.0 2741489.0 1836531.0Operating Profit 582359.0 660325.0 416562.0 166690.0Profit/loss Before Tax 521865.0 667850.0 558793.0 221558.0Taxation -169954.0 -141297.0 -125971.0 -51617.0Profit After Tax 351911.0 526553.0 432822.0 169941.0Extraordinary Items 0.0 0.0 82252.0 0.0Minority Interest -206074.0 -175325.0 0.0 -42292.0Net Profit/loss To Shareholders
145837.0 351228.0 515074.0 127649.0
Gross EPS (Sen) 47.22 117.04 150.91 48.04Dividend (Sen) 18.00 15.00 15.00 10.00
Balance Sheet (RM’000)
2009 2008 2007 2006CURRENT ASSETSCash And Bank Balances 405227.0 445476.0 648307.0 138917.0Short Term Investment 33669.0 27368.0 112205.0 7807.0Stocks 525883.0 388598.0 199227.0 172881.0Debtors / Receivables 790506.0 548909.0 615481.0 316078.0Other Current Assets 62040.0 56133.0 19477.0 55776.0TOTAL CURRENT ASSETS 1817325.0 1466484.0 1594697.0 691459.0
CURRENT LIABILITIESShort-term Loans 547747.0 566229.0 624642.0 389106.0Creditors / Payables 705908.0 361260.0 288818.0 243750.0Taxation 114620.0 122101.0 25052.0 2626.0Dividends 23426.0 16768.0 0.0 0.0Other Current Liabilities 401.0 0.0 0.0 0.0TOTAL CURRENT LIABILITIES 1392102.0 1066358.0 938512.0 635482.0
NET CURRENT ASSETS 425223.0 400126.0 656185.0 55977.0
LONG-TERM ASSETSProperty, Plant and Equipment 5291495.0 4184458.0 3117238.0 3216894.0Investments 60269.0 640664.0 542919.0 454266.0Intangible Assets 891691.0 320906.0 288159.0 285029.0Other Long Term Assets 13278.0 7447.0 5297.0 2595.0TOTAL LONG-TERM ASSETS 6256733.0 5153475.0 3953613.0 3958784.0
SHAREHOLDERS FUNDShare Capital 159336.0 154227.0 148545.0 137950.0Treasury Shares 0.0 0.0 0.0 0.0Reserves 3212029.0 3095086.0 2801734.0 2295514.0TOTAL SHAREHOLDERS FUND 3371365.0 3249313.0 2950279.0 2433464.0
MINORITY INTEREST 1699037.0 1020621.0 759739.0 373009.0LONG-TERM LIABILITIES 1611554.0 1283667.0 899780.0 1208288.0
Cash Flow Statement (RM’000)
2009 2008 2007 2006
Cash Flows From Operating Activities
628313.0 706541.0 470715.0 157332.0
Cash Flows From Investing Activities
-632855.0 -617793.0 79787.0 -238533.0
Cash Flows From Financing Activities
-45113.0 -324781.0 -26536.0 1668.0
Net Changes In Cash And Cash Equivalents
-49655.0 -236033.0 523966.0 -79533.0
Cash And Cash Equivalents Brought Forward
415038.0 628960.0 88597.0 168130.0
Cash And Cash Equivalents Carried Forward
365383.0 392927.0 612563.0 88597.0
EXHIBIT 5 FINANCIAL PERFORMANCES OF EKOVEST BERHAD
Ratio Performance
2010 2009 2008 2007Profitability RatioReturn on Equity 3.225 2.222 5.477 5.957Return on Total Assets 2.004 1.27 3.127 3.739
Investment RatioP/E Ratio 19.943 32.365 9.637 20.655Dividend Yield 3.546 3.205 4.386 1.887Dividend Payout 0.707 1.037 0.423 0.39
Liquidity RatioCurrent Ratio 1.116 1.12 1.218 1.612Quick Ratio 1.116 1.12 1.218 1.612
Financial Leverage RatioTotal Debt Equity Ratio 0.154 0.283 0.428 0.358Leverage Ratio 0.609 0.746 0.75 0.57
Performance RatioGross EPS (Sen) 7.07 4.82 11.83 12.83Dividend (Sen) 5.00 5.00 5.00 5.00
Income Statement (RM’000)
2010 2009 2008 2007
Turnover 217733.0 277759.0 442312.0 356601.0Operating Profit 23060.0 16317.0 29794.0 28792.0Profit/loss Before Tax 19567.0 10694.0 25838.0 25660.0Taxation -10659.0 -3872.0 -9081.0 -8237.0Profit After Tax 8908.0 6822.0 16757.0 17423.0Extraordinary Items 0.0 0.0 0.0 0.0Minority Interest 1191.0 4.0 -33.0 -82.0Net Profit/loss To Shareholders
10099.0 6826.0 16724.0 17341.0
Gross EPS (Sen) 7.07 4.82 11.83 12.83Dividend (Sen) 5.00 5.00 5.00 5.00
Balance Sheet (RM’000)
Balance Sheet (MYR '000) 2010 2009 2008 2007
CURRENT ASSETSCash And Bank Balances 75109.0 89803.0 94303.0 87612.0Short Term Investment 0.0 0.0 0.0 0.0Stocks 0.0 0.0 0.0 0.0Debtors / Receivables 127939.0 153439.0 169714.0 163810.0Other Current Assets 848.0 2403.0 2185.0 2446.0TOTAL CURRENT ASSETS 203896.0 245645.0 266202.0 253868.0
CURRENT LIABILITIESShort-term Loans 43544.0 80786.0 68965.0 49129.0Creditors / Payables 134974.0 138528.0 147090.0 105316.0Taxation 4247.0 66.0 2518.0 3070.0Dividends 0.0 0.0 0.0 0.0Other Current Liabilities 0.0 0.0 0.0 0.0TOTAL CURRENT LIABILITIES 182765.0 219380.0 218573.0 157515.0
NET CURRENT ASSETS 21131.0 26265.0 47629.0 96353.0
LONG-TERM ASSETS
Property, Plant And Equipment 134721.0 126371.0 98133.0 74873.0
Investments 165202.0 165481.0 170422.0 134966.0Intangible Assets 0.0 0.0 0.0 0.0Other Long Term Assets 0.0 0.0 39.0 27.0TOTAL LONG-TERM ASSETS 299923.0 291852.0 268594.0 209866.0
SHAREHOLDERS FUNDShare Capital 142889.0 141701.0 141388.0 138627.0Treasury Shares 0.0 0.0 0.0 0.0Reserves 170262.0 165481.0 163969.0 152476.0TOTAL SHAREHOLDERS FUND 313151.0 307182.0 305357.0 291103.0
MINORITY INTEREST 0.0 1191.0 395.0 6746.0LONG-TERM LIABILITIES 7903.0 9744.0 10471.0 8370.0
Cash Flow Statement (RM’000)
Cash flow Statement (MYR '000)
2010 2009 2008 2007
Cash Flows From Operating Activities
33583.0 13033.0 54791.0 109182.0
Cash Flows From Investing Activities
-17903.0 6963.0 -70012.0 -110230.0
Cash Flows From Financing Activities
-7202.0 -7079.0 -7073.0 3385.0
Net Changes In Cash And Cash Equivalents
8478.0 12917.0 -22294.0 2337.0
Cash And Cash Equivalents Brought Forward
-16127.0 -29044.0 -6750.0 -9087.0
Cash And Cash Equivalents Carried Forward
-7649.0 -16127.0 -29044.0 -6750.0
ANALYSIS AND EVALUATION
Ratio Performances
Ekovest Berhad
Liquidity ratios attempt to measure a company's ability to pay off its short-term debt
obligations. This is done by comparing a company's most liquid asset those that can be easily
converted to cash, its short-term liabilities. We decided to evaluate using current ratio, quick
ratio and net working capital. As we can see, there is a decreasing trend from year 2006 to 2010
whereby the ratio had a low increment. This indicates that it gets harder for Ekovest Berhad to
pay its short-term liabilities among the 5 years. Ekovest Berhad also will have difficulty meeting
running its operations, as well as meeting its obligations.
For activity ratios, we apply the average collection period. A lower average collection
period is seen as optimal, because this means that it does not take a company very long to turn its
receivables into cash. As we can see, the Ekovest Berhad has decreasing trend from 2006 to 2008
that indicates liquid account receivables that can be convert into cash quickly but its increase
from the year 2009 to 2010.
Profitability ratios much like the operational performance ratios, give users a good
understanding of how well the company utilized its resources in generating profit and
shareholder value. We decided to evaluate using return on assets, return on equity and net profit
margin. In general, the higher the percentage, the better because that means the company is doing
a good job using its assets to generate sales and using the investor money. Ekovest Berhad has
the increasing trend from year 2006 to 2007 and then decreased from year 2008 to 2009 before
slightly increase on 2010.
Debt ratios give investor a general idea of the company's overall debt load as well as its
mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a
company and its shareholders face. In general, the greater the amount of debt held by a company
the greater the financial risk of bankruptcy. We decided to evaluate using total debt and debt to
equity ratio. Ekovest Berhad has increasing trend of debt ratios from 2006 to 2009 that indicate
greater of financial risk and faced the bankruptcy but it slightly falls in 2010.
Market ratio ratios can be used by investors to estimate the attractiveness of a potential or
existing investment and get an idea of its valuation. The most well-know market ratio is the P/E
ratio, which compares the current price of company's shares to the amount of earnings it
generates. The purpose of this ratio is to give users a quick idea of how much they are paying for
each $1 of earnings. Ekovest Berhad has decreasing trend of P/E ratio from the year 2006 to
2010 that indicates the lower earnings growth in future.
Kulim (M) Berhad
For Liquidity Ratio, we decided to evaluate using current ratio, net working capital and
quick ratio. The reason why is because these ratios give an idea of the company’s ability to pay
back its short term liabilities with its short term assets. As we can see, there is an increasing trend
from year 2006 to 2009 whereby the ratio had a high increment but it falls to 0.95 x in 2010. This
indicates that it gets harder for Kulim Berhad to pay its short-term liabilities in 2010. Kulim
Berhad also is having difficulties in running and meeting obligations.
For Activity Ratio, we apply the asset turnover and average collection period ratios.
These ratios will identify whether a firm's able to convert different accounts within their balance
sheets into cash or sales. Companies will typically try to turn their production into cash or sales
as fast as possible because this will generally lead to higher revenues. As for Kulim Berhad’s
asset turnover, it experiences a profitable from year 2006 to 2009 but it falls by 0.13 in 2010.
This may indicate that Kulim Berhad is experiencing difficulties in using its assets in generating
sales or revenue. Kulim Berhad had suffered a loss when its average collection period reached to
81 days in 2007 but the company managed to bounce back when its average collection period fall
as low as 40 days in 2010. This indicates that Kulim Berhad possessing an optimal amount of
days.
For Debt Ratio, we apply the total debt ratio and debt-to-equity ratio to evaluate what
proportion of debt the company has relative to its assets. The measure gives an idea to the
leverage of the company along with the potential risks the company faces in terms of its debt-
load. Based on our findings, we found that Kulim Berhad has more assets than debt because its
debt ratio is below 1.00. This may imply that Kulim Berhad have a low level of risk. Meanwhile,
Kulim’s debt-to-equity ratio falls below 1.00, which means the company is in good condition
because it is not financed by debt. A low debt-to-equity ratio of Kulim Berhad implies that the
company has more shareholder equity.
For Profitability Ratio, we decided to use return on asset and return on equity ratio to
weigh up how profitable the company is relative to its total assets. Based on our findings on
Kulim’s ROA, the company starts off with a small return of 14 % in 2006 but had the highest
ROA of 49 % in 2007, which indicates that the company managed to employ a well managed
company’s total asset to make a profit. This means that Kulim is very much efficient in utilizing
its asset base. Meanwhile, its ROE had a huge increase from year 2006 to 2007, which is from 23
% to 74 % respectively. However, Kulim’s ROE had a insignificant decline from 2007 to 2008
but managed to recover through the years until 2010. This shows that Kulim Berhad is efficient
in utilizing its equity base and give better return to investors.
For Market Ratio, we apply the P/E ratio in evaluating the company's current share price
compared to its per-share earnings. Based on our findings, Kulim is experiencing the lowest
earnings to investors in 2008 which is 0.04, but it recover to grow into a higher earnings in 2009
and 2010, which is 0.16 and 0.10 respectively.
Cost of Capital
Ekovest Berhad
Wd = Total LiabilitiesWe Shareholder Equity
= 229,124 308,373
= 0.743
Wd = 0.743We
Wd = 0.743 We --------①
Wd + We = 1 -----------②
0.743 We + We = 1
1.743 We = 1
We = 0.574 Wd = 1 – 0.574
= 0.426
Ke = rf + β (rM - rf)
= 3.5% + 0.70 (18% - 3.5%)
= 13.65%
WACC = Wd Kd (1 – t) + We Ke
= 0.426 (0.021) (1 – 0.25) + 0.574 (0.1356)
= 0.0067095 + 0.078351
= 8.50 %
Kulim (M) Berhad
Wd = Total LiabilitiesWe Shareholder Equity
= 3,003,656 5,070,402
= 0.59
Wd = 0.59We
Wd = 0.59 We --------①
Wd + We = 1 ----------②
0.59 We + We = 1
1.59 We = 1
We = 0.629 Wd = 1 – 0.629
= 0.371
Ke = rf + β (rM - rf)
= 3.5% + 1.29 (18% - 3.5%)
= 22.21%
WACC = Wd Kd (1 – t) + We Ke
= 0.371 (0.0466) (1 – 0.25) + 0.629 (0.2221)
= 0.01297 + 0.1397
= 15.27 %
Will the Ekovest getting benefits from the acquisition based on the comparison of cost of capital
and company background between Ekovest and Kulim?
No. because from the calculation of cost of capital trough weighted average cost of
capital show that Kulim’s cost of capital higher than Ekovest. Weighted Average Cost of
Capital (WACC) is therefore an overall return that a corporation MUST earn on its existing
assets and business operations in order to increase or maintain the current value of the current
stock. In order to maintain Ekovest Berhad return, they must maintain 8.50 % on all its assets
and business operations. However, because of the percentage of WACC in KULIM (M) Berhad
is 15.27 %, they might be deficit of capital to take over KULIM.