Harvest Court’s related party transactions fair and reasonable, says independent adviser

PETALING JAYA: The independent advisor of Harvest Court Industries Bhd is recommending shareholders vote in favour of proposals relating to the company's diversification into the construction sector, a circular to shareholdes revealed.

The proposals are also related party transactions (RPTs) and have a combined contract value of RM808.1mil. The company's upcoming EGM (extraordinary general meeting) on this matter will be held on May 22.

Covenant Equity Consulting Sdn Bhd, the independent adviser, said the financial effects of the RPTs, which involved three construction projects, are not detrimental to Harvest Court shareholders and the future prospects of the construction industry in Malaysia appear to be favourable.

Covenant Equity said the proposed RPTs were fair and reasonable, and were intended to enhance shareholders' value in order to provide additional revenue sources to Harvest Court.

To recap, on December 19 last year, Harvest Court told Bursa Malaysia that it proposed to diversify its existing business of manufacturing and marketing of timber doors and other related products into the construction business via its wholly-owned subsidiary, Harvest Court Development Sdn Bhd (HCDSB).

As such, the company had proposed to enter into RPTs with Sagajuta (Sabah) Sdn Bhd and 1Green Enviro Sdn Bhd (1GE).

These would see HCDSB becoming the contractor to build an apartment property called Gold Tower (termed as the 1 Sulaman project) in Kota Kinabalu, Sabah and a pulp and paper plant to process oil palm empty fruit bunches in Negeri Sembilan.

In November 2011, Sagajuta also gave a letter of undertaking to award a RM609.1mil contract to HCDSB for two phases of a proposed mixed development called 1 Likas in Teluk Likas, Kota Kinabalu.

Under the 1 Sulaman project for Sagajuta, HCDSB would build a 28-storey medium cost apartment with 950 units, eight units of two-storey shop offices as well as common facilities and a five-level car park.

The contract value of the 1 Sulaman project is RM129mil while the GDV (gross development value) is RM173.35mil.

As for the proposed pulp and paper plant for 1GE, this would involve a contract value of RM70mil to build and upgrade production facilities to 25,000 metric tonnes capacity.

HCDSB is expecting net profit margins of 9.6% and 10.9% on the 1 Sulaman and 1GE plant projects respectively, as well as 9.3% and 9.4% for Phase One and Two of the 1 Likas project respectively.

Harvest Court director Datuk Raymond Chan Boon Siew and Mohd Nazifuddin Mohd Najib who have 15.95% and 2.2% direct stakes respectively in Harvest Court as at April 26, 2012, are also the directors and shareholders of Sagajuta and 1GE.

Sagajuta is the developer for the RM1.2bil 1Borneo Hypermall in Kota Kinabalu, Sabah.

Chan had gained prominence in recent months after buying substantial stakes in other small companies, namely Naim Indah Corp Bhd and Metronic Global Bhd.

Last month, Chan also bought a 5.1% equity stake in smallish information technology company Ariantec Global Bhd.

HCDSB's construction activities are expected to commence in one month after obtaining the approval of Harvest Court's shareholders at the upcoming EGM. Funding for the projects will be by bank borrowings or internally generated funds.

It should also be noted that Harvest Court has a pending proposed private placement and a rights issue with warrants exercise, which are expected to be completed in the second and fourth quarter of 2012 respectively.

Based on Harvest Court's assessment, the initial working funds needed for the proposed projects are RM5mil (for 1 Sulaman), RM6mil (for 1GE plant) and RM10mil (for 1 Likas). According to Covenant Equity, Harvest Court should be in a good position to secure the initial working funds through borrowings, in view of the low level of borrowings of the company and the availability of an unencumbered timber factory with a market value of RM25.7mil in Klang, Selangor.

Covenant Equity also highlighted that in 1995, Harvest Court had ventured into property development and construction.

“However, due to cashflow problems, these ventures failed and affected its core timber business.”

It was noted that subsequently, Harvest Court's borrowings had increased from RM9.3mil in 1994 to RM41.1mil in 2005.

“Following the failure of such ventures, Harvest Court had ceased or scaled down other business segments following the completion of its group-wide debt restructuring scheme on Dec 1, 2009 and its subsequent uplift from PN17 status on Dec 3, 2009.”

For the 1 Sulaman and 1 Likas project, HCDSB will rope in Sagajuta's project team, which is headed by Datuk Lim Thiam Huat who has more than 25 years of experience in the construction industry.

For the 1GE plant project, it is proposed that Chinese company Shaanxi Zhisen Pulp and Paper Engineering Co Ltd will be the engineering, procurement and construction sub-contractor.