Highlight Next — a cash call for KEuro

Highlight Next — a cash call for KEuro
Business & Markets 2013
Written by Isabelle Francis
Friday, 02 August 2013 12:07

KUMPULAN EUROPLUS BHD [] (KEuro) is expected to embark on a fundraising exercise to bulk up its balance sheet and cement a financial close for the development of the multibillion-ringgit West Coast Expressway (WCE).

This follows the emergence of cash-rich MWE HOLDINGS BHD [] as a major shareholder, replacing Tan Sri Chan Ah Chye, who mooted the 223km highway 17 years ago.

“KEuro executives were already working towards financial closure for the WCE irrespective of the changes in shareholding. However, bankers would be more comforted now with MWE on board as there is more certainty for the equity portion of the financing,” says a source.

Early last month (July), MWE bought a 22.15% stake from Chan for RM155 million to become KEuro’s largest shareholder with 27.4% equity interest. IJM Corp Bhd, which has been driving KEuro since 2007, is the second largest shareholder with a 23.85% stake, while Chan is now left with only 4.46% equity interest.

KEuro owns 80% of the WCE project owner, West Coast Expressway Sdn Bhd (WCESB), while the remaining 20% is held by IJM. This puts the latter’s effective interest in the highway project at about 39%.

Executives say IJM is not keen to own more than 40% of the WCE to avoid stretching its own balance sheet and give it some room to gear up for other projects. Based on KEuro’s closing share price of RM1.28 last Tuesday, it has a market capitalisation of RM669 million.

With MWE and IJM as anchor shareholders, the group should have little difficulty undertaking a sizeable fundraising exercise to fund the development of the highway project and its other property development activities. In fact, an impending cash call was one of the reasons for Chan’s divestment after working on the WCE project since 1996.

“He will not have the financial capacity to undertake his entitlement and it will be diluted eventually,” says an executive close to Chan.

Although Chan started planning for the WCE in 1997, he could not put the financing together for KEuro to undertake the project. In fact, it looked like KEuro was going to lose the WCE until IJM stepped in as a 25% shareholder in March 2006. Since then, IJM has been calling the shots — until it signed a concession agreement with the government in January this year.

“KEuro has nine months from the time the concession is signed to seal the financial close. It ends in October, but the company has an option to extend it for another three months,” says a source.

In fact, IJM’s partnership with Chan started more than seven years ago when the former’s CONSTRUCTION [] unit, IJM Construction Sdn Bhd, was appointed to help KEuro revive its flagship RM2.2 billion Puncak Jalil project.

Be that as it may, analysts are already saying the WCE project, which has been scaled down, will be more palatable to secure a financial close. With about 25% of the previous job scope to be excluded, WCE is seeing a substantial reduction in its estimated cost base to RM5.2 billion from RM7.07 billion previously.

Previously, the WCE project was to cover a distance of 316km, stretching from Banting in Selangor to Taiping, Perak, of which 224km would be tolled and 92km would be toll-free.

But the toll-free stretch spanning more than 80km has been taken out of the project scope. The WCE project will now involve a shorter stretch of 233km, of which 40km will be built later. The 40km road links Ipoh with the WCE.

Why MWE came in

Interestingly, while loss-making KEuro is depending on the WCE to enhance its financials, MWE is said to be attracted to the company not because of the highway but to get exposure to its property development in Bandar Rimbayu. The township, formerly known as Canal City, carries a conservative gross development value (GDV) of RM9 billion.

MWE is controlled by Tan Sri K K Lau, who is also known as Surin Upatkoon. Lau, who holds a 32.96% stake in the group, is also the largest shareholder of Magnum Bhd and MPHB Capital Bhd.

“MWE did not go into KEuro for the highway project because they are not contractors and it’s a project with a long gestation period. But it will give MWE cash flow in the future,” says a source.

Bandar Rimbayu is being developed by Radiant Pillar Sdn Bhd, a joint venture between KEuro and IJM. It is not clear whether MWE has plans to hold a stake in Radiant Pillar to tighten its grip on the project. Radiant Pillar has plans for an upscale development based on the “Venice” concept.

Irrespective of this, having the WCE in MWE’s stable would mean a meaningful diversification from its manufacturing and garment business. This is comes at a time when MWE’s core businesses are also facing headwinds.

The group saw a 10.99% decline in revenue to RM164.53 million for FY2012 from RM184.85 million in FY2011. It attributes the lower revenue to weakening demand from the US and European markets. It also expects volatility and weak demand from the two markets to continue into the near future.

As for KEuro, with its strong shareholders, it is expected to quickly firm up its balance sheet. Eventually, the WCE and Bandar Rimbayu will be its core businesses as its interest in associate company Trinity Corp Bhd, formerly Talam Corp Bhd, is likely to be divested.


Brilliant but too ambitious

Tan Sri Chan Ah Chye’s brilliance showed very early in his life. Coming from a poor family in Kampar, Perak, he earned a scholarship to study engineering at the University of Malaya.

He was offered an academic career but declined the opportunity to pursue a post-graduate degree at the prestigious Imperial College London. Instead, he went on to hone his skills as an engineer.

He served with the Selangor State Development Corporation (PKNS) and later, went on to establish his own property development company. At their height, companies under Chan were the main partners of PKNS in the development of state projects.

However, his brilliance was matched by his trusting nature. A seasoned corporate executive described Chan as “brilliant yet gullible in many ways”.

“Outsized ambitions were not supported by a management team that could see through the implementation of his grand plans. His attempts at diversification were a disaster, from gaming in China’s

Jilin province to toll road projects,” says the executive.

“He spent a lot in futile attempts to secure these projects, which were also distractions from his core business,” adds the executive.

“But that aside, he has a good heart. A staunch Buddhist in his earlier days, he is now a Christian lay preacher and finds solace in God,” he says.

Chan believed in buying big tracts of land, which turned Talam Corp Bhd (now Trinity Corp Bhd) into one of the most ambitious medium and low-cost development companies in the 1990s.

Unfortunately, the highly geared company was hit when the Asian financial crisis strick in 1997/98. Talam was unable to receive progress claims from end-financiers, which led to a mismatch between cash flow and debt obligations.

Talam and Chan never really recovered from the crisis. In 2005/06, his group was floundering with some 12,000 uncompleted homes in Bukit Jalil when IJM Corp Bhd bought into Kumpulan Europlus Bhd.

IJM completed the houses and is now seeing through the West Coast Expressway.

“A year ago, the writing was on the wall that Chan would exit KEuro. The project will need a lot of capital and a rights issue is underway. He will not be able to fork out that much cash.

“Chan is already close to 70 years old and WCE is a highway project with a long gestation period. By the time it generates dividends, it won’t be meaningful for Chan,” says the executive.

The price was also good for him. “It leaves him with cash for his future plans. Although he has stepped down from his executive roles, he still plays an advisory role, particularly at Trinity,” the executive adds.

Chan was not available for comment as he was in China attending board meetings for its investment there. Trinity, a 30.09%-associate of KEuro, has a joint venture to develop Yin Hai Complex, which carries a gross development value of RMB738 million (RM383.7 million), in Jilin.

Sources say it is likely Chan will accumulate interest in Trinity — hence going back to where he first started.

Even though he will no longer be part of WCE, he will go down as the brilliant engineer who could not complete the highway after working on it for 17 years.

This story first appeared in The Edge weekly edition of July 22 - July 28, 2013.