This article first appeared in The Edge Malaysia Weekly on September 21, 2020 - September 27, 2020

THE much-coveted Bandar Malaysia deal is finally in tycoon Tan Sri Lim Kang Hoo’s hands, after years of delay. And he now wants Ekovest Bhd to be part of the game.

An offer has been extended for Ekovest to acquire a 40% stake in IWH-CREC Sdn Bhd, held by Iskandar Waterfront Holdings Sdn Bhd (IWH), for a price tag of RM1.3 billion.

IWH-CREC holds a 60% stake in Bandar Malaysia, with the remaining 40% held by the Ministry of Finance via TRX City Sdn Bhd. The deal is subject to approvals from all relevant parties, including China Railway Engineering Corp (M) Sdn Bhd (CREC) and TRX City.

Can the deal provide strong support to Ekovest’s financial performance and share price? At first glance, the counter barely reacted to the news. After rising as much as 6.5 sen or 11.2% to hit its intraday high of 64.5 sen, the stock pared gains to close unchanged at 58 sen last Thursday.

On Friday, it slipped further by 1.5 sen, or 2.6%, to 56.5 sen, giving the company a market capitalisation of RM1.5 billion. The stock has been trading below RM1 in the past two years, after its share split exercise in February 2017.

A corporate adviser believes the deal could help Ekovest, which has seen a dwindling order book in the current environment.

“Ekovest has one more year to finish the DUKE 3 (Duta-Ulu Kelang Expressway Phase 3) project, so it has about RM1 billion left in terms of order book. If you invest in the Bandar Malaysia project, the gross development value can last for 30 to 50 years,” she tells The Edge.

Last Tuesday, Lim said the deal would benefit Ekovest in the long term as it would allow the company to participate in the mega project worth an estimated RM140 billion.

Lim holds a 63% stake in IWH and 32.4% equity interest in Ekovest. If the deal goes through, IWH-CREC will have three shareholders, namely Ekovest (40%), IWH (20%) and CREC (40%).

However, an analyst says funding is the immediate issue for Ekovest, and it could not expect short-term earnings contribution from the deal.

“Financiers might be doubtful about providing financing to whoever is involved in the project in this soft market environment. Even if they can secure financing, would the project be able to garner sufficient demand so that it can be translated into earnings?” he asks.

Ekovest had RM570.86 million in bank borrowings as at end-June, with cash and cash equivalents of RM234.58 million. Its gearing ratio rose to 1.52 times from 1.07 times a year ago.

Lim said internal funding, bank borrowings and cash calls are the options for Ekovest.

The company fell into the red in the fourth quarter ended June 30, 2020 (4QFY2020), with a net loss of RM53.82 million against a net profit of RM23.3 million in the same quarter last year, owing to lower contribution from the construction and toll operations, partly due to the impact of the Movement Control Order.

Full-year net profit slumped 66.6% to RM46.97 million from RM140.48 million a year ago.

Still, Ekovest shareholders will have the final say in this related-party transaction (RPT).

This is not the first time Lim has proposed an RPT for his entities. In 2017, a plan to merge IWH and its associate, Iskandar Waterfront City Bhd (IWCity), was mooted to create a larger property development entity in Malaysia. The corporate exercise, however, was called off as Sultan of Johor Sultan Ibrahim Sultan Iskandar and Kumpulan Prasarana Rakyat Johor Sdn Bhd decided to pull out from participating in the restructuring exercise.

In 2018, Lim proposed to merge Ekovest with IWCity, but the plan was shot down by Ekovest shareholders.

The Bandar Malaysia project is expected to commence early next year, following the settlement of a RM1.24 billion payment due to the federal government by IWH-CREC.

It will be an intelligent city featuring integrated components covering finance, technology, medical science, education, tourism and entrepreneurship, among others. It will also serve as the terminus station for the Kuala Lumpur-Singapore High-Speed Rail.

Areca Capital Sdn Bhd CEO Danny Wong sees the Bandar Malaysia project having spillover effects on the construction sector, which are much needed to revive the economy.

“We need a collective effort to make it a success story and boost economic growth. The market demand for office space and residential housing is soft right now, but there is expectation of better demand in the future,” he says.

Meanwhile, the corporate adviser says Bandar Malaysia, as an extended central business district, is a project of national interest that needs to be anchored. “It will set the direction for Malaysia in the next 40 to 50 years. We need to start something even if the market is not so good. It is quite timely to have this sizeable project. If the transaction is completed, we will have foreign direct investments of a larger scale.”

She is unfazed by talk of a supply glut in the property market amid the ongoing Tun Razak Exchange (TRX) that has seen the emergence of many skyscrapers. “Compared with Bandar Malaysia, TRX is a relatively small development with only one small plot of land unsold.”

It has also been revealed that IWH is looking to raise at least RM5 billion from its planned initial public offering in the first half of next year.

Despite having a sizeable land bank of over 4,000 acres in Johor, IWH is not directly involved in property development projects but sells land to developers and co-invests with them in the form of joint ventures.

Thus, the adviser says the floating of IWH is not comparable with other conventional property firm listings. “IWH progressively realises the land bank to the market. So, there is no good or bad time for listing, unless you take the view that the land in Bandar Malaysia and Iskandar Malaysia in Johor will depreciate one day.”

Areca Capital’s Wong notes that valuation is the key factor for any IPO in view of the weak market sentiment. “Sentiment may not be as good as three to four years ago, so, you cannot demand very high pricing.”

A search on the Companies Commission of Malaysia website shows that IWH recorded net losses of RM90.95 million and RM90.31 million for the financial year ended Dec 31, 2018 (FY2018) and FY2017 respectively. Prior to that, it reported profits of RM39.66 million, RM339.29 million and RM173.17 million in FY2016, FY2015 and FY2014 respectively.

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