This article first appeared in The Edge Malaysia Weekly on February 26, 2018 - March 4, 2018

THE dispute that has broken out between Star Media Group Bhd and JAKS Resources Bhd has its roots in a deal signed between them eight years ago, which coincided with a bitter party election of the Malaysian Chinese Association (MCA).

On March 3, 2010, Star and JAKS inked a joint development agreement (JDA) to develop 24,568 sq m of leasehold land owned by the media group in Petaling Jaya. The initial estimated gross development value (GDV) of the project was RM370 million.

Under the JDA, Star was entitled to 30% of the GDV via commercial space worth RM111 million, including a 15-storey office tower. It was JAKS’ first foray into property development, to be undertaken by its 51%-owned subsidiary, JAKS Island Circle Sdn Bhd (JIC).

The JDA has raised eyebrows due to several reasons. Firstly, it was signed merely three weeks before the MCA party election on March 28, 2010, which saw incumbent president Tan Sri Ong Tee Keat defeated in a three-cornered fight for the presidency.

MCA is the controlling shareholder of Star with a 40% stake via Huaren Holdings Sdn Bhd, an investment vehicle owned by the Barisan Nasional component party. Tan Sri Dr Chua Soi Lek’s presidential victory led to a reshuffle of Star’s board and management.

Questions were raised as to why Star, which had cash reserves of close to RM700 million at the time, did not develop the land by itself. And, if it needed a development partner, why did it choose JAKS — a pipe manufacturing and contracting company with no proven property development record.

Another controversial part of the JDA was the requirement for Star to jointly apply with JAKS for RM50 million in banking facilities to part finance the project. Many were asking why should Star raise any money to fund the development when it has already come up with the land.

Amid the crescendo of disgruntled voices against the deal from shareholders and employees of Star as well as some members of MCA, on Aug 11, 2011, the contracting parties announced changes to the original agreement.

Instead of a JDA, Star would sell the land to JAKS for RM135 million, to be paid via cash and in kind, that is, the 15-storey office tower identified as Tower A. As security to ensure that the tower is completed and delivered on time, JAKS was required to provide a RM50 million bank guarantee to Star.

The tower was supposed to be completed within three years of JAKS receiving vacant possession. The contract would also be automatically extended by 12 months if JAKS fails to complete it within the stipulated period, at a cost of 8% interest per annum to the contractor.

The project now boasts a GDV of RM1.1 billion.

More than six years after the sales and purchase agreement (SPA) was signed, Star decided to call on the guarantee because the whole project has been delayed by over two years and it has refused to grant a further extension of time to JAKS.

JAKS announced last Monday that Star has given notification to the two issuing financial institutions to call on the bank guarantee. In accordance with the terms of the facilities, JIC will have to pay the financial institutions the sum of RM50 million.

JIC has since instructed its solicitors to file an injunction with the High Court to restrain the banks from releasing the bank guarantee amount to Star. The company says the call on the bank guarantee is baseless and accuses Star of preventing the completion of the tower.

The development comprises Tower A, a 17-storey commercial-cum-education block, a podium, a 34-storey residential block and two 25-storey residential blocks.

According to JAKS’ 2011 annual report, the group estimated that the project would have a development cost of RM670 million, spread over four years. While the entire project, dubbed Pacific Star, is estimated to be completed within four years, Tower A should be ready in three years.

The development plan was approved by Majlis Bandaraya Petaling Jaya on Aug 16, 2012, and JAKS estimated that construction would start by the end of that year. That means Tower A should have been completed in late 2015 or early 2016.

However, as at FY2016, JAKS only recognised RM93.08 million out of the deferred contract revenue of RM135 million. Tower A’s percentage of completion as of now is unknown, but JAKS has managed to complete most of the structure, judging from a street view of the site.

JAKS’ venture into the property development sector seems to have stressed its balance sheet. To manage this, the group has resorted to selling its assets and placing out new shares to investors to raise funds as well as an internal reorganisation of its structure.

Between FY2011 and FY2016, JAKS recognised about RM856 million of accumulated property development cost in its profit-and-loss accounts, excluding the conversion premium of the leasehold land. The group incurred a conversion premium of RM177.84 million in FY2012.

By 2016, signs of JAKS attempting to monetise its property development and investments emerged. In April 2016, JAKS said it wants to fully divest its stake in Evolve Concept Mall, which was only recognised in its books as an investment property in FY2015.

However, JAKS has not been able to secure a buyer for the mall in Ara Damansara. As at end-FY2016, the mall was recorded in JAKS’ books at RM390 million and had a fair value of RM450 million, as valued by Raine & Horne International Zaki + Partners Sdn Bhd.

By early last year, more signs emerged, calling into question JAKS’ ability to complete the Pacific Star project. In what it called an “internal reorganisation”, JAKS and its partner, Island Circle Development (M) Sdn Bhd, set up a new company in order to get financing to complete the project.

Last March, JAKS, together with Island Circle, set up Fortress Pavilion Sdn Bhd. Then, in August, JIC entered into an SPA with Fortress Pavilion for the disposal of Pacific Star Business Hub (which excludes Tower A) for RM240 million.

According to the announcement on the SPA, JIC intends to use the proceeds from the sale to fund the construction of the Pacific Star project. The internal reorganisation will result in a corporate structure that allows the group to obtain financing from a bank to complete the project.

On March 24 last year, JAKS announced that it has completed the placement of 43.84 million shares at RM1.36 per share. Of the RM59.62 million raised by JAKS through the private placement, RM34 million was allocated to part finance its property development projects.

The group disposed of a piece of freehold industrial land measuring 1.214ha, together with a one-storey factory, in Taman Industri Sungai Penaga to Hectare Square Sdn Bhd for RM25.87 million on Feb 2.

It is also in the process of finalising the disposal of four parcels of freehold land in the same vicinity measuring 6ha to Sunway Bhd for RM167.59 million. The proceeds from the disposals will be used to pare down its borrowings.

As at Sept 30 last year, JAKS had current borrowings of RM149.26 million, bank overdraft of RM66.5 million and long-term borrowings of RM296.4 million. It had cash and bank balances of RM46.5 million and deposits with licensed banks amounting to RM60.5 million. This worked out to a net gearing of 0.69 times.

JAKS also had contingent liabilities of RM162.7 million, comprising RM139.9 million in bank guarantees issued for the execution of contracts, guarantees given to suppliers of goods amounting to RM2 million and liquidated and ascertained damages (LAD) of RM20.8 million.

It is worth noting that JAKS did not provide a breakdown of the LAD by construction projects. As at Sept 30 last year, JAKS was involved in construction projects, including Tower A of Pacific Star, Package CB3 of the Sungai Besi-Ulu Kelang Expressway and the sewerage pipe network and sewerage treatment plant rationalisation in Puchong and Kepong.

Affin Hwang Research says in a Feb 5 research report on JAKS that the near-term re-rating catalyst for the group lies in the completion of the Pacific Star project. The project has dragged down JAKS’ earnings since early last year, it adds.

Meanwhile, JAKS is also tied up with a contract to build a 1,200mw coal-fired power plant in Hai Duong province, Vietnam. The project was awarded to JAKS in 2011, but the venture only reached financial close at the third quarter of 2015. The engineering, procurement and construction contract was worth US$454.5 million. JAKS managed to rope in China Power Engineering Consulting Group Co Ltd as a partner for the project.

When the writer visited the Pacific Star site, it was not the buzz of activities usually seen at construction sites with workers and suppliers coming in and out. When asked, one of the few workers at the site says it was because of the Chinese New Year break.

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