Magna Prima paying for missing the property cycle

This article first appeared in The Edge Malaysia Weekly, on June 27, 2022 - July 03, 2022.
Magna Prima paying for missing the property cycle
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THE woes that property developer Magna Prima Bhd is facing might have been averted had the group monetised some of its land bank several years ago before the property development sector took a turn for the worse.

In 2015, Magna Prima, led by then group managing director Datuk Rahadian Mahmud Mohammad Khalil, had planned to dispose of some of the group’s land parcels to raise an estimated RM500 million.

The plans included selling or developing the former site of SJK (C) Lai Meng on Jalan Ampang, Kuala Lumpur, with a partner, and selling parts of its 20-acre land in Section 15, Shah Alam, and two parcels in Petaling Jaya.

The RM500 million raised would have been used to pare down its debts and focus on smaller plots that would have a gross development value (GDV) of between RM250 million and RM300 million each.

According to a former executive with the group, Rahadian’s plan was considered sound, as the property market had been slow for several years back then, and there was no sign of recovery. A small property developer like Magna Prima did not have the luxury of riding out the downturn.

“Larger developers could still develop products and get minimum margins that would be able to serve their cash-flow needs. They could also sell some land and still have a lot more to develop and roll over their cash,” says the former executive.

Magna Prima was caught in a situation in which the products that it planned to launch were not in demand — high-end, high-rise residential and commercial projects. Products that have been in demand for several years now are affordable high-rise units and landed properties.

To recap, in March 2009, Magna Prima acquired the 2.6-acre parcel known as the Lai Meng School land on Jalan Ampang for RM148.15 million for the land portion. As part of the consideration, the group also built new schools in Bukit Jalil for the land owner Lai Meng Girls Schools Association.

The plan then was for Magna Prima to develop the land into a RM1.8 billion integrated development.

Then, in 2012, Magna Prima acquired the 20-acre land in Section 15, Shah Alam, for RM100 million from PCM Bina Sdn Bhd. The plan then was to develop the land into a mixed residential and commercial project with a GDV of RM1.4 billion.

As the property market softened over the last decade, however, Magna Prima found itself stuck with land parcels that were difficult to develop or monetise because this was prime land that might not be suitable for affordable properties.

It appears that Rahadian’s plan was unsuccessful; he left Magna Prima last July.

To be fair, Magna Prima could not sell the land parcels not for lack of trying.

The group had put up the Lai Meng School land for sale in 2015, targeting a value of RM3,500 psf. Nothing came of it, despite Rahadian saying in 2017 that some investors had shown interest in it.

Meanwhile, in January 2017, Hua Yang Bhd emerged as a substantial shareholder of Magna Prima after acquiring a 10.84% stake for RM66.6 million. Hua Yang then increased its stake in Magna Prima to 30.96% three months later, becoming the largest shareholder of the group.

Subsequently, Hua Yang CEO Ho Wen Yan said the group aimed to unlock the Lai Meng School land by March 31, 2020.

While all these considerations were taking place, Magna Prima’s revenue and profitability continued to slide.

In its financial year ended Dec 31, 2012 (FY2012), the group registered RM17.7 million in net profits on revenue of RM196.5 million. Magna Prima slipped into the red in FY2014, with a RM13.9 million net loss on the back of RM142.55 million revenue.

The group had a major revenue and earnings boost in FY2015, however, as it recognised the sale proceeds from its high-end residential project in Melbourne, as well as the completion and sale of shopoffices at its Jalan Kuching Commercial Centre Phase 1 project.

In FY2015, the group recorded net profits of RM408.5 million on RM795.5 million in revenue.

Since then, Magna Prima’s fortunes have been on a downward trend. For FY2018, FY2019 and FY2020, the group recorded net losses of RM55.26 million, RM32.9 million and RM150.87 million respectively.

In FY2021, Magna Prima recorded a small net profit of RM2.9 million, but revenue was a paltry RM6.53 million, down from RM18.7 million in FY2020.

In its FY2021 audited financial statements, its auditors flagged material uncertainties related to the group’s ability to continue as a going concern. Notably, Magna Prima’s current liabilities have exceeded its current assets by RM75.2 million, two subsidiary companies defaulted on their borrowing obligations, and the group was involved in several pending litigations.

The misfortunes at Magna Prima caused the group to default on a RM37.8 million term-loan facility from Alliance Bank Malaysia Bhd on June 24, 2020.

On Oct 29, 2021, Magna Prima made a payment of RM13 million to Alliance Bank. It is not known whether the payment constituted the settlement of the entire outstanding term-loan facility with the bank.

According to an announcement by Magna Prima on May 31, Alliance Bank had agreed not to enforce and/or exercise its rights against Magna Ecocity Sdn Bhd until Oct 31, 2022, subject strictly to the fulfilment of terms stated in the bank’s letter.

Magna Ecocity is the registered owner of the Section 15 land in Shah Alam. In 2020, a receiver and manager (R&M) had been appointed over the subsidiary — likely at the initiation of Alliance Bank, as there was a subsequent agreement between the bank, the R&M and Magna Prima, on the “re-floatation with reservation of right for the re-appointment of an R&M, subject to the fulfilment of certain conditions, including the execution of a sale and purchase agreement [likely of the land] by Oct 31, 2021”. However, this did not materialise.

Nevertheless in April, Magna Prima announced that property developer OCR Group Bhd will jointly develop the Section 15 land into an integrated e-commerce logistics hub with a planned GDV of RM1.5 billion. The project will be launched in phases from 2023.

The proposed joint venture will involve a profit-sharing scheme that will require OCR to pay RM160 million as minimum entitlement, or 30% of the development profit — whichever is higher — to Magna Ecocity Sdn Bhd — the land owner — upon the fulfilment of certain conditions.

The proposed development will comprise a mix of retail and commercial spaces, including multi-storey integrated e-commerce spaces specifically targeted for small and medium enterprises (SMEs), as well as serviced apartments.

Meanwhile, Magna Prima reported no revenue for its first quarter ended March 31, 2022, but it still managed to turn in a net profit of RM138,000.

Then, on June 8, during the group’s 27th annual general meeting, its shareholders refused to approve the directors’ fees of up to RM200,000.

Prior to that, on June 1, Magna Prima had announced the resignation of its independent, non-executive chairman Tan Sri Adzmi Abdul Wahab, citing the group’s failure to pay directors’ fees, meeting attendance allowance and passage leave since April 2020.

As at March 31, 2022, Magna Prima had RM128.15 million in current borrowings and RM82.9 million in trade and other payables. Long-term borrowings stood at RM19.8 million. Its cash, bank balances and fixed deposits stood at RM7.27 million.

Note that Magna Prima is asset-rich, with RM369.65 million worth of non-current assets identified as investment properties, and RM112.62 million worth of land held for property development. The group also has RM129.63 million in non-current assets held for sale.

The joint venture with OCR is the group’s latest attempt to turn Magna Prima around. Whether the project takes off and the group finally monetises the piece of land will be closely monitored by its shareholders, who have seen the value of their investments decline over the years. Over the last one year, Magna Prima’s share price has fallen 21.9% to 50 sen as at last Thursday, giving it a market capitalisation of RM201 million.  

 

Largest shareholder Hua Yang reviewing options to realise best returns

Hua Yang Bhd — Magna Prima Bhd’s largest shareholder, with a 25.78% stake — says it is constantly reviewing options to realise the best returns for its investment in the ailing property development group.

Asked whether Hua Yang was concerned about the financial and operational performance of Magna Prima, Hua Yang CEO Ho Wen Yan, in emailed responses to questions from The Edge, says: “Hua Yang monitors the financial and operational performance of Magna Prima, as we are still accountable to our stakeholders. The current management at Magna Prima has taken steps to improve the situation.”

He adds that the steps Magna Prima’s management has taken to improve the financial situation has resulted in the uplifting of the receivership on Magna Ecocity Sdn Bhd being, which has allowed the group to enter into a joint venture with OCR Avenue Sdn Bhd for a joint development in Shah Alam. This will eventually drive Magna Prima’s business, says Ho.

“Last year, Magna Prima successfully placed out 20% of its paid-up capital and that has improved its overall cash flow position. Magna Prima still has avenues to raise funds,” he says, when asked whether the group could still fund its business.

Hua Yang also believes Magna Prima’s valuable assets, such as the Jalan Ampang land and several other pieces of land in prime areas of the Klang Valley, will help the group turn around and create value for its shareholders.

Ho says these land parcels — 5.25 acres in Section 13, Shah Alam; 6.95 acres in Jalan Gasing, Petaling Jaya; and the Jalan Ampang land — along with 266 serviced apartments in Kepong, have a carrying value of at least RM483 million.

Hua Yang was trading at 21.5 sen a share last Thursday, valuing the group at RM76 million. Meanwhile, at Magna Prima’s market capitalisation of RM201 million as at last Thursday, Hua Yang’s 25.78% stake in the group is worth RM51.82 million.  

Hua Yang, a developer of affordable housing, bought a 10.8% stake in Magna Prima in January 2017 for RM66.6 million. Three months later, the group bought a 20.12% stake for RM123.75 million.

 

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