Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on August 15, 2022 - August 21, 2022

PENANG-based Ivory Properties Group Bhd’s descent into Practice Note 17 (PN17) status — the first property firm to do so since the outbreak of Covid-19 — has prompted concerns that the operating landscape in the lacklustre property sector may be worsening.

But is this really the case or more a matter of recent decisions taken by Ivory that have placed it in this situation?

“Ivory’s admission into PN17 is not entirely because of a market slowdown … In this challenging environment, other property developers are trying to manage their inventories, but it seems Ivory has to do more,” an industry observer tells The Edge.

Another industry observer says divestment of land bank could be an immediate solution for cash-strapped companies such as Ivory, but adds, “However, it is not a sustainable way because you can’t just keep selling, you have to develop the land for sales.”

Ivory has two pieces of vacant land in Penang with a total value of RM132.77 million, according to its latest annual report.

When contacted, Ivory declined to comment. “The management has decided to put all interviews on hold at the moment,” its spokesperson said.

To regularise its financial position, Ivory has to formulate and submit a restructuring plan to the authorities by end-July 2023.

Interestingly, on Aug 2 — a day after Ivory announced its admission into PN17 — founder and CEO Datuk Low Eng Hock offloaded 3.03 million shares, or a 0.62% stake in the company, to “rectify personal margin account position” by Kenanga Nominees (Tempatan) Sdn Bhd and Maybank Nominees (Tempatan) Sdn Bhd, according to the group’s filings with Bursa Malaysia.

The first block of 50,000 shares was sold at seven sen per share, and the second block of 2.98 million shares at 4.5 sen apiece, for a total disposal sum of RM137,658.50. Low currently holds a direct stake of 42.21% and an indirect stake of 5.76% in the group.

Ivory’s market value has plunged to a mere RM27 million based on its closing price of 5.5 sen last Friday, compared with RM186 million when it was listed on the Main Market of Bursa Malaysia 12 years ago.

Because of financial constraints, Ivory has defaulted on RM1.89 million in payments due to CIMB Bank Bhd, Bank Islam Malaysia Bhd and Bay Commercial Services Sdn Bhd, it told Bursa Malaysia in an announcement last Monday.

“The company is of the view that there shall be no significant impact on the business, both financially and operationally, with inclusion of the proposed capital raising exercise which is currently being formulated.”

Note that Ivory’s proposed private placement to raise RM14.2 million has yet to be completed as it was granted a six-month extension to Oct 19 to complete the corporate exercise.

Ivory’s auditors Messrs KPMG PLT had flagged material uncertainties over the property company’s ability to continue as a going concern in view of its liabilities exceeding current assets by RM60.22 million.

For the financial year ended March 31 (FY2022), Ivory’s net loss narrowed slightly to RM79.51 million from RM84.22 million in FY2021, when it recorded a one-off RM40.1 million impairment loss. The substantial sale cancellations involving 52 sale and purchase agreements led to a gross loss of RM17.5 million in FY2021.

Ivory has been in the red since FY2020 as it failed to achieve the desired revenue to sustain its operating costs. The group’s cash and bank balances as at March 2022 stood at RM1.67 million, with negative operating cash flow of RM8.9 million.

Adding to Ivory’s financial woes is the difficulty in obtaining financing as well as the termination of certain agreements and forfeiture of deposits.

Questions were raised previously as to why Ivory entered into a deal to acquire a 4.9-acre piece of freehold land on Penang island for RM142.8 million after Covid-19 broke out.

The transaction was eventually terminated in September 2021 as it could not meet the balance of the financial obligations within the stipulated time, resulting in a deposit forfeiture of RM14.3 million.

And in another deal, Ivory’s ability to provide a RM1 billion corporate guarantee in relation to a development near the proposed new international airport in Kulim, Kedah, is also under scrutiny.

Again, the deal was struck during the pandemic. In August 2021, Ivory entered into a binding term sheet with ECK Group to jointly develop 135 acres of residential land. The deal called for Ivory to provide a RM1 billion corporate guarantee in favour of KXP AirportCity Holdings Sdn Bhd — a subsidiary of Kedah Development Corp — for the due performance and observance of ECK’s obligation under the airport project.

No definitive agreement has been executed so far. The corporate guarantee was only valid until July 31 this year, according to the initial announcement. Given the tough financial position, it is likely that the deal may not take off.

Another key question is whether Ivory has sufficient cash to proceed with its property developments. Ongoing projects include The Wave (RM504 million gross development value [GDV]), which forms Phase 3 of multi-phase development Penang Times Square. The upcoming Phase 4 and 5 expansion plans carry a GDV of RM722 million.

In total, Ivory has 86 acres of development land (including joint-venture development rights) in Penang and the Klang Valley. Its upcoming projects are The Millennium (RM985 million GDV), Crown Penang (RM375 million) and The Gardens (RM316 million) in Penang; Avenue 8 Residence (RM354 million GDV) and Grand Connaught (RM904 million) in Kuala Lumpur.

As at end-March 2022, the carrying amount of its assets stood at RM227.75 million, with its net assets per share at 47.64 sen.

Worsening property outlook?

Though the property industry outlook remains sluggish, an analyst with a bank-backed research house is hopeful of a pick-up in the financial performance of property players when uncertainties surrounding raw material prices and the general election ease.

“Sales are still okay for the market, but rising raw material cost is a main concern. So, we can’t really see good earnings among the developers. Raw material prices may remain elevated this year because of the ongoing Russia-Ukraine war, China’s zero Covid policy and Taiwan Strait tensions.”

Another property analyst stresses that developers need to be prudent, and at the same time launch appropriate products to target the right buyers in view of increasing credit risk.

As things stand, the property glut does not appear to be abating. MIDF Research expects the issue of oversupply to persist as the number of residential overhang units remains high with more than 30,000 in 1Q2022.

“The increase in overhang units could be attributed to the disruption of economic activity from several lockdowns in Malaysia … Nevertheless, the situation showed signs of easing on a sequential basis as it eased marginally to 35,592 units in 1Q2022 from 36,863 units in 4Q2021,” it says in an Aug 12 note.

 

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