Keuro-By Serious Investing

Will IJM continue to shortchange Kumpulan Europlus' shareholders?

I can tell you I have been monitoring and spending too much time on this. Who is Kumpulan Euro ("Keuro") in the first place - not too long ago (that is more than 10 years), it was Larut, and of course the controlling shareholder is whom many depressed house buyers in Klang Valley would know - Tan Sri Chan Ah Chye. Where many housing projects were (and are) doing well, Keuro has failed because in many instances it failed to deliver.

(Note that I am not writing this on behalf of Chan Ah Chye but for the minority shareholders. The shortchanging, I feel is not only onto the largest shareholder but all the other minority shareholders.)

Keuro does not have the cashflow and namesake (Keuro and Talam's brand are worthless and they have been hiding under IJM brand) to deliver. What Keuro has not failed though is the assets and its accumulation during the 1990s and 2000s.

In the balance sheet of Keuro, it has three large assets:

1. 30% of Talam (or Trinity) - you can check the assets, despite it being a penny stock (at RM0.055), its Net Asset (before revision) is easily worth RM0.14 per share. I would not know how much if it is revalued as it has not been revalued for a long time;
2. then the Rimbayu (or formerly Canal City Construction Sdn Bhd). This is a large piece of 1870 acres of leasehold land in south Klang Valley which it effectively owns 35% (the other 35% being IJM Land). The first phase launch of some 500 units of landed houses (priced between RM550k to RM600k) was very well received with many more in the waiting list (and there is no DIBS or 5/95 plan in the project). Upon completion, this area is supposed to have 10,000 households with RM11 billion in Gross Development Value. To make the shareholders of Keuro excited, an adjacent land of 1,200 acres (which is also called Canal City) was sold to Tropicana Group by Selangor state government for RM1.3 billion recently, hence effectively valuing the land held by Rimbayu at some RM2 billion. How much Keuro had to pay for it back in 2004? Nothing. So you probably would not see anything in the balance sheet except for some accumulation of expenses for the project delivery. And since it is a JV with IJM, it is equity accounting the project (not consolidation, hence you are not seeing the effect from its project sales). At my soft guess, the land would have worth easily more than RM700 million to Keuro. Can you imagine, with the land being free, how much can the project bring in terms of profitability to the project owner? And best of all, in the balance sheet it shows nothing until revenue recognition;
3. now of course the most prized (with much fanfare) is the West Coast Expressway (WCE). Keuro has 80% of WCE and it has been awarded a 50 years concession by the government. If we are not so sure of what it is, WCE is almost parallel to the North-South Highway owned by PLUS linking Banting to Taiping (tolled road around 233 km). Hence, you can see it is the heavier traffic part of the linkage from north to south. How much would the concession be worth upon completion, that's the question? Since, there are very little details about the project, except for it being given a soft loan of RM2.24 billion of 4% interest by the government, its value may not be known to a lay shareholder like you and I. Much of the details are unknown, but what is announced is that since it is a public-private initiative, upon it reaching certain revenue threshold, 70% of the revenue will be used to pay off the government loan, until the loan is fully paid off. Upon that, the revenue sharing will be 30%:70% between WCE and government. On the valuation, just a note - PLUS (of which 84% of the revenue derived from North-South Highway) was sold to UEM and EPF for RM23 billion (tagged along with RM11 billion debt) in 2011 - hence effectively valuing PLUS at RM34 billion at enterprise value at that point of time. How much would you think a 233km concession along North-South be worth upon completion then? It is noteworthy that PLUS' North-South Highway is 840 km, but it also has portion which has lower traffic, i.e. the Penang - Bukit Kayu Hitam stretch.

With that 3 assets, how much would you think Keuro is worth? To me that is a tough question as one of its larger shareholder, IJM which also owns 23.8% of Keuro, has purchased assets of Keuro at amazingly low valuation. One should note though the partnership with IJM also comes with the good part as well, i.e. the delivery partner and the confidence that is associated with Keuro and Talam in the ability to complete projects. IJM has 20% of WCE in itself and through its 22% stake in Keuro, it is IJM's interest to keep the concession going as well as kickstarting Rimbayu and other land assets held through Talam. Why? For IJM, it is killing 2 birds with one stone, as besides owning the shares at low price, through Keuro, it will have continuous projects from Talam and Keuro's rich assets where the WCE project alone is going to be worth RM5.5 billion in terms of project value. Surely, IJM being the project owner and construction company would get a big chunk.

To kick start the WCE concession though, Keuro needs RM200 million as highlighted by the board yesterday. That is something which Keuro does not have, and has always been a problem for the company. If I am IJM, I would of course continue to retain that, as a hungry and weak partner will always needed me to catch and feed it with fish, rather than it catching the fish itself.

The value for Keuro is not in its financials. It is highly geared with little revenue to show.

Now, how did IJM went into Keuro in the first place? Back in 2007, when Keuro needed help, IJM took a 25% stake at RM0.28 per share - now that share is worth RM1.28 or 23.85% of Keuro's RM666 million market cap (and the value could probably be much more once the projects kickstart, in which case some like the Rimbayu project had). During the period until now, IJM has become a delivery partner to many of Keuro and Talam's projects and in the process got to buy an additional 10% of the Canal City Construction (from Keuro) at an amazingly low price of RM2 million in 2008 and 20% of WCE from a partner of Keuro (actually partly held through Chan Ah Chye's brother) at RM6.75 million. The RM2 million for 10% of Canal City was basically valuing the land at RM20 million. What is it worth now?

Hence, while Keuro benefited out of this (sort of partly rescued), the main beneficiary was IJM. Keuro remained to have poor liquidity. As said earlier, the WCE project will need RM200 million of capital injection by September with 3 months extension option. It needed to raise cash fast and as said, one of the options is to sell part of the Rimbayu project. I can only guess that the buyer is IJM as by doing that, it would be able to consolidate the financials from the Rimbayu project, and what more to do it off a hungry and weak partner at a low price? (Note that under IFRS10, IJM should be able to consolidate the Rimbayu project as at now as it seems to have full control over the project) 

If I am a shareholder, I would prefer the equity fund raising option for Keuro but I just could not understand why it took them so long to raise the needed RM200 million after 7 months since the concession was signed in January 2013. Probably IJM was the hyena, that was just waiting to have more flesh out of them...perhaps? Why not let it be hungry as long as it is still alive! I am just wondering, after all these while why the need to sell the assets of Rimbayu as one of the options...

I am sure given the proper explanation and the partners that are involved, raising the RM200 million equity would not be that difficult, but the work (as I see it) is not planned properly. 

In previous times, any fund raising would just dilute the shareholders (which is the case why the fund raising has been dragged, as they may not want it or may not have the funds for it), but new shareholders with more firepower would allow rights issue to be done and Keuro (and Talam for that matter) needs to do rights issue rather than private placements. Hard land assets is worthless without the funds to deliver - that's the POINT. UNLESS OF COURSE YOU SELL THE ASSETS.

The latest news however, a probable stronger shareholder in town (MWE) which has some RM350 million cash in its coffer would probably have a bigger voice once the shares from Chan Ah Chye changed hands and perhaps IJM may not just bully the very weak Keuro anymore, as we have witnessed in the past. It will then has a stronger shareholder to content with, and that's hopefully better for the minorities. What is more important though is making sure of the money needed for the WCE project is resolved for now, and Keuro is running out of time to get it done.

To be fair to IJM, it has forwarded some RM200 million interest-bearing loan for kickstarting the Rimbayu project. Without that, it can't even commence.

Disclaimer: These are entirely my opinion and observation and it may not be fully accurate.