IJM’s stand on MWE’s entry into K-Euro

By Jose Barrock

In the third part of our series on MWE Holdings buying into Kumpulan Europlus, KiniBiz looks at the impact of the new entrant on construction giant IJM Corp, the second largest shareholder in Kumpulan Europlus. In a brief meeting with KiniBiz, IJM’s executive deputy chairman Krishnan Tan Boon Seng shares his thoughts on the new deal.  

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At the outset, it looked as though the possible entry of MWE Holdings into Kumpulan Europlus (K-Euro) with 27% equity interest may have triggered a negative response from IJM Corp, which now has about 23.6% in K-Euro.

A day prior to the announcement of MWE’s proposed entry, IJM mopped up some 4.6 million shares or 0.9% of K-Euro from the open market, nudging the construction giants shareholding up to 23.85% in K-Euro.

Prior to this large acquisition IJM had only nibbled at K-Euro’s stock buying a few thousand shares.

However IJM’s executive deputy chairman Krishan Tan Boon Seng cleared the air on the notion of hostility between the two parties.

“We welcome them (MWE)…there’s no hostility whatsoever, IJM welcomes it (the entry of MWE),” he told KiniBiz.

Tan added that with MWE coming into K-Euro, there was a strong possibility that the West Coast Expressway (WCE) in which K-Euro has an 80% interest (IJM controls the remaining 20%) would finally kick off.

While Tan does not disclose details, insiders say that overtures were made by mutual friends asking if IJM would mind the entry of MWE, to which the construction giant did not object.

With a market capitalisation in excess of RM8 billion, and the Employees Provident Fund (EPF) being the largest shareholder with some 11.5%, IJM cannot be taken lightly.

IJM’s stance

Nevertheless for IJM, the entry of MWE should bode well. MWE’s entry will mean the exit of Chan Ah Chye who is currently K-Euro’s largest shareholder with 27%.

Chan was basically a stumbling block, and prevented K-Euro from raising funds for the WCE.

With his financial limitations Chan would have been unable to subscribe to a rights issue or any other cash call mechanisms proposed for the WCE. With Chan’s exit the WCE seems almost certain to kick off by year end at least.

While Chan’s lack of financial clout has hindered K-Euro’s and WCE’s progress, IJM has been very cautious, not looking to expose itself excessively to K-Euro.

“The project is worth in excess of RM6 billion… what if something goes wrong? Tan asked KiniBiz.

IJM has a direct 20% stake in WCE and 80% indirectly via its 23.6% stake in K-Euro.

This gives IJM an effective stake of about 38.9%, which still makes WCE an associate company, thus not requiring any consolidation of profits or losses, as well as debts.

It is also noteworthy that IJM has not exercised an option for an additional five percent in K-Euro, when it bought into the company back in August 2007. IJM had acquired the block from Chan at 28 sen a share.

There was a massive sell down of IJM’s stock in the late 1990’s—during the financial crisis—when foreign funds dumped the company’s stock, stating high debt levels among other reasons for the offloading.

“A debt can be ring fenced, or tied to a project, but when there is an impetus to sell, there is no explanation you can give to prevent a shareholder from selling…we’ve seen it all at IJM,” Tan explains.

For its financial year ended March 2013, IJM posted net profits of RM420.9 million on the back of RM4.7 billion in revenue. Earnings per share for the year in review stood at 30.46 sen.

“We also have to be wary, all concessions will suffer losses in the first few years…things will pick up when the debts are reduced,” Tan added.

An analyst from a local bank-backed brokerage said that he estimates the WCE to suffer losses for the first five years of its operations.

A fund manager from a Singaporean outfit concurs. “IJM stands to benefit from the construction profits, but in the early years, maybe the first five years at least K-Euro is unlikely to book any profits,” he said.

But it is noteworthy that IJM with pre-tax profits in excess of RM800 million a year will unlikely be overly reliant on its 23.6% in K-Euro to keep it afloat.

At present IJM’s order book stands at about RM4 billion, but this could double once the jobs from the WCE start trickling in.

MWE needs IJM as well

While IJM may be comfortable with the entry of MWE, it is also apparent that MWE will be banking on IJM’s expertise.

MWE has some experience in property development, via its wholly owned MWE Properties Sdn Bhd, but it is a much smaller outfit than IJM.

It is not clear if MWE Properties has the capacity to undertake such jobs as the massive RM11 billion property development project held under Radiant Pillar Sdn Bhd which is equally owned by IJM and K-Euro. Radiant Pillar wholly owns Bandar Rimbayu Sdn Bhd which is developing a 1,800-acre tract of land in Shah Alam.

Also, under MWE Properties is 51% controlled MWE Macadam Sdn Bhd, a construction outfit. However it is unlikely that the company will play much of a role in the construction of the RM6 billion WCE.

According to MWE’s notes which accompany its financials, its property development arm registered revenues of RM10.5 million and a profit of RM614,000 for its first three months of FY2013 ended March. The construction arms profits are likely to have been consolidated into that of its property arm.

During the three months in review, MWE posted net profits of RM4.7 million from RM86.9 million in sales.

“Basically K-Euro has potentially two revenue generating arms, the 80% controlled WCE which is at the last leg of getting financing sorted out, and the property development arm, held under 50% owned Radiant Pillar.

“IJM plays a key role in both (K-Euro’s businesses), with 20% equity interest in WCE and 50% in Radiant Pillar…basically IJM is already entrenched in K-Euro,” the analyst from the bank backed brokerage said.

For the near term at least, Chan’s exit seems likely to pave the way for K-Euro to commence work on the WCE, and chalk up earnings from its property development project.

While IJM may be the larger of the two companies and playing the starring role, MWE’s 33% shareholder is Surin Upatkoon, who was stated to be Malaysia’s 18th richest individual by Forbes in February this year with a net worth estimated at US$805 million.

Surin’s flagship is Magnum or what was formerly known as Multi-Purpose Holdings, a company with interests in gaming, properties and insurance among others.

In a nutshell, Surin is not to be taken lightly as well.

While IJM’s Tan said that the construction giant is comfortable with the entry of MWE, time will tell whether there will be any friction between the two, much like the old Chinese proverb that says, one hill cannot shelter two tigers.

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Tomorrow: MWE breaks its silence

Yesterday: Will K-Euro and WCE take off?