We refer to our announcement dated 25 April in relation to the Proposed Acquisition (“Announcement”).
All abbreviations and definitions used herein shall have the same meanings as the words and expressions defined in the Announcement, except where the context otherwise requires or where otherwise defined herein.
The Board wishes to provide the following additional information in relation to the Proposed Acquisition:
i. The name of the directors of KDSB
The directors of KDSB are Lim Lam Seng (NRIC No. 600907-08-5735) and Chong Seu Ling (NRIC No. 321115-08-5037).
ii. Brief history of KDSB including its commencement date of operation and the details of the property development projects completed, including the project name, gross development value etc.
KDSB was established in 19 May 1994 and commenced business in year 1999. The current issued and paid-up share capital of KDSB is RM5,000,000 divided into 5,000,000 ordinary shares of RM1.00 each.
KDSB is the sole owner of the piece of land in its entirety, located at KM14, Jalan Tuaran, Kota Kinabalu, Sabah (“the Land”).
To date KDSB has successfully completed four (4) Joint Venture Projects on the Land listed as below:-
Item |
Contract Project Title | Gross Development Value (RM) | Contract Period |
Remark |
1. |
Steel Industries Development Project |
2,979,504.00 |
May 2007 –Dec 2011 | OC* Obtained Dec 2011 |
2. | Proposed 35 units of 2 Storey residential Houses, Taman Seri Pelangi 1, at KM13 , Jalan Tuaran, Kota Kinabalu |
15,363,000.00 | May 2007 - Apr 2010 | OC* Obtained 14.04.2010 |
3. | Proposed 24 units of 2 Storey residential Houses, Taman Seri Pelangi 2A, at KM13 , Jalan Tuaran, Kota Kinabalu |
17,240,000.00 | Jun 2010 - Jun 2012 | OC* Obtained 06.06.2012 |
4. | Proposed 15 units of 2 Storey residential Houses, Taman Seri Pelangi 2B, at KM13 , Jalan Tuaran, Kota Kinabalu |
11,760,000.00 | Aug 2011 - Jul 2013 | OC* Obtained 04.02.2014 |
* oc stands for Occupation Certificates. An OC verifies that the Principal Certifying Authority (in Sabah is the Dewan Bandaraya Kota Kinabalu (“DBKK”) is satisfied that the building is suitable for occupation.
iii. To specify the net profit/loss after tax and net assets/liabilities based on the latest audited financial statements.
Based on the audited financial statements of KDSB for financial year ended 31 December 2012, KDSB’s net loss and net current liabilities is RM0.34 million and RM1.23 million respectively.
iv. Detailed information on the development projects pursuant to Items (1) and (4) of Appendix 10A, Part C of the Main Market Listing Requirements
KDSB holds in possession of three (3) adjoining parcels of land under CL015018621 (“Land 1”), CL015012470 (“Land 2”) and CL015263466 (“Land 3”) situated at KM14, Jalan Tuaran, in the District of Kota Kinabalu, Sabah (collectively, referred to as the “Land”).
The Land was subsequently subdivided into several titles for several projects. The title allocated and registered in the name of KDSB are as below. All information are extracted from the valuation report, as appraised by JS Valuer Property as at 3 August 2011 for a market value of RM 36,574,000.00 using two (2) methods of valuation (ie.: Comparison Method of valuation and Residual Method of valuation)
Title Nos. | Land area |
CL015633815 | 3,653.90 |
CL015633824 | 1,792.30 |
CL015633860 | 47,577.30 |
CL015633879 | 3128.50 |
CL015633833 | 3125.30 |
CL015633379 | 905.5 |
CL015633388 | 601.9 |
Total | 60,784.70 |
The above land titles exclude the two (2) completed/disposed projects as listed below.
Phase | Particulars | Land area ( acres) | Status of project |
Ph 1a & 1b | 2 storey terraced houses | 9.22 | Completed |
Ph 1C | 2 storey detached houses (2 units) | 0.37 | Marked for future development |
Ph 2a & 2b | 7 & 14 storey condominium (738 units) landscape “A & B” and Turfing area 6.1 m wide carriageway 20m wide road reserve Sewerage treatment Plant | 13.39 | In progress discussion & negotiation |
Ph 2 C | 2 storey link- detached house (5 units) landscape and turfing area | 0.72 | In progress discussion & negotiation |
Ph 3 | 13 storey link-detached & hotel suite 6.7 m wide carriageway and carpark open space and turfing area | 2.02 | Joint Development with Bina Puri Properties Sdn. Bhd. |
Ph 4 | Future Development | 3.05 | Disposed in 2007 |
| TOTAL | 28.77 |
|
Subsequently, KDSB had appointed the following valuers to revalue the balance of land as below:
(1) CH William Talhar & Wong (S) Sdn Bhd on 20th January 2014 for both Ph 2 a & 2b and also Ph 2 C with a market value of RM 41,500,000.00 for a total area of 13.478 acres. Method of valuation is Comparison Method of valuation; and
(2) JS Valuer Property Consultants (EM) Sdn. Bhd. dated 17th July 2013 for Ph 3 for a market value of RM 8,524,000.00 for a total area of 7,976.30 square meters. Method of valuation is Comparison Method of valuation.
Existing use | : | Commercial/residential land |
Terms of tenure | : | 1st January 2006 for a term of 99 years expiring on 2195 |
Encumbrances | : | N/A |
Restriction in interest | : | The Land cannot be transferred and/or charged without the relevant state authority’s consent |
Express condition | : | Commercial /Residential building |
Latest audited net book value
| : | RM3.403 million * Based on KDSB’s audited consolidated financial statements for the FYE 31 December 2012 |
KDSB has intended to develop the Land into a mixed commercial development with an estimated gross development value (“GDV”) of approximately RM595.8 million (“Proposed Development”).
Phase | Particulars | GDV | GDC | GDP |
Ph 1C | 2 storey detached houses(2 units) | 4 million | 2.8 million | 1.2 million |
Ph 2a & 2b | 7 & 14 storey condominium (738 units) landscape “A 7 B” and Turfing area 6.1 m wide carriageway 20m wide road reserve Sewerage treatment Plant | 563 Million | 337 million | 226 million |
Ph 2 C | 2 storey link- detached house (5 units) landscape and turfing area | 10.8 million | 7million | 3.8 million |
Ph 3 | 13 storey link-detached & hotel suite 6.7 m wide carriageway and carpark open space and turfing area | 18 million (profit guarantee) | Nil | 18 million |
| TOTAL | 595.8 million | 346.8 million | 249 million |
The total development cost is estimated at RM305.80 million (excluding land cost of RM41.0 million) with an estimated gross development profit of RM249 million. The development cost shall be funded through KDSB’s internally generated funds and/or bank borrowings.
The Proposed Development is expected to commence construction in 2014 with all the requisite approvals and span over a development period of six (6) years. As at the date of this announcement, the master development plan was approved on 7 July 2007 under the reference of OMA/KK287/DP1A Rev. P (the “DP”) and pending revalidation for project namely Ph 1C, Ph 2a & 2b, & Ph 2 C. The approved DP for Ph 3 was prepared by Arkitek Daniel Koh vide reference Drawing nos. ADK1009/sp/101/e dated April 2010 and ADK1009/ASC-COM/201A-211A dated October 2010 and also DBKK’s letter dated September 2010.
The Proposed Development is still in its initial planning stage and therefore, the above information is preliminary at this juncture and may be subject to further refinement. Therefore, the estimated development cost and estimated development profit may vary depending on the finalised master plan for the Proposed Development as well as the prevailing market conditions.
v. Further clarification on how the valuation range between RM89.86 million and RM95.97 million were determined, including the detailed assumptions used by the Independent Valuer
The ascribed fair value range was ascertained by discounting the net cash flow from which KDSB would achieve from the development projects. In this instance, the net cash flow were derived from the revenue to be obtained from the sales of the development units less the development costs for the development projects and subsequently discounted at an appropriate discount rate, being the weighted average cost of capital (“WACC”) of KDSB which ranged from 15.34% and 17.25%.
In arriving at the valuation, the Independent Valuer had taken into consideration the following bases and critical assumptions:
(i) the return from the development of the 13-storey commercial and home suite, i.e. 8 Avenue, on the subject lands is estimated based on the development agreement signed between KDSB and Bina Puri Properties Sdn. Bhd. on 14 June 2013 as listed in Part IV of this reply;
(ii) the discount rate of 15.34% and 17.25%, based on KDSB’s WACC, computed using the Capital Asset Pricing Model (“CAPM”) and using rates obtained from companies listed on the Main Market of Bursa Malaysia Securities Berhad which are in similar business as KDSB as surrogates. Additionally, there is also a premium of between 30% and 50% imputed in arriving at the WACC, to account for the higher premium attached to the non-marketability of KDSB shares;
(iii) the cost of development are estimated by the Directors of KDSB as the following:
Condominium:
Construction cost at approximately 46% of the GDV;
Professional fees at 5% of the construction cost;
Sales and marketing costs is at 1.70% of the GDV; and
Developer expenditure and finance costs are at 2% of the GDV.
Bungalow:
Construction cost at approximately 30% of the GDV;
Professional fees at 5% of the construction cost;
Sales and marketing costs is at 2% of the GDV;
Statutory development charges and contributions is at 3% of the GDV; and
Developer expenditure and finance costs are at 2% of the GDV;
(iv) The debt to equity ratio is estimated at 50:50; and
(v) The cost of debts is estimated at 1.25% plus Base Lending Rate. The Base Lending Rate is estimated at 6.60%.
Based on the foregoing, the fair value of on KDSB’s development projects is between RM89.86 million and RM95.97 million
vi. Basis/ justification for the Independent Valuer in using the DCF valuation methodology to determine the valuation of the development projects
In determining the valuation of the development projects, the Independent Valuer had adopted the DCF valuation methodology. In this instance, the DCF approach is highly regarded for the valuation of assets/businesses which generate income. As such, value is measured by the present value of the net economic benefit over the life of the asset/business.
Furthermore, the DCF approach measures the value of an enterprise owning a right of development based on the forecast and projected free cash flows (as opposed to profits) of the enterprise, discounted to the present date. This variation of the DCF approach places emphasis on the net cash generated by projects and/or the business, and assumes a fair discounted rate of return.
The DCF approach is also often used in the valuation of intangible assets, which includes the right of development, which can be reviewed as a separate cash generating unit on its own.
vii. Quantification of the adjusted Net Assets of KDSB based on the latest audited financial statements after taking into consideration the valuation of the development projects
The Directors of KDSB do not expect the valuation of the development projects would have any effect to the Net Assets of KDSB on the latest audit financial statements as the land held for development as shown as part of the non-current assets in the financial statements of KDSB will continued to be carried at cost less any accumulated impairment, if there is any, pursuant to the requirement of FRS 136, as recommended by paragraph 13 of FRS 201.
viii. The principal activities of Bestempire Limited
Bestempire Limited is an Investment Holding Company.
ix. Given that KDSB currently does not generate any profit, to justify the statement that “the Proposed Acquisition is expected to diversify the Company’s earnings base and contribute positively to the revenue and profitability of Halex and its subsidiaries in the future”
Notwithstanding that KDSB currently does not generate any profit, given the potential demand for residential and commercial properties, the relatively strategic location and accessibility of the Land and its contemplated development plans that intends to meet the market trends and demand, when launched is expected diversify the Company’s earnings base and contribute positively to the revenue and profitability of Halex and its subsidiaries in the future.
x. The effect of the Group’s gearing assuming that the Proposed Acquisitions will be fully financed by bank borrowings
For illustrative purposes only, based on the audited consolidated statement of financial position of Halex as at 30 September 2013 and on the assumption that the Proposed Acquisition is to be fully financed by bank borrowings and completed as at that date, the proforma effects of the Proposed Acquisition on the gearing of Halex Group is set out below:-
| Audited as at 30 September 2013 | After the Proposed Acquisition |
| (RM’000) | (RM’000) |
|
|
|
Interest-bearing borrowings | 1,054 | 23,054 |
Gross gearing (times) | 0.01 | 0.25 |
Net gearing (times) | Net cash | 0.17 |
xi. To specify “all aspects” of the Proposed Acquisition, that were considered by the Board of Directors in arriving at its opinion that the Proposed Acquisition is in the best interest of the Company
The Board, after careful deliberation and taking into consideration of all aspects of the Proposed Acquisition, including but not limited to the rationale, financial effects, valuations, risk factors and mitigating measures and the prospects of the Proposed Acquisition is of the opinion that the Proposed Acquisition is in the best interests of the Halex Group.
This announcement is dated 30 April 2014.
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