BACKGROUND OF THE CASE

Johor Corporation is spoilt for choice when it comes to unlocking the value of its assets

to settle the RM3.6 billion debt that matures in July 2012. The state-owned group has many

options at its disposal, with RM2.1 billion worth of assets available for sale, to meet its debt

obligations. There has been much speculation lately that Johor Corporation may be looking to

sell its prized assets including Kulim (M) Bhd to address its debt woes.

Its new president and chief executive Kamaruzzaman Abu Kassim says the RM3.6 billion

debt burden is unsustainable and the group aims to bring it down to RM1 billion to RM1.5

billion, which means it is looking at settling as much as RM2.6 billion of the amount due. The

group already have 70% of that amount planned, which works out to RM1.82 billion and the

remaining 30% will come from sales from its stable of local and foreign assets.

The RM3.6 billion in bonds coming due next year has fuelled speculation that it would

sell assets to settle the debt. Indeed, last November, three offers were made for KFC Holdings

and QSR, all of which were turned down. JCorp had engaged CIMB Investment Bank and

Maybank Investment Bank as advisors in the debt restructuring. Kamaruzzaman notes that the

bankers have shortlisted assets that the group should sell or keep. He stressed that JCorp will

select and keep assets that can be developed to generate recurring income for the group.

JCorp may even list some of the businesses within the group, but the objective of any

listing would not be to raise capital to settle its debts but for these entities to meet their own

financial needs. Among the businesses slate to be listed is EA Technique (M) Sdn Bhd, a

shipping company held by Sindora Bhd, Kulim main market-listed 75.2% subsidiary.

Kamaruzzaman acknowledges that there have been a number of related party transactions

within the group, but points out that that JCorp has many land holdings in strategic locations and

the KFC restaurant business has targets to meet in terms of the number of new outlets to be

added each year under its franchise agreement with YUM! Brands Inc. JCorp also owned a vast

land bank comprising industrial, commercial and residential lands as well as hotel properties in

Johor. It have industrial property valued at RM1.3 billion, classified as assets held for sale and

commercial land valued at RM2.5 billion.

JCorp aims to unlock the value or develop these lands to generate income for the group.

It believes its close relationship with the state government will be an advantage, especially in

obtaining approvals to develop the land as its objectives are aligned with the state. The group

were spoilt for choices where there are many things can be chose from and which in short, JCorp

must continue in its developmental role with the state government as the group were now

become the prime FDI agent for the state.

As for Ekovest Bhd, an industry source say the group are interested to bidding on Kulim

which were controlled by Johor businessman, Datuk Lim Kang Hoo. The bid are curiously been

issued, considering that Ekovest is a small company attempting to acquire another many times

larger capitalization. As for now, the market capitalization for Ekovest was RM606.11 million,

compared to Kulim’s RM4.43 billion.

Lim, who controls 25.4% of Ekovest, also sits on the board of two other listed companies,

namely Knusford Bhd and PLS Plantations Bhd. Another substantial shareholder of Ekovest is

one Khoo Nang Seng, who has a direct 10.23%. When queried by Singapore's Business Times

on his interest in PMP, Ekovest's Lim had reportedly replied, `I'm a businessman and if I see a

good investment opportunity, I will invest.'

Is it possible for Ekovest Bhd to take over Kulim? What are the benefits that Ekovest will

get from the acquisition? How does Ekovest plan to fund the takeover?

EKOVEST BERHAD

Ekovest, the name synonymous with building construction and civil engineering works

was formed by a group of highly enterprising and self-motivated individuals and highly qualified

experienced professionals.

On 2nd January 1985, the founders started Ekovest Bina Sdn. Bhd. and this signaled the

involvement in bigger and more technically demanding engineering projects. This name was

later changed to Ekovest Sdn. Bhd. Following its conversion to a public listed company and

listing in KLSE on 28th August 1992, it assumed its new name – Ekovest Berhad. Since then,

Ekovest Berhad has emerged as one of the leading construction companies in the country

involved in major civil engineering and building works such as turnkey, design and build

projects and project management.

KULIM (M) BHD

Kulim (Malaysia) Berhad, through its subsidiaries, engages in oil palm plantation,

investment holding, and property investment businesses in Malaysia. The company’s plantation

operations comprise oil palm planting, crude palm oil processing and plantation, and

management and consultancy services. It also manufactures and sells oleo chemicals and rubber

products; operates quick service restaurants, such as Pizza Hut and Ayamas outlets; engages in

sea transportation, parking management, sale of wood-based products, and bulk mailing and

printing services; and involves in property investment business, which include property letting.

In addition, the company assembles mechanical and agricultural equipment; produces oil

palm clones by plant tissue culture technology; trades and distributes tropical fruits; operates

palm oil mills and plantations, and rubber estates; cultivates sugar cane, pineapples, and other

agricultural products; conducts in-house and external training programs; breeds and sells cattle;

manufactures biodiesel; produces oil palm seeds and sells germinated oil palm seeds; and trades

a granular synthetic bone graft, GranuMas.

Further, it offers facilities maintenance, and project and construction services; field

clearing, earthwork, road construction, and resurfacing services; and landholding services, as

well as manufactures esters, soap noodles, and palm wax. The company also trades parking and

related transportation equipment, and wood products; and processes and sells sawn timber and

timber doors, as well as operates as a forwarding agent. It has operations in Papua New Guinea,

Indonesia, Malaysia, the United States, China, Japan, and the Netherlands. The company was

incorporated in 1933 and is based in Johor Bahru, Malaysia. Kulim (Malaysia) Berhad is a

subsidiary of Johor Corporation.

EXHIBIT 1 CORPORATE STRUCTURE OF EKOVEST BERHAD

EXHIBIT 2 PROJECTS COMPLETED BY EKOVEST BHD

Item Projects1 Labuan Financial Park2 Fitting out of Petronas Twin Tower3 Universiti Malaysia Sabah4 Office Buildings at Putrajaya and infrastructure5 Office Buildings for Petronas Carigali in Lutong6 KLIA Central Terminal Areas Road and Structure7 Danga Bay8 KL Central Station and related infrastructure9 Universiti Tun Hussein Onn Malaysia (UTHM)10 DUKE Highway

EXHIBIT 3 CORPORATE STRUCTURE OF KULIM (M) BHD

EXHIBIT 4 FINANCIAL INFORMATION OF KULIM (M) BHD

Ratio Performance

2009 2008 2007 2006Profitability RatioReturn on Equity 4.326 10.809 17.458 5.246Return on Total Assets 1.806 5.306 9.283 2.745

Investment RatioP/E Ratio 15.989 3.913 5.268 10.824Dividend Yield 2.384 3.275 1.887 1.923Dividend Payout 0.381 0.128 0.099 0.208

Liquidity RatioCurrent Ratio 1.305 1.375 1.699 1.088Quick Ratio 0.928 1.011 1.487 0.816

Financial Leverage RatioTotal Debt Equity Ratio 0.506 0.451 0.355 0.336Debt Ratio 0.891 0.723 0.623 0.758

Performance/Market RatioGross EPS (Sen) 47.22 117.04 150.91 48.04Dividend (Sen) 18.00 15.00 15.00 10.00

Income Statement (RM’000)

2009 2008 2007 2006

Sales Revenues 5806205.0 3989338.0 2741489.0 1836531.0Operating Profit 582359.0 660325.0 416562.0 166690.0Profit/loss Before Tax 521865.0 667850.0 558793.0 221558.0Taxation -169954.0 -141297.0 -125971.0 -51617.0Profit After Tax 351911.0 526553.0 432822.0 169941.0Extraordinary Items 0.0 0.0 82252.0 0.0Minority Interest -206074.0 -175325.0 0.0 -42292.0Net Profit/loss To Shareholders

145837.0 351228.0 515074.0 127649.0

Gross EPS (Sen) 47.22 117.04 150.91 48.04Dividend (Sen) 18.00 15.00 15.00 10.00

Balance Sheet (RM’000)

2009 2008 2007 2006CURRENT ASSETSCash And Bank Balances 405227.0 445476.0 648307.0 138917.0Short Term Investment 33669.0 27368.0 112205.0 7807.0Stocks 525883.0 388598.0 199227.0 172881.0Debtors / Receivables 790506.0 548909.0 615481.0 316078.0Other Current Assets 62040.0 56133.0 19477.0 55776.0TOTAL CURRENT ASSETS 1817325.0 1466484.0 1594697.0 691459.0

CURRENT LIABILITIESShort-term Loans 547747.0 566229.0 624642.0 389106.0Creditors / Payables 705908.0 361260.0 288818.0 243750.0Taxation 114620.0 122101.0 25052.0 2626.0Dividends 23426.0 16768.0 0.0 0.0Other Current Liabilities 401.0 0.0 0.0 0.0TOTAL CURRENT LIABILITIES 1392102.0 1066358.0 938512.0 635482.0

NET CURRENT ASSETS 425223.0 400126.0 656185.0 55977.0

LONG-TERM ASSETSProperty, Plant and Equipment 5291495.0 4184458.0 3117238.0 3216894.0Investments 60269.0 640664.0 542919.0 454266.0Intangible Assets 891691.0 320906.0 288159.0 285029.0Other Long Term Assets 13278.0 7447.0 5297.0 2595.0TOTAL LONG-TERM ASSETS 6256733.0 5153475.0 3953613.0 3958784.0

SHAREHOLDERS FUNDShare Capital 159336.0 154227.0 148545.0 137950.0Treasury Shares 0.0 0.0 0.0 0.0Reserves 3212029.0 3095086.0 2801734.0 2295514.0TOTAL SHAREHOLDERS FUND 3371365.0 3249313.0 2950279.0 2433464.0

MINORITY INTEREST 1699037.0 1020621.0 759739.0 373009.0LONG-TERM LIABILITIES 1611554.0 1283667.0 899780.0 1208288.0

Cash Flow Statement (RM’000)

2009 2008 2007 2006

Cash Flows From Operating Activities

628313.0 706541.0 470715.0 157332.0

Cash Flows From Investing Activities

-632855.0 -617793.0 79787.0 -238533.0

Cash Flows From Financing Activities

-45113.0 -324781.0 -26536.0 1668.0

Net Changes In Cash And Cash Equivalents

-49655.0 -236033.0 523966.0 -79533.0

Cash And Cash Equivalents Brought Forward

415038.0 628960.0 88597.0 168130.0

Cash And Cash Equivalents Carried Forward

365383.0 392927.0 612563.0 88597.0

EXHIBIT 5 FINANCIAL PERFORMANCES OF EKOVEST BERHAD

Ratio Performance

2010 2009 2008 2007Profitability RatioReturn on Equity 3.225 2.222 5.477 5.957Return on Total Assets 2.004 1.27 3.127 3.739

Investment RatioP/E Ratio 19.943 32.365 9.637 20.655Dividend Yield 3.546 3.205 4.386 1.887Dividend Payout 0.707 1.037 0.423 0.39

Liquidity RatioCurrent Ratio 1.116 1.12 1.218 1.612Quick Ratio 1.116 1.12 1.218 1.612

Financial Leverage RatioTotal Debt Equity Ratio 0.154 0.283 0.428 0.358Leverage Ratio 0.609 0.746 0.75 0.57

Performance RatioGross EPS (Sen) 7.07 4.82 11.83 12.83Dividend (Sen) 5.00 5.00 5.00 5.00

Income Statement (RM’000)

2010 2009 2008 2007

Turnover 217733.0 277759.0 442312.0 356601.0Operating Profit 23060.0 16317.0 29794.0 28792.0Profit/loss Before Tax 19567.0 10694.0 25838.0 25660.0Taxation -10659.0 -3872.0 -9081.0 -8237.0Profit After Tax 8908.0 6822.0 16757.0 17423.0Extraordinary Items 0.0 0.0 0.0 0.0Minority Interest 1191.0 4.0 -33.0 -82.0Net Profit/loss To Shareholders

10099.0 6826.0 16724.0 17341.0

Gross EPS (Sen) 7.07 4.82 11.83 12.83Dividend (Sen) 5.00 5.00 5.00 5.00

Balance Sheet (RM’000)

Balance Sheet (MYR '000) 2010 2009 2008 2007

CURRENT ASSETSCash And Bank Balances 75109.0 89803.0 94303.0 87612.0Short Term Investment 0.0 0.0 0.0 0.0Stocks 0.0 0.0 0.0 0.0Debtors / Receivables 127939.0 153439.0 169714.0 163810.0Other Current Assets 848.0 2403.0 2185.0 2446.0TOTAL CURRENT ASSETS 203896.0 245645.0 266202.0 253868.0

CURRENT LIABILITIESShort-term Loans 43544.0 80786.0 68965.0 49129.0Creditors / Payables 134974.0 138528.0 147090.0 105316.0Taxation 4247.0 66.0 2518.0 3070.0Dividends 0.0 0.0 0.0 0.0Other Current Liabilities 0.0 0.0 0.0 0.0TOTAL CURRENT LIABILITIES 182765.0 219380.0 218573.0 157515.0

NET CURRENT ASSETS 21131.0 26265.0 47629.0 96353.0

LONG-TERM ASSETS

Property, Plant And Equipment 134721.0 126371.0 98133.0 74873.0

Investments 165202.0 165481.0 170422.0 134966.0Intangible Assets 0.0 0.0 0.0 0.0Other Long Term Assets 0.0 0.0 39.0 27.0TOTAL LONG-TERM ASSETS 299923.0 291852.0 268594.0 209866.0

SHAREHOLDERS FUNDShare Capital 142889.0 141701.0 141388.0 138627.0Treasury Shares 0.0 0.0 0.0 0.0Reserves 170262.0 165481.0 163969.0 152476.0TOTAL SHAREHOLDERS FUND 313151.0 307182.0 305357.0 291103.0

MINORITY INTEREST 0.0 1191.0 395.0 6746.0LONG-TERM LIABILITIES 7903.0 9744.0 10471.0 8370.0

Cash Flow Statement (RM’000)

Cash flow Statement (MYR '000)

2010 2009 2008 2007

Cash Flows From Operating Activities

33583.0 13033.0 54791.0 109182.0

Cash Flows From Investing Activities

-17903.0 6963.0 -70012.0 -110230.0

Cash Flows From Financing Activities

-7202.0 -7079.0 -7073.0 3385.0

Net Changes In Cash And Cash Equivalents

8478.0 12917.0 -22294.0 2337.0

Cash And Cash Equivalents Brought Forward

-16127.0 -29044.0 -6750.0 -9087.0

Cash And Cash Equivalents Carried Forward

-7649.0 -16127.0 -29044.0 -6750.0

ANALYSIS AND EVALUATION

Ratio Performances

Ekovest Berhad

Liquidity ratios attempt to measure a company's ability to pay off its short-term debt

obligations. This is done by comparing a company's most liquid asset those that can be easily

converted to cash, its short-term liabilities. We decided to evaluate using current ratio, quick

ratio and net working capital. As we can see, there is a decreasing trend from year 2006 to 2010

whereby the ratio had a low increment. This indicates that it gets harder for Ekovest Berhad to

pay its short-term liabilities among the 5 years. Ekovest Berhad also will have difficulty meeting

running its operations, as well as meeting its obligations.

For activity ratios, we apply the average collection period. A lower average collection

period is seen as optimal, because this means that it does not take a company very long to turn its

receivables into cash. As we can see, the Ekovest Berhad has decreasing trend from 2006 to 2008

that indicates liquid account receivables that can be convert into cash quickly but its increase

from the year 2009 to 2010.

Profitability ratios much like the operational performance ratios, give users a good

understanding of how well the company utilized its resources in generating profit and

shareholder value. We decided to evaluate using return on assets, return on equity and net profit

margin. In general, the higher the percentage, the better because that means the company is doing

a good job using its assets to generate sales and using the investor money. Ekovest Berhad has

the increasing trend from year 2006 to 2007 and then decreased from year 2008 to 2009 before

slightly increase on 2010.

Debt ratios give investor a general idea of the company's overall debt load as well as its

mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a

company and its shareholders face. In general, the greater the amount of debt held by a company

the greater the financial risk of bankruptcy. We decided to evaluate using total debt and debt to

equity ratio. Ekovest Berhad has increasing trend of debt ratios from 2006 to 2009 that indicate

greater of financial risk and faced the bankruptcy but it slightly falls in 2010.

Market ratio ratios can be used by investors to estimate the attractiveness of a potential or

existing investment and get an idea of its valuation. The most well-know market ratio is the P/E

ratio, which compares the current price of company's shares to the amount of earnings it

generates. The purpose of this ratio is to give users a quick idea of how much they are paying for

each $1 of earnings. Ekovest Berhad has decreasing trend of P/E ratio from the year 2006 to

2010 that indicates the lower earnings growth in future.

Kulim (M) Berhad

For Liquidity Ratio, we decided to evaluate using current ratio, net working capital and

quick ratio. The reason why is because these ratios give an idea of the company’s ability to pay

back its short term liabilities with its short term assets. As we can see, there is an increasing trend

from year 2006 to 2009 whereby the ratio had a high increment but it falls to 0.95 x in 2010. This

indicates that it gets harder for Kulim Berhad to pay its short-term liabilities in 2010. Kulim

Berhad also is having difficulties in running and meeting obligations.

For Activity Ratio, we apply the asset turnover and average collection period ratios.

These ratios will identify whether a firm's able to convert different accounts within their balance

sheets into cash or sales. Companies will typically try to turn their production into cash or sales

as fast as possible because this will generally lead to higher revenues. As for Kulim Berhad’s

asset turnover, it experiences a profitable from year 2006 to 2009 but it falls by 0.13 in 2010.

This may indicate that Kulim Berhad is experiencing difficulties in using its assets in generating

sales or revenue. Kulim Berhad had suffered a loss when its average collection period reached to

81 days in 2007 but the company managed to bounce back when its average collection period fall

as low as 40 days in 2010. This indicates that Kulim Berhad possessing an optimal amount of

days.

For Debt Ratio, we apply the total debt ratio and debt-to-equity ratio to evaluate what

proportion of debt the company has relative to its assets. The measure gives an idea to the

leverage of the company along with the potential risks the company faces in terms of its debt-

load. Based on our findings, we found that Kulim Berhad has more assets than debt because its

debt ratio is below 1.00. This may imply that Kulim Berhad have a low level of risk. Meanwhile,

Kulim’s debt-to-equity ratio falls below 1.00, which means the company is in good condition

because it is not financed by debt. A low debt-to-equity ratio of Kulim Berhad implies that the

company has more shareholder equity.

For Profitability Ratio, we decided to use return on asset and return on equity ratio to

weigh up how profitable the company is relative to its total assets. Based on our findings on

Kulim’s ROA, the company starts off with a small return of 14 % in 2006 but had the highest

ROA of 49 % in 2007, which indicates that the company managed to employ a well managed

company’s total asset to make a profit. This means that Kulim is very much efficient in utilizing

its asset base. Meanwhile, its ROE had a huge increase from year 2006 to 2007, which is from 23

% to 74 % respectively. However, Kulim’s ROE had a insignificant decline from 2007 to 2008

but managed to recover through the years until 2010. This shows that Kulim Berhad is efficient

in utilizing its equity base and give better return to investors.

For Market Ratio, we apply the P/E ratio in evaluating the company's current share price

compared to its per-share earnings. Based on our findings, Kulim is experiencing the lowest

earnings to investors in 2008 which is 0.04, but it recover to grow into a higher earnings in 2009

and 2010, which is 0.16 and 0.10 respectively.

Cost of Capital

Ekovest Berhad

Wd = Total LiabilitiesWe Shareholder Equity

= 229,124 308,373

= 0.743

Wd = 0.743We

Wd = 0.743 We --------①

Wd + We = 1 -----------②

0.743 We + We = 1

1.743 We = 1

We = 0.574 Wd = 1 – 0.574

= 0.426

Ke = rf + β (rM - rf)

= 3.5% + 0.70 (18% - 3.5%)

= 13.65%

WACC = Wd Kd (1 – t) + We Ke

= 0.426 (0.021) (1 – 0.25) + 0.574 (0.1356)

= 0.0067095 + 0.078351

= 8.50 %

Kulim (M) Berhad

Wd = Total LiabilitiesWe Shareholder Equity

= 3,003,656 5,070,402

= 0.59

Wd = 0.59We

Wd = 0.59 We --------①

Wd + We = 1 ----------②

0.59 We + We = 1

1.59 We = 1

We = 0.629 Wd = 1 – 0.629

= 0.371

Ke = rf + β (rM - rf)

= 3.5% + 1.29 (18% - 3.5%)

= 22.21%

WACC = Wd Kd (1 – t) + We Ke

= 0.371 (0.0466) (1 – 0.25) + 0.629 (0.2221)

= 0.01297 + 0.1397

= 15.27 %

Will the Ekovest getting benefits from the acquisition based on the comparison of cost of capital

and company background between Ekovest and Kulim?

No. because from the calculation of cost of capital trough weighted average cost of

capital show that Kulim’s cost of capital higher than Ekovest. Weighted Average Cost of

Capital (WACC) is therefore an overall return that a corporation MUST earn on its existing

assets and business operations in order to increase or maintain the current value of the current

stock. In order to maintain Ekovest Berhad return, they must maintain 8.50 % on all its assets

and business operations. However, because of the percentage of WACC in KULIM (M) Berhad

is 15.27 %, they might be deficit of capital to take over KULIM.