Tuesday, October 6, 2020

Why the Ecoworld-UEM deal is a better deal for UEM than Ecoworld

We have been hearing that Ecoworld is looking for financial support through some of the blogs and comments that came from political parties. It has been deemed as a rescue on Ecoworld as the company has a substantial debt that it is looking to pare down. For a while, as Ecoworld has been building its base, it has leveraged, and now it seems this has taken its toll on the company during the worst of times to leverage.

Property market has been bad for a while since probably 2015 when Bank Negara reduced the allowance for retail debt making the property market went spiralling down. While it has taken its toll, Ecoworld with its very confident management continued to grow, partially from its own money with debt together.

I for one have been impressed with the way the group has been building its brand. Today, it is probably one of the better brand in Malaysia. Of course, with the depreciation of oil price in 2016 and Covid in 2020, these events have been problematic for Ecoworld. MCO itself has caused the company to not be able to build its properties for almost 3 months. People will be careful in buying properties given the situation moreover. Additionally, it will have more challenges selling its properties to overseas client.

Ecoworld's latest balance sheet position

As seen from diagram above, Ecoworld's balance sheet is not in good position. However, to get out of it should not be through merger as I would deem it as a rescue on UEM rather than Ecoworld. 

I still think Ecoworld can get out of the debt trap as long as it continues to deliver on its projects and through making a decent amount of new sales albeit lower as compared to previously. It claimed that it has RM3.36 billion of unbilled sales. Given that situation, I still think it is a situation which it is able to solve. If it is able to deliver on its projects, I believe the new injection of funds will materialise. It needs some time to show the results.

Let's visit the situation that UEM Sunrise is in. For a while, UEM has not had a strong management as well as performance. It is much more dependent on Johor than Klang Valley. Its gearing position is not much better off than Ecoworld although its liquidity position is better with RM1.35 billion cash. Because of UEM is a much older company with past records from the old Renong days, its book value is probably understated. That are the two advantage given that Ecoworld is doing an exercise with UEM Sunrise.

However, as we know during times like this liquidity is important but in the longer term it is the deliveries of sales, projects, better pricing etc.

What Khazanah is taking advantage of is the predicament that Ecoworld is facing and it is taking action. By proposing a merger, it is taking advantage of its long term problem by doing a merger which should not be deemed as a rescue. 

For Ecoworld to take up this deal, it is probably facing more challenges in the future as while Khazanah has been in the past taken its hands off from the management, it does not mean it will not meddle especially on matters such as land issues and development.

Hence, I think while it is for the short term resolve of its issues for Ecoworld, I do not think it is a good deal for Ecoworld in the long run. For UEM, it is quite the opposite.

Good twist of questioning by Noelle Lim on BFM on Sasbadi CEO

 I liked the way Noelle changed her question when she interviewed the CEO of Sasbadi. I am sure that the CEO was not going to be frank when he was interviewed especially with questions on the competitiveness of our students especially on PISA test. He was questioned as well on teaching English in Maths and Science and it was clear that the CEO was not going to be frank preferring to protect his business rather than being forefront on it.

On the prospect of Sasbadi, to be frank given the experience that I have gone through in teaching my children during the MCO, I do not see a positive light of school text books. In fact, during the short period as mentioned by the CEO, the business is affected due to their inability to push their books through the schools. This means whenever a parent like me go to a bookstore, we have much more options. In fact the options is even more prevalent when I go online.

Quite a number of the old traditional business channels and methods will be affected especially now the choices have opened up.