EA HOLDINGS BERHAD ("EAH" OR THE "COMPANY")
I. PROPOSED BONUS ISSUE OF UP TO 267,356,264 NEW ORDINARY SHARES OF RM0.10 EACH IN EAH ("EAH SHARE(S)") ("BONUS SHARE(S)") TO BE CREDITED AS FULLY PAID-UP ON THE BASIS OF ONE (1) BONUS SHARE FOR EVERY FIVE (5) EXISTING EAH SHARES HELD ON AN ENTITLEMENT DATE TO BE DETERMINED LATER ("PROPOSED BONUS ISSUE");
II. PROPOSED ACQUISITION BY EAH OF 800,000 ORDINARY SHARES OF RM1.00 EACH IN CEKAP AIR SDN BHD ("CEKAP"), REPRESENTING 20% OF THE EQUITY INTEREST IN CEKAP FOR A PURCHASE CONSIDERATION OF RM47.04 MILLION, TO BE FULLY SATISFIED VIA THE ISSUANCE OF NEW EAH SHARES AT THE ISSUE PRICE OF RM0.10 PER EAH SHARE ("PROPOSED ACQUISITION"); AND
III. PROPOSED DIVERSIFICATION OF THE EXISTING PRINCIPAL ACTIVITIES OF EAH AND ITS SUBSIDIARY COMPANIES TO INCLUDE MECHANICAL AND ELECTRICAL ENGINEERING BUSINESS AND CONSTRUCTION PROJECT MANAGEMENT CONSULTANCY BUSINESS ("PROPOSED DIVERSIFICATION")
(COLLECTIVELY REFERRED TO AS THE "PROPOSALS")
1. INTRODUCTION
On behalf of the Board of Directors of EA Holdings Berhad ("EAH" or the "Company") ("Board"), RHB Investment Bank Berhad ("RHBIB") wishes to announce that the Company proposes to undertake the following:-
i. bonus issue of up to 267,356,264 new ordinary shares of RM0.10 each in EAH ("EAH Shares" or "Shares") ("Bonus Shares"), to be credited as fully paid-up on the basis of one (1) Bonus Share for every five (5) existing EAH Shares held on an entitlement date to be determined later ("Entitlement Date") ("Proposed Bonus Issue");
ii. acquisition by EAH from Chong Mui Fun, Shankar a/l Muniandy, Yong Chee Hon, Dr. Yeoh Seong Mok, Yong Zhen Wei and Yeoh William (collectively referred to as the "Vendors"), for the proposed acquisition of 800,000 ordinary shares of RM1.00 each in Cekap ("Cekap Shares"), representing 20% of the equity interest in Cekap ("Sale Shares") for a purchase consideration of RM47,040,000 ("Purchase Consideration"), which will be fully satisfied by the issuance of 470,400,000 EAH Shares ("Consideration Shares") at an issue price of RM0.10 per EAH Share ("Proposed Acquisition"); and
iii. diversification of the existing principal activities of EAH and its subsidiary companies ("EAH Group" or "Group") to include mechanical and electrical ("M&E") engineering business and construction project management consultancy business ("Proposed Diversification").
(The Proposed Bonus Issue, the Proposed Acquisition and the Proposed Diversification are collectively referred to as the "Proposals").
For the avoidance of doubt, the Proposed Acquisition is intended to be implemented after the Entitlement Date of the Proposed Bonus Issue.
1 For illustrative purposes throughout this announcement, the effects of the Proposals shall be based on the following two (2) scenarios:-
Minimum Scenario : § Assuming none of the outstanding 151,063,248 warrants 2010/ 2015 in EAH ("Warrants A") are exercised prior to the Entitlement Date; and
§ Assuming none of the outstanding 122,776,822 warrants 2014/ 2019 in EAH ("Warrants B") are exercised prior to the Entitlement Date; and
§ Assuming none of the outstanding 212,588,250 warrants 2014/ 2019 in EAH ("Warrants C") are exercised prior to the Entitlement Date
Maximum Scenario : § Assuming all the outstanding 151,063,248 Warrants A are exercised prior to the Entitlement Date; and
§ Assuming all the outstanding 122,776,822 Warrants B are exercised prior to the Entitlement Date; and
§ Assuming all the outstanding 212,588,250 Warrants C are exercised prior to the Entitlement Date
Further details on the Proposals are set out in the ensuing sections.
2. DETAILS OF THE PROPOSALS
2.1 Proposed Bonus Issue
2.1.1 Basis and number of Bonus Shares to be issued
The Proposed Bonus Issue will entail an issuance of up to 267,356,264 Bonus Shares to be credited as fully paid-up on the basis of one (1) Bonus Share for every five (5) existing EAH Shares held by the shareholders of EAH whose names appear in the Record of Depositors on the Entitlement Date. The Entitlement Date will be determined and announced at a later date after all the relevant approvals for the Proposed Bonus Issue have been obtained.
The actual number of Bonus Shares to be issued pursuant to the Proposed Bonus Issue shall be determined on the Entitlement Date, after taking into consideration of the following:-
i. the issued and paid-up share capital of EAH as at 6 March 2015, being the latest practicable date of this announcement ("LPD"), of RM85,035,300 comprising 850,353,000 EAH Shares; and
ii. any new EAH Shares that may be issued on or prior to the Entitlement Date pursuant to the exercise of the outstanding 151,063,248 Warrants A, 122,776,822 Warrants B and 212,588,250 Warrants C.
Based on the issued and paid-up share capital of EAH as at the LPD of RM85,035,300 comprising 850,353,000 EAH Shares and assuming the full exercise of all the outstanding Warrants A, Warrants B and Warrants C on or prior to the Entitlement Date, a maximum of 267,356,264 Bonus Shares will be issued pursuant to the Proposed Bonus Issue.
2 The Proposed Bonus Issue is undertaken entirely and only for the existing shareholders of EAH, and the Vendors will not be entitled to the Bonus Shares. For the avoidance of doubt, the Proposed Acquisition is intended to be implemented after the Entitlement Date of the Proposed Bonus Issue whereby the Consideration Shares pursuant to the Proposed Acquisition will only be issued and allotted after the Entitlement Date for the Proposed Bonus Issue.
Fractional entitlements arising from the Proposed Bonus Issue, if any, shall be disregarded and dealt with by the Board in such manner at its absolute discretion as it may deem fit and expedient and in the best interest of the Company.
The Proposed Bonus Issue will not be implemented on a staggered basis.
2.1.2 Capitalisation of reserves
The Proposed Bonus Issue shall be capitalised from the share premium and retained earnings accounts of the Company.
An illustration of the proposed capitalisation for the Proposed Bonus Issue based on the latest audited financial statements of EAH for the FYE 31 December 2013 at the Company level, after adjusting for subsequent events up to the LPD, is set out as follows:-
Minimum Scenario Maximum Scenario Share Retained Share Retained EAH (Company level) premium earnings Total premium earnings Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
Audited as at 31 December 2013 9,312 1,293 10,605 9,312 1,293 10,605
Add: § Dividend declared and paid by EAH's - 9,951 9,951 - 9,951 9,951 subsidiary companies to EAH on 1 March 2014
§ Dividend declared and paid by EAH's - 9,500 9,500 - 9,500 9,500 subsidiary companies to EAH on 1 March 2015
§ Assuming all outstanding Warrants A - - - 30,213 - 30,213 are exercised
§ Assuming all outstanding Warrants B - - - 4,912 - 4,912 are exercised
§ Assuming all outstanding Warrants C - - - 4,252 - 4,252 are exercised
§ Transfer from warrants reserve - - - 6,120 - 6,120 account upon exercise of Warrants A
§ Transfer from warrants reserve - - - 9,503 - 9,503 account upon exercise of Warrants C
Less: § Transfer to warrants reserve account - (9,503) (9,503) - (9,503) (9,503) upon recognition of fair value of Warrants C
§ Expenses incurred for the previous (258) - (258) (258) - (258) bonus issue of warrants exercise*1
3 Minimum Scenario Maximum Scenario Share Retained Share Retained EAH (Company level) premium earnings Total premium earnings Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
§ Expenses incurred for the previous (982) - (982) (982) - (982) rights issue with warrants exercise*2
Adjusted reserves 8,072 11,241 19,313 63,072 11,241 74,313
Amount to be capitalised pursuant to the (8,072) (8,935) (17,007) (26,736) - (26,736) Proposed Bonus Issue
Estimated expenses in relation to the - (550) (550) - (550) (550) Proposals
After the Proposed Bonus Issue - 1,756 1,756 36,336 10,691 47,027
Notes:-
*1 EAH had undertaken a bonus issue of warrants exercise on the basis of two (2) free Warrants B for every nine (9) existing EAH Shares held ("Bonus Issue of Warrants"), which was completed on 3 March 2014
*2 EAH had undertaken a rights issue with warrants exercise on the basis of one (1) EAH Share ("Rights Share") for every one (1) existing EAH Share held, together with free detachable Warrants C on the basis of one (1) free Warrant C for every two (2) Rights Shares subscribed for ("Rights Issue with Warrants"), which was completed on 24 June 2014
An illustration of the proposed capitalisation for the Proposed Bonus Issue based on the latest unaudited quarterly report of EAH for the FYE 31 December 2014 at the Company level, after adjusting for subsequent events up to the LPD, is set out below:-
Minimum Scenario Maximum Scenario Share Retained Share Retained EAH (Company level) premium earnings Total premium earnings Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
Unaudited as at 31 December 2014 8,072 228 8,300 8,072 228 8,300
Add: § Dividend declared and paid by EAH's - 9,500 9,500 - 9,500 9,500 subsidiary companies to EAH on 1 March 2015
§ Assuming all outstanding Warrants A - - - 30,213 - 30,213 are exercised
§ Assuming all outstanding Warrants B - - - 4,912 - 4,912 are exercised
§ Assuming all outstanding Warrants C - - - 4,252 - 4,252 are exercised
§ Transfer from warrants reserve - - - 6,120 - 6,120 account upon exercise of Warrants A
§ Transfer from warrants reserve - - - 9,503 - 9,503 account upon exercise of Warrants C
Adjusted reserves 8,072 9,728 17,800 63,072 9,728 72,800
Amount to be capitalised pursuant to the (8,072) (8,935) (17,007) (26,736) - (26,736) Proposed Bonus Issue
4 Minimum Scenario Maximum Scenario Share Retained Share Retained EAH (Company level) premium earnings Total premium earnings Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
Estimated expenses in relation to the - (550) (550) - (550) (550) Proposals
After the Proposed Bonus Issue - 243 243 36,336 9,178 45,514
Pursuant to Rule 6.31(1) of the Listing Requirements of Bursa Securities ("Listing Requirements"), a listed issuer intending to make a bonus issue of securities must ensure that the necessary reserves required for capitalisation of the bonus issue is unimpaired by losses on a consolidated basis, where applicable, based on the listed issuer's latest audited financial statements as well as its latest unaudited quarterly report.
The Board confirms that based on the latest audited financial statements for the FYE 31 December 2013 and unaudited quarterly report for the FYE 31 December 2014 of EAH, EAH has adequate reserves available to be capitalised for the Proposed Bonus Issue, and that reserves is unimpaired by losses on a consolidated basis in accordance with Rule 6.31(1) of the Listing Requirements.
Further, pursuant to Rule 6.31(3) of the Listing Requirements, the Board will obtain a confirmation letter from its reporting accountant on the adequacy of reserves to cover the capitalisation of the Proposed Bonus Issue, details of which will be disclosed in the Circular to shareholders to be issued.
2.1.3 Ranking of the Bonus Shares
The Bonus Shares will, upon allotment and issuance, rank pari passu in all respects with the existing EAH Shares, save and except that the Bonus Shares will not be entitled to any dividends, rights, allotment and/ or any other forms of distribution that may be declared, made or paid for which the entitlement date for the said distribution precedes the date of allotment and issuance of the Bonus Shares.
2.1.4 Listing of and quotation for the Bonus Shares
The Bonus Shares shall be listed and quoted on the ACE Market of Bursa Securities on the next market day following the Entitlement Date of the Proposed Bonus Issue, to be determined by the Board after all the relevant approvals for the Proposed Bonus Issue have been obtained.
The notice of allotment of the Bonus Shares will be issued and despatched to the entitled shareholders within four (4) market days after the date of listing of and quotation for the Bonus Shares, or such other period as may be prescribed by Bursa Securities.
As the Bonus Shares are prescribed securities under Section 14(5) of the Securities Industry (Central Depositories) Act, 1991, the Bonus Shares will be subjected to the Securities Industry (Central Depositories) Act, 1991 and the Rules of Bursa Malaysia Depository Sdn Bhd. Accordingly, the Bonus Shares will be credited into the respective CDS accounts of the entitled shareholders and no physical share certificates will be issued.
5 2.2 Proposed Acquisition
The Company had on 18 March 2015, entered into a conditional share sale agreement ("SSA") with the Vendors for the proposed acquisition by EAH of the Sale Shares at the Purchase Consideration, which will be fully satisfied by the issuance of 470,400,000 Consideration Shares at an issue price of RM0.10 per EAH Share.
Subject to the terms and conditions of the SSA, the Vendors as legal and beneficial owners shall sell and the Company relying on the warranties and representations by the Vendors shall purchase the Sale Shares free from any and all encumbrances and with all rights, benefits and advantages attached or deeming to be attached thereto, including all bonuses, rights, dividends and distributions declared made and paid as from the completion date of the SSA.
2.2.1 Information on Cekap
Cekap was incorporated in Malaysia on 26 November 2001 under the Companies Act, 1965 as a private limited company under the present name.
Cekap is principally involved in the provision of hydraulic M&E engineering for water supply and treatment while its wholly-owned subsidiary company, namely WY Consultancy & Development Sdn Bhd ("WY Consultancy") of which the acquisition by Cekap was completed on 22 January 2014, is principally involved in project management consultancy and its related activities. As at the LPD, Cekap does not have any associate company.
Cekap commenced operations as a provider of mechanical installation, piping works and maintenance services. Subsequently, Cekap expanded its services to become a provider of M&E engineering services to the growing water and waste water treatment industry. Besides the water and waste water treatment industry, Cekap has also expanded their range of services by undertaking M&E engineering works for other industries, such as, amongst others, the oil and gas industry.
Since its incorporation, Cekap has been continuously upgrading and improving its offerings to ensure that its services are reliable and of high quality. Cekap has various certifications and registrations obtained from the licensing bodies, such as, Suruhanjaya Perkhidmatan Air Negara ("SPAN") permits, Grade G5 registered contractor status under the Construction Industry Development Board Malaysia ("CIDB") and registered contractor status with Ministry of Defense.
Meanwhile, WY Consultancy specialises in providing construction project management consultancy and project management services. Its range of services include, amongst others, integrated design and build consultancy services that encompass civil and structural design, M&E design, quantity surveying, interior design, architectural and green index consultation and compliance, forensic engineering and contract management.
WY Consultancy project management processes are developed and based on established project management knowledge and follow the guidelines set by the Project Management Institute ("PMI") of the United States of America ("USA").
The principal markets of Cekap and WY Consultancy are in Malaysia and all the revenues are currently derived from Malaysia.
As at the LPD, the authorised share capital of Cekap is RM5,000,000 comprising of 5,000,000 Cekap Shares, of which RM4,000,000 comprising 4,000,000 Cekap Shares have been issued and fully paid-up.
6
The shareholders and directors of Cekap and their respective shareholdings in Cekap as at the LPD are as follows:-
Directors Nationality <------Direct------> <------Indirect------> No. of No. of Cekap Shares % Cekap Shares %
Yong Chee Hon Malaysian 353,846 8.85 - -
Siow Loo Sun Malaysian - - - -
Yong Zhen Wei Malaysian 176,923 4.42 - -
Shareholders Nationality <------Direct------> <------Indirect------> No. of No. of Cekap Shares % Cekap Shares %
Chong Mui Fun Malaysian 2,496,154 62.40 - -
Shankar a/l Muniandy Malaysian 442,308 11.06 - -
Yong Chee Hon Malaysian 353,846 8.85 - -
Dr. Yeoh Seong Mok Malaysian 353,846 8.85 - -
Yong Zhen Wei Malaysian 176,923 4.42 - -
Yeoh William Malaysian 176,923 4.42 - -
A summary of the financial information of Cekap and its subsidiary company ("Cekap Group") for the past three (3) financial years up to the financial year ended ("FYE") 31 December 2014 is set out as follows:-
<------Audited------> <------FYE 31 December------> 2012 2013 2014 RM'000 RM'000 RM'000
Revenue 5,863 21,065 26,997 Profit before tax ("PBT")/ (loss before tax)("LBT") (61) 648 13,757 Profit after tax ("PAT")/ (loss after tax)("LAT")*1 (83) 515 10,388 Shareholders' funds/ Net assets ("NA") 758 1,622 12,300 Total interest-bearing borrowings 347 328 1,053 Gearing (times) 0.46 0.20 0.09
Note:-
*1 There are no non-controlling interests in Cekap for the financial years under review
7 Commentary on past performance:-
FYE 31 December 2012
For the FYE 31 December 2012, Cekap's revenue increased by RM2.26 million or 62.8% to RM5.86 million as compared to the FYE 31 December 2011. The increase was due to Cekap securing a major contract for M&E works during the year. The PBT had decreased by RM0.30 million or approximately 125.4% to a LBT of RM0.06 million in the FYE 31 December 2012, as compared to the FYE 31 December 2011 mainly due to the bad debt expense which arose from a project.
Further, Cekap's total borrowings decreased to RM0.35 million from RM0.56 million as compared to the FYE 31 December 2011. The decrease in total borrowings was due to the repayment by Cekap from its revenue collection.
FYE 31 December 2013
For the FYE 31 December 2013, Cekap's revenue increased by RM15.20 million or 259.3% to RM21.07 million as compared to the previous FYE 31 December 2012. The increase was mainly due to higher amount of works completed and billed for the major contract secured in 2012. The increase in revenue has attributed to the increase in PBT to RM0.65 million in FYE 31 December 2013, as compared to a LBT in the FYE 31 December 2012. In addition, Cekap had managed to recover RM0.45 million of bad debt that was provided for in the preceding financial year, which had also contributed to the increase in PBT.
Further, Cekap's total borrowings decreased to RM0.33 million from RM0.35 million as compared to FYE 31 December 2012 due to Cekap having surplus funds to settle the borrowings and it did not secure any additional borrowings during the year.
FYE 31 December 2014
For the FYE 31 December 2014, Cekap's revenue increased by RM5.93 million or 28.2% to RM27.00 million as compared to the previous FYE 31 December 2013. The increase was mainly due to the consolidation of its subsidiary’s, namely WY Consultancy's revenue. The consolidation of WY Consultancy's high profit margin’s results have attributed to the significant increase in PBT by RM13.11 million or approximately 2,023.0% to RM13.76 million in the FYE 31 December 2014, as compared to the FYE 31 December 2013.
Further, Cekap's total borrowings increased to RM1.05 million from RM0.33 million as compared to the FYE 31 December 2013 due to the consolidation of WY Consultancy’s borrowings, which are substantially attributable to motor vehicles under hire purchase.
8 2.2.2 Basis and justification of arriving at the Purchase Consideration
The Purchase Consideration was arrived at on a willing-buyer willing-seller basis, after taking into account the following:-
i. The Vendors’ guarantee of the PAT of Cekap Group that it shall be at least RM56,000,000 in aggregate for the two (2) financial years ending 31 December 2015 and 31 December 2016. This translates into an average PAT of RM28,000,000 per annum. Based on the above and the value accorded to 100% equity interest in Cekap of approximately RM235,200,000, the Purchase Consideration represents a price-to-earnings ("PE") multiple of 8.40 times;
ii. The future earnings potential of Cekap Group given the track record and current order book of Cekap Group of RM53.89 million which will provide earnings visibility up to July 2017, details as set out below; and
iii. The favourable outlook of the construction industry in relation to Cekap Group's M&E engineering business as well as construction project management consultancy business as set out in Section 4.1 of this announcement.
The list of major contracts/ projects completed by Cekap Group for the past one (1) year is as follows:-
Project Completion value month RM'000
Water supply phase in Sarawak – for M&E works 26,640 October 2014
Project owner: Ministry of Rural and Regional Development, Malaysia and several construction companies
Water supply scheme package in Ngoi Ngoi, Seremban – for full testing and 207 April 2014 commissioning works
Project owner: an engineering company in Malaysia
Water supply scheme package in Ngoi Ngoi, Seremban – for full testing and 393 July 2014 commissioning works
Project owner: an engineering company in Malaysia
Luxury condominium in Johor – for project management consultancy services 791 March 2014
Project owner: a property development company in Malaysia
Total 28,031
THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
9 As at the LPD, the contracts in hand of Cekap Group are as follows:-
Balance order Expected Stage of Project book as at Commencement completion completion value the LPD month month as at the LPD RM'000 RM'000 %
Water treatment plant and water reticulation system in Hulu Langat – for 588 588 March 2015 July 2015 0.0 the supply, delivery and installation of lime service tank
Project owner: Federal government's water asset management company and joint venture with several engineering companies in Malaysia
Water treatment plant and water reticulation system in Hulu Langat - for 803 803 March 2015 December 0.0 the fabrication of filter slab 2015
Project owner: Federal government's water asset management company and joint venture with several engineering companies in Malaysia
Upgrading of water treatment plant in Kulim – for mechanical works 10,832 10,832 February 2015 November 0.0 2016 Project owner: A state government and a construction company in Malaysia
Liquefied Natural Gas (LNG) plant project in Lumut – for the supply of 2,200 1,392 February 2014 April 2016 36.7 manpower for preservation and installation of equipment
Project owner: an oil and gas services company in Malaysia
Luxury condominium in Penang – for project management consultancy 2,400 900 December 2013 December 62.5 services 2015
Project owner: a property development company in Malaysia
Commercial project in Klang – for project management consultancy 5,850 4,225 April 2014 April 2017 27.8 services
Project owner: a property development company in Malaysia
Premium mixed development project in Kuala Lumpur City Centre – for 7,550 5,913 August 2014 July 2017 21.7 project management consultancy services
Project owner: a property development company in Malaysia
10 Balance order Expected Stage of Project book as at Commencement completion completion value the LPD month month as at the LPD RM'000 RM'000 %
Major link road and undersea tunnel in Penang – for project management 19,254 14,666 November 2013 October 23.8 consultancy services 2015
Project owner: a state government in Malaysia
Luxury condominium in Mont Kiara – for project management consultancy 5,000 3,611 May 2014 January 27.8 services 2017
Project owner: a property development company in Malaysia
Office building in Petaling Jaya – for project management consultancy 3,500 3,000 July 2014 July 2017 14.3 services
Project owner: a conglomerate company in Malaysia
Indoor theme park in Oman – for project management consultancy 7,960 7,960 January 2014*1 January 0.0*1 services, quantity surveying consultancy and M&E engineering services 2017
Project owner: an amusement park operator company in Oman
Total 65,937 53,890
Note:-
*1 The said project has been delayed mainly due to the change of design, which is currently pending the Oman authority's approval
11 2.2.3 Mode of Settlement
The Purchase Consideration will be satisfied entirely by the issuance of 470,400,000 EAH Shares at an issue price of RM0.10 per EAH Share for the Proposed Acquisition based on the following manner in accordance with the SSA:-
No. of No. of % of Sale Purchase Consideration Vendors Sale Shares Shares Consideration Shares RM
Chong Mui Fun 499,230 62.40 29,354,724 293,547,240
Shankar a/l Muniandy 88,462 11.06 5,201,566 52,015,660
Yong Chee Hon 70,769 8.85 4,161,217 41,612,170
Dr. Yeoh Seong Mok 70,769 8.85 4,161,217 41,612,170
Yong Zhen Wei 35,385 4.42 2,080,638 20,806,380
Yeoh William 35,385 4.42 2,080,638 20,806,380
Total 800,000 100.00 47,040,000 470,400,000
2.2.4 Profit Guarantee
Pursuant to the SSA, the Vendors jointly and severally agree, undertake and guarantee that the aggregate PAT of Cekap Group for the two (2) financial years ending 31 December 2015 and 31 December 2016 ("Profit Guarantee Period") shall not be less than RM56,000,000 ("Profit Guarantee").
Pursuant to the Profit Guarantee, the Vendors shall deposit such number of the Consideration Shares equivalent to RM11,200,000 in value, representing 20% of the total Profit Guarantee which is the proportion attributable to EAH, based on the issue price of RM0.10 per EAH Share ("Pledged Shares") into several pledged securities Central Depository System ("CDS") accounts as set out below:-
Vendors <------Pledged Shares------> Number Value RM
Chong Mui Fun 69,892,200 6,989,220
Shankar a/l Muniandy 12,384,680 1,238,468
Yong Chee Hon 9,907,660 990,776
Dr. Yeoh Seong Mok 9,907,660 990,776
Yong Zhen Wei 4,953,900 495,390
Yeoh William 4,953,900 495,390
Total 112,000,000 11,200,000
12 The aggregate value of the Pledged Shares and if applicable, the Additional Securities (hereinafter defined) (collectively referred to as "Stakeholding Securities") shall be reviewed from time to time with at least two (2) reviews being undertaken in the financial year ending 31 December 2015, with the first calculation within three (3) months from the date of listing of the Consideration Shares:-
i. In the event that the aggregate value of the Stakeholding Securities falls below RM11,200,000, calculated based on the five (5)-days WAMP (as quoted by Bloomberg, Malaysia) immediately prior to the date of calculation, the Vendors are obliged to provide additional EAH Shares and/ or any other securities or cash or form as are added thereto whether or not by way of any bonus issue or dividend payment or any other entitlement thereto deposited into the Securities Account from time to time and agreed to in writing by the Purchaser at its sole and absolute discretion ("Additional Securities") in order that the aggregate value of the Stakeholding Securities is no less than RM11,200,000; or
ii. In the event that the aggregate value of the Stakeholding Securities is above RM11,200,000, none of the Stakeholding Securities is required to be released to the Vendors.
The aggregate value of Stakeholding Securities shall be reviewed from time to time with at least two (2) reviews being undertaken during the financial year ending 31 December 2016, with the first calculation being undertaken within three (3) months after the adoption by Cekap’s shareholders of the audited consolidated financial statements of Cekap Group for the financial year ending 31 December 2015 ("Accounts 2015") or by 30 June 2016 (whichever is the earlier):-
i. In the event that the aggregate value of the Stakeholding Securities falls below the Profit Guarantee amount attributable to the Purchaser which has yet to be met in financial year ending 31 December 2015, the Vendors are obliged to provide Additional Securities in order that the value of the aggregate Stakeholding Securities is no less than such unmet amount.
ii. In the event the aggregate value of the Stakeholding Securities is above such unmet amount, none of the Stakeholding Securities is required to be released to the Vendors.
Further details of the salient terms of the Profit Guarantee are set out in Section 2.2.11(iii) of this announcement.
2.2.5 Basis of arriving at the Issue Price
The issue price of RM0.10 per Consideration Share was fixed by the Board after taking into consideration the theoretical ex-bonus price of RM0.10 based on the five (5)-day weighted average market price ("WAMP") of EAH Shares up to and including 17 March 2015, being the last market day prior to the date of the SSA pursuant to the Proposed Acquisition, of RM0.12. The issue price of RM0.10 per Consideration Share also represents the par value of EAH Shares of RM0.10.
The issue price of RM0.10 represents the theoretical ex-bonus price of RM0.10 based on the five (5)-day WAMP up to and including 17 March 2015, and represents a discount of approximately 9.1% to the theoretical ex-bonus price of RM0.11 based on the one (1)-month and three (3)-month WAMP up to and including 17 March 2015.
13 2.2.6 Ranking of the Consideration Shares
The Consideration Shares shall, upon allotment and issuance, rank pari passu in all respects with the existing EAH Shares, save and except that they shall not be entitled to any dividends, rights, allotment and/ or other distributions which are declared, made or paid for which the entitlement date for the said distributions precedes the date of allotment and issuance of the Consideration Shares.
2.2.7 Liabilities to be assumed by EAH
Save for the obligations and liabilities in and arising from the SSA, there are no other liabilities including contingent liabilities and guarantees to be assumed by EAH arising from the Proposed Acquisition.
2.2.8 Additional financial commitment required
Save for the Purchase Consideration, there are no additional financial commitments required by EAH to put the business of Cekap Group on- stream. As set out in Section 2.2.1 of this announcement, Cekap Group is an on-going business entity.
2.2.9 Listing of the Consideration Shares
An application will be made to Bursa Malaysia Securities Berhad ("Bursa Securities") for the listing of and quotation for the Consideration Shares on the ACE Market of Bursa Securities.
2.2.10 Information on the Vendors
i. Yong Chee Hon
Yong Chee Hon, a Malaysian aged 53, completed his technical college training in 1980 and has more than 34 years of work experience in project management and implementation for engineering works such as installation, modification, retrofitting, fabrication and operation for water treatment, sewage plants and oil and gas fabricators. Yong Chee Hon is also a member of the Malaysian Water Association. He is currently the Chief Executive Officer of Cekap Group, of which he joined Cekap in May 2005, responsible for overseeing the entire operations of the Cekap Group and responsible for the strategic planning and direction of the Cekap Group.
Yong Chee Hon started his career with Salcon Engineering Sdn Bhd in 1984 as a technical assistant and was promoted to the position of Assistant Manager before leaving in 2001. During his tenure with Salcon Engineering Sdn Bhd, he was involved in approximately thirty (30) engineering projects, where he had also received extensive on the job training and attended various seminars on project management. Amongst the notable project he was involved in is the implementation of the first Dissolved Air Floatation plant in Malaysia, which was implemented at the Sultan Idris Shah Water Treatment plant in Parit, Perak in 1991, and the implementation of the 45 million litres per day compact clarification plant in Bukit Sebukor, Melaka in 1994, using stainless steel plate settling technology from Sweden.
14 ii. Dr. Yeoh Seong Mok
Dr. Yeoh Seong Mok, a Malaysian aged 59, obtained his Doctorate Degree in Business Administration in Management from Greenwich University, Australia in 2002 and Doctorate Degree in Business Administration in Project Management from Honolulu University, USA in 2002. Dr. Yeoh is a Project Management Professional certified by PMI, USA, and a Certified Financial Planner accredited by the Financial Planning Association of Malaysia, a qualified Lead Assessor/ Auditor, Quality Management Systems, ISO 9000 and he also holds a Bachelor of Laws (LLB) Degree from the University of London in 2007. He is currently the Senior Director of WY Consultancy, which he joined in June 2012, overseeing the strategic and long-term planning for the company.
Dr. Yeoh has been actively involved in promoting Project Management knowledge through developing and delivering project management training programmes and providing project management consultancy services. He has more than 30 years of experience in managing projects and is a member of PMI, USA. He has worked as a project manager in various public listed companies. He was involved in managing projects such as Menara Celcom, Kuala Lumpur, Robson Height Condominium, Plaza Angsana Shopping Complex, Duty Free Shopping Complex and Eden Garden Hotel in Johor Bahru. He was involved in notable projects such as the Integrated Transport Terminal Bandar Tasik Selatan, Banting Matriculation College, Jelas Expressway and Maju Expressway. iii. Yeoh William
Yeoh William, a Malaysian aged 33, completed his Master of Business Administration from Universiti Utara Malaysia in 2007. He has more than 13 years of experience managing a business in the insurance industry. He started William Consulting Sdn Bhd in 2012, which was later renamed WY Consultancy & Development Services Sdn Bhd and has been its Director since then, where he is responsible for the day-to-day operations of WY Consultancy. He is the son of Dr. Yeoh Seong Mok. iv. Chong Mui Fun
Chong Mui Fun, a Malaysian aged 41, completed her Sijil Pelajaran Malaysia (SPM) in 1990. Upon the completion of her studies, she had worked at various short-term employments before being involved in various businesses in the business consultancy, real property and natural resources industries. She is a passive investor and has no management role in Cekap Group. v. Shankar a/l Muniandy
Shankar a/l Muniandy, a Malaysian aged 37, completed his Bachelor of Engineering Degree in Mechanical Engineering in 2002 from Swinburne University, Melbourne, Australia and has more than 12 years of experience in project management, research management and sales and marketing. Shankar joined Everest Products Sdn Bhd in 2002 as its procurement manager before gradually rising to his current position as Managing Director in 2006. He is a passive investor and has no management role in Cekap Group.
15 vi. Yong Zhen Wei
Yong Zhen Wei, a Malaysian aged 21, is currently pursuing his Bachelor of Science Degree in Mechanical Engineering at Indiana University, USA. He is the son of Yong Chee Hon.
2.2.11 Salient terms of the SSA
i. Sale and Purchase of Sale Shares
In consideration of the Purchase Consideration which shall be satisfied by the issuance and allotment of the Consideration Shares by EAH in favour of the Vendors, the Vendors as legal and beneficial owners shall sell and EAH relying on the warranties and representations by the Vendors contained in the SSA shall purchase the Sale Shares free from any and all encumbrances and with all rights, benefits and advantages now or thereafter attaching thereto, including all bonuses, rights, dividends and distributions declared made and paid as from the completion date of the SSA.
ii. Conditions precedent
Completion of the SSA is conditional upon:-
(a) EAH obtaining the approval of its shareholders for the following:-
i. purchase of the Sale Shares in exchange for the Consideration Shares upon the terms and conditions of the SSA; and
ii. diversification of the Purchaser’s business to include M&E engineering business and construction project management consultancy business.
(b) EAH obtaining the approval of Bursa Securities for the listing of and quotation for the Consideration Shares (including the Pledged Shares) on the ACE Market of Bursa Securities;
(c) EAH conducting or cause to be conducted due diligence on the Cekap Group to the satisfaction of EAH;
(d) the Vendors obtaining the approval of the board of directors of Cekap for the transfer of the Sale Shares to EAH; and
(e) the approvals, consents, authorisations, permits or waivers of any other relevant governmental or regulatory body and any other third parties necessary or appropriate to carry out the sale and purchase of the Sale Shares pursuant to the terms of the SSA having been obtained.
iii. Profit Guarantee
(a) The Vendors jointly and severally agree, undertake and guarantee that the aggregate PAT of Cekap Group for the financial years ending 31 December 2015 and 31 December 2016 ("Profit Guarantee Period") shall be not less than RM56,000,000.
16 (b) As security for the Profit Guarantee, the Vendors agree that EAH shall issue and deposit the Pledged Shares into the securities account(s) ("Securities Account") operated by a trustee company appointed by the parties to hold the Pledged Securities ("Security Stakeholder").
(c) The Vendors hereby agree, covenant and undertake to maintain during the period from the Pledged Shares being deposited in the Securities Account up to the adoption of the Accounts 2015 by the shareholder(s) of Cekap such amount of Stakeholding Securities in the Securities Account so that the actual total market value of the Stakeholding Securities shall not be less than RM11,200,000 being 20% of the aggregate Profit Guarantee; it being the proportion attributable to the Purchaser ("Purchaser’s Attribution").
(d) Upon adoption of the Accounts 2015:-
i. the Security Stakeholder shall calculate the value of the Stakeholding Securities based on the five (5)- days WAMP (as quoted by Bloomberg, Malaysia) immediately prior to the date of calculation; and
ii. in the event Cekap Group has a consolidated profit after taxation based on the Accounts 2015, the Security Stakeholder shall release all security interest over and if required transfer such number of the Stakeholding Securities of up to an amount equivalent in value to 20% of the PAT of Cekap Group for the financial year ending 31 December 2015 to the Vendors PROVIDED ALWAYS that the remaining value of the Stakeholding Securities in the Securities Account shall not be less than 20% of the remaining Profit Guarantee amount which has not been met.
(e) In the event the aggregated consolidated profit after taxation and loss after taxation (if any) of Cekap Group for the financial years ending 31 December 2015 and 31 December 2016 ("Total PAT") is equivalent to or more than the Profit Guarantee amount, the Security Stakeholder shall release all security interest over all Stakeholding Securities and where applicable, transfer the said Stakeholding Securities into the CDS accounts of the Vendors.
Purely for illustrative purpose, if there is any PAT for any one financial year and losses after tax for the other financial year during the Profit Guarantee Period, such losses are to be set-off against such profits in deriving the Total PAT.
(f) In the event there is a shortfall between the Total PAT and the Profit Guarantee ("Shortfall"), then the Vendors shall be jointly and severally liable to EAH to fully pay the amount of Shortfall attributable to EAH (being 20% of the Shortfall) ("Shortfall to Purchaser") but up to an amount of RM11,200,000.
17 (g) In the event that the Vendors fail to pay EAH the Shortfall to Purchaser in full, EAH shall be entitled and the Vendors hereby authorise EAH to issue a written notice to the Security Stakeholder stating the same and the amount of the Shortfall to Purchaser that remains unpaid, whereupon the Security Stakeholder is authorised to sell all or part of the Stakeholding Securities and/ or utilise all or any moneys in the Securities Account sufficient to cover the said amount. In the event the proceeds of the sale and moneys in the Securities Account are insufficient to pay the entire Shortfall to Purchaser, the Security Stakeholder shall inform the Vendors and EAH in writing of the same and the Vendors shall be liable to pay EAH such differential amounts indicated in such notice within 14 days of such notice.
(h) The Vendors’ liability to pay the Shortfall to Purchaser shall be up to the aggregate amount of RM11,200,000 only. iv. Breach/ Termination
(a) If EAH shall fail to complete the sale and purchase of the Sale Shares in accordance with the SSA and/ or breaches any of the terms and/ or warranties of the SSA, then the Vendors shall be entitled to either:-
i. claim for specific performance of the SSA; or
ii. terminate the SSA and upon such termination, EAH shall pay to the Vendors all reasonable costs and expense incurred by the Vendors pursuant to the negotiation and preparation of the SSA and any incidental costs thereto;
after which the Vendors shall have no other claims whatsoever against EAH and the Vendors shall be entitled to sell or dispose of the Sale Shares freely to any other party or parties.
(b) If any of the Vendors ("Defaulting Vendors") shall fail to complete the sale and purchase of the Sale Shares in accordance with the SSA and/ or breaches any of the terms of the SSA, then EAH shall be entitled to either:-
i. claim for specific performance of the SSA; or
ii. terminate the SSA and upon such termination, the Defaulting Vendors shall pay to the Purchaser all reasonable costs and expenses incurred by EAH pursuant to the negotiation and preparation of the SSA and any incidental costs thereto;
after which EAH shall have no other claims whatsoever against the Vendors and the Vendors shall be entitled to sell or dispose of the Sale Shares freely to any other party or parties.
18 (c) If any of the Vendor shall breach any of their respective obligations under Section 2.2.11 above, EAH shall be entitled to claim for specific performance in addition to any other remedies as may be available to EAH under law and/ or equity and the Vendors shall indemnify and hold EAH harmless against all costs, charges and expenses incurred or suffered by EAH arising from such breach.
2.3 Proposed Diversification
The principal activities of EAH are in the provision of investment holding, management and consultancy services while its subsidiary companies are principally involved in the provision of business intelligence software and development, information technology ("IT") service, management consultancy and system integration, E-business consultancy and hardware system integration specialists and research, design, development, sales and distribution of radio frequency identification ("RFID")-based tracking systems.
Upon the completion of the Proposed Acquisition, the business of EAH Group will be diversified to include M&E engineering business and construction project management consultancy business. This would thus allow EAH Group to diversify into new areas and viable businesses as part of a longer term plan to move EAH Group forward. The Proposed Diversification shall potentially provide the Group with another stream of income, thus diversifying the earnings base, which may in turn improve shareholders' value in the medium to long term.
Pursuant to the above, the Board anticipates that EAH Group’s new business activities in the M&E engineering business and construction project management consultancy business may contribute 25% or more of the net profits and/ or result in a diversion of 25% or more of the net assets of EAH Group in the future. As such, the Board proposes to seek approval of the shareholders of EAH for the Proposed Diversification pursuant to Rule 10.13 of the Listing Requirements at an extraordinary general meeting ("EGM") to be convened.
Notwithstanding the Proposed Diversification, the Board intends to continue with EAH Group’s existing core business in the same manner. Pursuant thereto, upon completion of the Proposed Diversification, EAH Group will be principally involved in the IT industry and the M&E engineering and construction industry.
Further details on the key management of Cekap Group will be disclosed in the Circular to shareholders to be issued.
3. RATIONALE AND JUSTIFICATIONS FOR THE PROPOSALS
3.1 Proposed Bonus Issue
After due consideration, the Board is of the view that the Proposed Bonus Issue is the most appropriate avenue of rewarding the existing shareholders of the Company while at the same time enhancing the Company's share capital base as the Proposed Bonus Issue will:-
i. Increase the Company's issued and paid-up share capital to a level which would be more reflective of its current scale of operations and assets employed;
ii. Reward the existing shareholders of the Company for their loyalty and continuing support;
19 iii. Increase the number of ordinary shares held by the Company's existing shareholders, whilst maintaining their percentage of equity interest; and
iv. Be able to encourage the trading liquidity of EAH Shares on Bursa Securities through greater participation by investors.
3.2 Proposed Acquisition and Proposed Diversification
As disclosed in Section 2.3 of this announcement, the Proposed Acquisition shall allow EAH Group to diversify its existing business operations into the M&E engineering business and construction project management consultancy business, given the favourable outlook of the M&E engineering and construction industry as set out in Section 4.1 of this announcement. With the Proposed Acquisition, EAH Group would be able to expand its marketing reach to the other industries that Cekap and WY Consultancy are involved in, thereby reducing its reliance on its current mix of customers which are mainly in the services industry.
As at the LPD, Cekap’s order book stood at RM53.89 million, which shall provide earnings visibility up to July 2017, while Cekap Group has also participated in project tenders with a total estimated value of approximately RM99.03 million. In addition, Cekap Group had recorded PAT of RM10.39 million based on the latest audited consolidated financial statements for the FYE 31 December 2014.
Coupled with the current order book of Cekap Group as mentioned above and the Profit Guarantee given by the Vendors, the Proposed Acquisition and the Proposed Diversification are expected to diversify and enhance the earnings potential of EAH Group in the future in addition to allowing EAH Group to diversify into new areas and viable businesses and ultimately enhance EAH's shareholders' value in the medium to long term. Upon completion of the Proposed Acquisition, Cekap Group will become a 20%-owned associate company of EAH Group, allowing EAH to recognise a share of profits of Cekap Group based on its 20% equity interest.
The Board is of the view that the issuance of the Consideration Shares to satisfy the Purchase Consideration is the most appropriate avenue as it will lessen the cash outlay of EAH Group for the Proposed Acquisition, which can be channeled towards operations and other working capital purposes. In addition, issuance of the Consideration Shares will strengthen the financial position of the EAH Group.
4. INDUSTRY OVERVIEW AND OUTLOOK AND FUTURE PROSPECTS OF CEKAP GROUP
4.1 Overview and outlook of the construction industry
The construction sector continued to register a double-digit growth of 14.3% during the first half of 2014 (January-June 2013: 12%). During the period, 19,649 construction projects were undertaken with contract value of RM50.1 billion. The civil engineering subsector contributed 33% to the total construction works, followed by the non-residential (32.3%), residential (29.6%) and special trade (5%). The private sector contributed 71.4% to the total value construction works. Meanwhile, the higher construction activity was led by the residential and non-residential subsectors, while growth in the civil engineering subsector moderated following completion of some major projects, including KLIA2, Second Penang Bridge and Manjung coal-power plant. Moving forward, the sector is expected to grow 12.7% in 2014 (2013: 10.9%) and contribute 4% to gross domestic product, supported by ongoing residential, oil and gas and transportation projects.
20 Growth in the non-residential subsector turned around sharply by 14% in line with healthy business activity during the first half of 2014. This was reflected by increased construction activities especially for commercial buildings with incoming supply of shops increasing to 72,117 units. In the public sector, construction was mainly concentrated in building 33 new schools and upgrading facilities in universities and hospitals. Industrial building starts grew significantly by 81.6% to 1,580 units, particularly in Johor, Selangor and Pulau Pinang. Meanwhile, construction starts for purpose-built offices ("PBO") decreased substantially to 2,965 square metre after experiencing strong growth of 61.2% in PBO starts in 2013. However, the national occupancy rates of buildings remained stable at 83.4% despite an additional 194,738 square metre space. Meanwhile, the incoming supply of shopping complexes declined 22%, while construction starts dropped 64.2% during the first half of 2014. However, the overall occupancy rate remained high at 81.3%, reflecting strong retail activities supported by resilient private consumption. As at end-June 2014, the stock of shopping complexes and PBO stood at 12.39 million square metres and 19.20 mllion square metres respectively.
The residential subsector expanded strongly by 22.1% during the first half of 2014 supported by higher growth in incoming supply at 9.5%. Meanwhile, new housing approvals increased significantly by 32.6% to 96,115 units. Despite the decline in housing starts at 5.3% to 70,346 units, residential activity is expected to remain stable. The take-up rate for houses priced between RM500,001 and RM1,000,000, within six (6) months after launch, was lower at 11.6% following several measures to cool the housing sector. Meanwhile, the highest take-up rate was recorded for houses priced between RM200,001 and RM250,000 at 49.3%. With regard to provision of adequate houses for the low-income group, the Government continues to allocate funds to build affordable houses under various Government programmes, such as Rumah Mesra Rakyat ("RMR"), Rumah Mampu Milik ("RMM") and Rumah Idaman Rakyat ("RIR"). In addition, in the 2013 Budget, the Government has introduced a new category under Rumah Mesra 1Malaysia, with sales prices between RM45,000 to RM65,000 per unit. Under the new category, the Government will provide a subsidy between RM15,000 and RM20,000 per unit. The Government also allocated RM1 billion under 1Malaysia Housing Programme ("PR1MA") to build 80,000 housing units.
The construction sector is projected to increase 10.7% in 2015 (2014: 12.7%, 2013: 10.9%) supported by commencement of some oil and gas projects such as Refinery and Petrochemical Integrated Development ("RAPID") as well as on-going transportation-related infrastructure projects. Meanwhile, the residential subsector is expected to remain strong in view of the increased demand for housing, particularly from the middle-income group. Demand for affordable housing will remain favourable amid several Government initiatives such as PR1MA, RIR and RMR. The non- residential subsector is also expected to remain stable supported by encouraging demand for industrial and commercial buildings. Major commercial building projects such as the 118-storey Menara Warisan and Bukit Bintang City Centre are expected to contribute to the growth of the sector.
21 Meanwhile, growth of the water segment rose 3% during the first half of 2014 (January-June 2013: 2.9%). Demand for water supply from consumers rose 2.6% to 15,387 million litres per day (January-June 2013: 1.8%, 14,990 million litres per day). In 2013, water supply coverage for the urban and rural population stood at 97% and 92.5%, respectively with a total coverage of 95.1%. A major initiative by the government to address the water shortage problem is to increase distributable capacity and existing reserve margin by building new water treatment plants ("WTPs") or upgrade existing WTPs. One of the initiatives is the construction of Langat 2 Water Treatment Plant and Distribution System Phase 1 in Selangor which started in May 2014 and is scheduled for completion in June 2017. The plant will provide an additional 1,130 million litres per day of treated water to Selangor, Kuala Lumpur and Putrajaya.
(Source: Chapter 3 – Economic Performances and Prospects, Economic Report 2014/ 2015, Ministry of Finance, Malaysia)
The construction sector grew by 8.7% in the fourth quarter (3Q 2014: 9.6%), underpinned by the non-residential and residential sub-sectors. The growth in the non-residential sub-sector was stronger amid higher construction activity for industrial and commercial buildings while the residential sub-sector was supported by activity of residential properties in the mass-market and affordable housing segments. Growth in the civil engineering sub-sector was weaker following the near-completion of large infrastructure projects. In the special trade sub-sector, growth was sustained following continued activity for piling, earthworks, electrical and system installation as well as building completion and finishing works.
(Source: Economic and Financial Developments in the Malaysian Economy in the Fourth Quarter of 2014, Bank Negara Malaysia)
4.2 Future prospects of Cekap Group
Cekap is well positioned in the water industry for its M&E engineering services, which is further aided by the various registration and certification obtained by Cekap. With the acquisition of WY Consultancy in 2014, Cekap has broadened its market reach as it is able to create synergy with WY Consultancy by accessing its customer base and tapping its knowledge and expertise in project management. Notwithstanding its short track record, WY Consultancy has received several international awards in quality management and is led by industry veterans who are well qualified and have vast experience in their respective field of expertise.
In addition, Cekap Group has a current order book of approximately RM53.89 million, which will provide earnings visibility up to July 2017. The management of Cekap Group believes that Cekap Group has the necessary resources to carry out its order book and is well positioned to secure more projects moving forward in view of the abovementioned prospects of Cekap Group and in light of the positive outlook of the construction industry as set out in Section 4.1 of this announcement.
(Source: Management of Cekap Group)
Barring any unforeseen circumstances, the Board after having considered all the relevant aspects, including the Vendors' Profit Guarantee, the aforementioned future prospects of Cekap Group as well as the industry overview and outlook as set out in Section 4.1 of this announcement, is of the opinion that the Proposed Acquisition is expected to contribute positively to the future earnings of the Group and to enhance EAH's shareholders' value in the medium to long term.
22 5. RISK FACTORS IN RELATION TO THE PROPOSED ACQUISITION AND THE PROPOSED DIVERSIFICATION
5.1 Political, Economic and Regulatory Risk
Cekap Group's financial and business prospects and the industry which it operates in, will depend to some degree on the developments in the economy and political and regulatory front in Malaysia. Amongst the economic, political and regulatory factors are changes in inflation rates, interest rates, war, terrorism activities, riots, expropriations, changes in political leadership and unfavourable changes in the governments' policies on the M&E engineering and construction industry. These factors are generally beyond the management’s control and affect all the players in the industry.
EAH Group will continue to monitor its investments in Cekap Group and to advise the directors and/ or management of Cekap Group to adopt effective measures such as prudent management and efficient operating procedures to mitigate these factors, where required. However, there can be no assurance that adverse economic, political and regulatory changes will not materially affect EAH Group's business.
5.2 Industry Risks
The performances of Cekap Group are subject to risks inherent in the M&E engineering and construction industry. These may include, amongst others, the risks of entry of new players, shortage of labour and skilled staff, availability and cost fluctuations of materials, increase in the cost of labour, cost of operations and unfavourable changes in government policies affecting the industry.
Nevertheless, EAH Group will monitor its investments in Cekap Group and to advise the directors and/ or management of Cekap Group to mitigate these risks via keeping abreast with the latest developments in the M&E engineering and construction industry and general economic conditions as well as carry out continuous review of Cekap Group's operations. However, there is no assurance that any changes which are beyond the Cekap Group's control, will not materially affect its business.
5.3 Competition Risks
Cekap Group may face intense competition from existing competitors and new entrants into the market in the future, both locally and internationally which offer similar services.
In view of the competitive market environment, Cekap Group is expected to continuously sharpen its competitive edge by developing new measures to counter competition. As such, Cekap Group will continue to provide training to its staff either via in-house courses and external courses to maintain quality and ensure conformity to new practices and guidelines and to focus on providing quality services, on-time delivery of its projects and achieve better cost savings. However, there can be no assurance that Cekap Group would be able to sustain its competitiveness against current and future competitors.
5.4 Diversification Risks
The Proposed Acquisition and the Proposed Diversification would result in a diversification of EAH Group’s existing business to include the M&E engineering business and construction project management consultancy business. EAH Group will then be subject to risks inherent to the M&E engineering and construction industry which EAH Group has no prior experience in. There can be no assurance that the anticipated benefits of the Proposed Acquisition and the Proposed Diversification will be realised which will in turn enable EAH to enhance its financial performance.
23 Nevertheless, Cekap Group has a professional management team with vast experience in M&E engineering services and construction project management consultancy businesses. Upon completion of the Proposed Acquisition, the key management team of Cekap Group is not expected to change as the key management are expected to remain as shareholders of Cekap after the Proposed Acquisition and as such, may have incentives to drive Cekap Group forward profitably.
5.5 Dependence on key personnel
Cekap Group's future success will depend upon its ability to attract and retain its key personnel after the Proposed Acquisition. The loss of key personnel of Cekap Group may have an unfavourable and material impact on the performance of Cekap Group as the continued success of the business is considerably dependent on the combined efforts of the management team of Cekap Group.
As such, Cekap Group is expected to continuously consider measures so as to attract and retain Cekap Group's key personnel by providing incentives and competitive remunerations for continued and future satisfactory performance.
5.6 Acquisition Risks
Although the Board believes that EAH Group may derive benefits from the Proposed Acquisition, there is no assurance that the anticipated benefits of the Proposed Acquisition will be realised or that the Company will be able to generate sufficient income from the Proposed Acquisition to offset the associated acquisition costs incurred. There is also no assurance that the Group is able to maintain or improve the standards of quality and services of its business. However, the Company mitigates such risk by adopting prudent investment strategies and conducting assessment and review including a due diligence review on Cekap Group, prior to making its investment decisions and completing the Proposed Acquisition.
5.7 Non-completion risks
The completion of the Proposed Acquisition is subject to certain conditions which are beyond the control of EAH Group, such as the approvals of relevant authorities and shareholders. There is no assurance that the Proposed Acquisition will be completed as contemplated by EAH Group. However, the Company will take reasonable steps that are within its control to ensure that the conditions precedent pursuant to the Proposed Acquisition are fulfilled by the stipulated date.
6. FINANCIAL EFFECTS OF THE PROPOSALS
The Proposed Diversification will not have any effect on the issued and paid-up share capital, substantial shareholding structure and convertible securities of EAH as well as the NA, gearing and earnings per Share ("EPS") of EAH Group.
For illustration purposes, the effects of the Proposed Bonus Issue and the Proposed Acquisition have been prepared based on the Minimum Scenario and Maximum Scenario.
24 6.1 Issued and paid-up share capital
The proforma effects of the Proposed Bonus Issue and the Proposed Acquisition on the issued and paid-up share capital of EAH are as follows:-
Minimum Scenario Maximum Scenario No. of EAH No. of EAH Shares RM Shares RM
Existing issued and paid-up share 850,353,000 85,035,300 850,353,000 85,035,300 capital as at the LPD
Shares to be issued assuming all of - - 151,063,248 15,106,325 the outstanding Warrants A are exercised 850,353,000 85,035,300 1,001,416,248 100,141,625
Shares to be issued assuming all of - - 122,776,822 12,277,682 the outstanding Warrants B are exercised 850,353,000 85,035,300 1,124,193,070 112,419,307
Shares to be issued assuming all of - - 212,588,250 21,258,825 the outstanding Warrants C are exercised 850,353,000 85,035,300 1,336,781,320 133,678,132
Shares to be issued pursuant to the 170,070,600 17,007,060 267,356,264 26,735,626 Proposed Bonus Issue 1,020,423,600 102,042,360 1,604,137,584 160,413,758
Shares to be issued pursuant to the 470,400,000 47,040,000 470,400,000 47,040,000 Proposed Acquisition
Enlarged issued and paid-up share 1,490,823,600 149,082,360 2,074,537,584 207,453,758 capital
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25 6.2 NA and gearing
Based on the audited consolidated financial statements of EAH Group as at 31 December 2013 and adjusted for the Bonus Issue of Warrants and Rights Issue with Warrants, the proforma effects of the Proposed Bonus Issue and the Proposed Acquisition on the consolidated NA and gearing of the Group are as follows:-
Minimum Scenario
Proforma I Proforma II Audited as After adjusting After adjusting After I and at 31 for the Bonus for the Rights After the the December Issue of Issue with Proposed Proposed 2013 Warrants Warrants Bonus Issue Acquisition RM'000 RM'000 RM'000 RM'000 RM'000
Share capital 42,518 42,518 85,035 102,042 149,082 Share premium 9,312 9,054*1 8,072*2 -*5 - Warrants reserve 6,120 6,120 15,623*3 15,623 15,623 Transaction with non- (13,738) (13,738) (13,738) (13,738) (13,738) controlling interest reserve Retained earnings 24,928 24,928 15,425*3 5,940*5 5,940 Shareholders' Equity/ NA 69,140 68,882 110,417 109,867 156,907
No. of shares in issue ('000) 425,177 425,177 850,353 1,020,424 1,490,824
NA per share (RM) 0.16 0.16 0.13 0.11 0.11
Borrowings (interest-bearing) 5,776 5,776 2,486*4 2,486 2,486 (RM'000)
Gearing (times) 0.08 0.08 0.02 0.02 0.01
Notes:-
*1 After deducting expenses of RM0.26 million incurred in relation to the Bonus Issue of Warrants
*2 After deducting expenses of RM0.99 million incurred in relation to the Rights Issue with Warrants
*3 After the recognition of the fair value of the Warrants C amounting to RM9.50 million in the warrants reserve account from the retained earnings account
*4 After partial repayment of borrowings amounting to RM3.29 million as at the LPD pursuant to the utilisation of proceeds arising from the Rights Issue with Warrants
*5 After accounting for the capitalisation of approximately RM8.07 million from the share premium account and approximately RM8.94 million from the retained earnings account pursuant to the Proposed Bonus Issue and estimated expenses of RM0.55 million in relation to the Proposals from the retained earnings account
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26 Maximum Scenario
Proforma I Proforma II Proforma III Proforma IV Proforma V Assuming all After I and After II and After adjusting After adjusting of the assuming all of assuming all of After III and Audited as at for the Bonus for the Rights outstanding the outstanding the outstanding the After IV and 31 December Issue of Issue with Warrants A are Warrants B are Warrants C are Proposed the Proposed 2013 Warrants Warrants exercised exercised exercised Bonus Issue Acquisition RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000
Share capital 42,518 42,518 85,035 100,142 112,419 133,678 160,414 207,454 Share premium 9,312 9,054*1 8,072*2 44,405*5 49,316*6 63,071*7 36,335*8 36,335 Warrants reserve 6,120 6,120 15,623*3 9,503 9,503 - - - Transaction with non- (13,738) (13,738) (13,738) (13,738) (13,738) (13,738) (13,738) (13,738) controlling interest reserve Retained earnings 24,928 24,928 15,425*3 15,425 15,425 15,425 14,875*9 14,875 Shareholders' Equity/ NA 69,140 68,882 110,417 155,737 172,925 198,436 197,886 244,926
No. of shares in issue ('000) 425,177 425,177 850,353 1,001,416 1,124,193 1,336,781 1,604,138 2,074,538
NA per share (RM) 0.16 0.16 0.13 0.16 0.15 0.15 0.12 0.12
Borrowings (interest-bearing) 5,776 5,776 2,486*4 2,486 2,486 2,486 2,486 2,486 (RM'000)
Gearing (times) 0.08 0.08 0.02 0.01 0.01 0.01 0.01 0.01
Notes:-
*1 After deducting expenses of RM0.26 million incurred in relation to the Bonus Issue of Warrants
*2 After deducting expenses of RM0.99 million incurred in relation to the Rights Issue with Warrants
*3 After the recognition of the fair value of the Warrants C amounting to RM9.50 million in the warrants reserve account from the retained earnings account
*4 After partial repayment of borrowings amounting to RM3.29 million as at the LPD pursuant to the utilisation of proceeds arising from the Rights Issue with Warrants
*5 After adjusting for the increase in the share premium account of RM30.21 million and the transfer from warrant reserve account of RM6.12 million pursuant to the exercise of all outstanding Warrants A at the exercise price of RM0.30 per Warrant A
*6 After adjusting for the increase in the share premium account of RM4.91 million pursuant to the exercise of all outstanding Warrants B at the exercise price of RM0.14 per Warrant B
*7 After adjusting for the increase in the share premium account of RM4.25 million and the transfer from warrant reserve account of RM9.50 million pursuant to the exercise of all outstanding Warrants C at the exercise price of RM0.12 per Warrant C
27 *8 After accounting for the capitalisation of approximately RM26.74 million from the share premium account pursuant to the Proposed Bonus Issue
*9 After deducting estimated expenses of RM0.55 million in relation to the Proposals
6.3 Substantial shareholders' shareholding
The Proposed Bonus Issue will not have any effect on the substantial shareholders' percentage of shareholdings in the Company as the Bonus Shares will be allotted on a pro-rata basis to all shareholders of the Company. However, the number of EAH Shares held by the substantial shareholder will increase proportionately as a result of the Proposed Bonus Issue.
The proforma effects of the Proposed Bonus Issue and the Proposed Acquisition on the substantial shareholder's shareholdings of EAH as at the LPD are as follows:-
Minimum Scenario
Proforma I Proforma II Shareholdings as at the LPD After the Proposed Bonus Issue After I and the Proposed Acquisition*1 <------Direct------> <-----Indirect------> <------Direct------> <------Indirect-----> <------Direct------> <------Indirect-----> Substantial No. of No. of No. of No. of No. of No. of Shareholders Shares % Shares % Shares % Shares % Shares % Shares %
Mohammad Sobri bin 145,877,454 17.15 - - 175,052,944 17.15 - - 175,052,944 11.74 - - Saad
Chong Mui Fun*1 ------293,547,240 19.69 - -
Note:-
*1 The other Vendors' shareholding in EAH after the Proposed Acquisition is less than 5%, and as such, are not listed above
28 Maximum Scenario
Proforma I Proforma II Assuming all the outstanding Warrants After I and assuming all the outstanding Shareholdings as at the LPD A are exercised Warrants B are exercised <------Direct------> <-----Indirect------> <------Direct------> <------Indirect-----> <------Direct------> <------Indirect-----> Substantial No. of No. of No. of No. of No. of No. of Shareholders Shares % Shares % Shares % Shares % Shares % Shares %
Mohammad Sobri bin 145,877,454 17.15 - - 190,427,760 19.02 86*1 -*2 208,136,719 18.51 86*1 -*2 Saad
Chong Mui Fun*3 ------
Proforma III Proforma IV Proforma V After II and assuming all the outstanding Warrants C are exercised After III and the Proposed Bonus Issue After IV and the Proposed Acquisition*3 <------Direct------> <-----Indirect------> <------Direct------> <------Indirect-----> <------Direct------> <------Indirect-----> Substantial No. of No. of No. of No. of No. of No. of Shareholders Shares % Shares % Shares % Shares % Shares % Shares %
Mohammad Sobri bin 251,158,030 18.79 86*1 -*2 301,389,636 18.79 86*1 -*2 301,389,636 14.53 86*1 -*2 Saad
Chong Mui Fun*3 ------293,547,240 14.15 - -
Notes:-
*1 Deemed interested under Section 132(12)(c) of the Companies Act, 1965 by virtue of his spouse's shareholding in EAH upon exercise of her Warrants A
*2 Negligible
*3 The other Vendors' shareholding in EAH after the Proposed Acquisition is less than 5%, and as such, are not listed above
29 6.4 Earnings and EPS
For the latest audited FYE 31 December 2013, EAH had recorded an audited consolidated PAT of RM8.98 million or approximately 1.06 sen per EAH Share (after taking into consideration the increase in the issued and paid-up share capital pursuant to the completed Rights Issue with Warrants). For the latest unaudited FYE 31 December 2014, EAH had recorded an unaudited consolidated PAT of RM4.89 million or approximately 0.57 sen per EAH Share based on the issued and paid-up share capital of 850,353,000 Shares. Meanwhile, for the FYE 31 December 2014, Cekap Group had recorded an audited consolidated PAT of RM10.39 million.
Pursuant to the Proposed Acquisition, the Vendors had provided a profit guarantee of RM56.00 million for the financial years ending 31 December 2015 and 31 December 2016, translating to an average PAT of RM28.00 million per annum. Based on the above and a 20% share of profits of Cekap Group, EAH Group stands to recognise an estimated RM5.60 million per annum for the FYE 31 December 2015 and 31 December 2016, respectively. Moving forward, barring any unforeseen circumstances and assuming the Bonus Shares pursuant to the Proposed Bonus Issue has not been taken into account, the Proposed Acquisition is expected to be earnings accretive based on the Profit Guarantee and contribute positively to the future earnings of the enlarged EAH Group. The Proposed Acquisition is expected to be completed by the second quarter of 2015.
The Proposed Bonus Issue is not expected to have any material effect on the earnings of the Group for the financial year ending 31 December 2015. However, the Proposed Bonus Issue will result in a corresponding dilution in the EPS of the Group due to the increase in the issued and paid-up share capital of the Company after the completion of the Proposed Bonus Issue.
6.5 Convertible securities
As at the LPD, save for the outstanding Warrants A, Warrants B and Warrants C, the Company does not have any other convertible securities.
The Proposed Acquisition will not give rise to any adjustments to the exercise price and/ or subscription rights of the outstanding Warrants A, Warrants B and Warrants C held by each holder of the respective Warrants A, Warrants B and Warrants C pursuant to the deed poll dated 25 November 2010 constituting the Warrants A ("Deed Poll A"), deed poll dated 11 February 2014 constituting the Warrants B ("Deed Poll B") and deed poll dated 9 May 2014 constituting the Warrants C ("Deed Poll C"), respectively.
The Proposed Bonus Issue may give rise to adjustments to the exercise price and/ or number of outstanding Warrants A, Warrants B and Warrants C held by each holder of the respective Warrants A, Warrants B and Warrants C pursuant to the Deed Poll A, Deed Poll B and Deed Poll C, respectively.
Any adjustment which is required will be made in accordance with the provisions of Deed Poll A, Deed Poll B and Deed Poll C to mitigate any potential equity dilution resulting from the Proposed Bonus Issue and to ensure that the status of the holders of the outstanding Warrants A, Warrants B and Warrants C are not prejudiced after the Proposed Bonus Issue. Save for the adjustments to the exercise price and/ or number of outstanding Warrants A, Warrants B and Warrants C, other provisions stipulated in Deed Poll A, Deed Poll B and Deed Poll C including the rights and obligations of the holders of the Warrants A, Warrants B and Warrants C will remain unchanged.
30 Any necessary adjustments to the exercise price and additional number of Warrants A, Warrants B and Warrants C to be issued arising from the Proposed Bonus Issue in relation to the outstanding Warrants A, Warrants B and Warrants C will only be finalised on the Entitlement Date and upon consultation with an approved adviser and certified by the auditors of the Company in accordance with the provisions as contained in the Deed Poll A, Deed Poll B and Deed Poll C. In addition, a notice will be despatched to the respective holders of Warrants A, Warrants B and Warrants C in the event of any such adjustments.
7. APPROVALS REQUIRED
The Proposals are subject to the following approvals being obtained:-
i. Bursa Securities for the following:-
a) the listing of and quotation for the Bonus Shares to be issued pursuant to the Proposed Bonus Issue;
b) the listing of and quotation for the Consideration Shares to be issued pursuant to the Proposed Acquisition;
c) the listing of and quotation for the additional Warrants A, Warrants B and Warrants C to be issued pursuant to the adjustments to be made arising from the Proposed Bonus Issue; and
d) the listing of and quotation for the new EAH Shares to be issued arising from the exercise of the additional Warrants A, Warrants B and Warrants C to be issued by EAH pursuant to the adjustments to be made arising from the Proposed Bonus Issue,
on the ACE Market of Bursa Securities;
ii. The shareholders of EAH for the Proposals at an EGM to be convened; and
iii. Any other relevant authorities, if required.
The Proposed Bonus Issue is not conditional upon the Proposed Acquisition and the Proposed Diversification, and the Proposed Acquisition and the Proposed Diversification are not conditional upon the Proposed Bonus Issue. However, the Proposed Acquisition and the Proposed Diversification are conditional upon each other. Further, the Proposals are not conditional upon any other proposals undertaken or to be undertaken by the Company.
8. HIGHEST PERCENTAGE RATIO
The highest percentage ratio applicable to the Proposed Acquisition pursuant to Rule 10.02(g) of the Listing Requirements of Bursa Securities is 55.32% which is derived from the number of EAH Shares to be issued, compared with the existing issued and paid-up share capital of EAH.
9. INTERESTS OF DIRECTORS, MAJOR SHAREHOLDERS AND/ OR PERSONS CONNECTED
None of the Directors and/ or major shareholders of EAH and/ or persons connected to them have any interest, direct or indirect, in the Proposals, apart from their respective entitlements as shareholders of the Company pursuant to the Proposed Bonus Issue, the rights of which are also available to all other existing shareholders of the Company as at the Entitlement Date.
31 10. DIRECTORS' STATEMENT
The Board, after having considered all aspects of the Proposals, including the rationale, the outlook and future prospects of Cekap Group and the risk factors for the Proposed Acquisition and the Proposed Diversification as set out in Sections 3, 4 and 5 of this announcement, is of the opinion that the Proposals are in the best interest of the Company and the terms and conditions of the SSA are fair and reasonable.
11. APPLICATION TO THE AUTHORITIES
Barring any unforeseen circumstances, the application to the relevant authorities in relation to the Proposals is expected to be made within a period of two (2) months from the date of this announcement.
12. ESTIMATED TIMEFRAME FOR COMPLETION
Barring any unforeseen circumstances and subject to all relevant approvals being obtained, the Proposals are expected to be completed by the second quarter of 2015.
13. ADVISER
RHBIB has been appointed by the Company to act as the Adviser for the Proposals.
14. DOCUMENTS FOR INSPECTION
A copy of the SSA will be made available for inspection at the Company's Registered Office of EAH at 149A, Jalan Aminuddin Baki, Taman Tun Dr Ismail, 60000 Kuala Lumpur during normal business hours from Monday to Friday (except public holidays) for a period of three (3) months from the date of this announcement.
This announcement is dated 18 March 2015.
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