SINGAPORE (Oct 14): Capital World, the property developer formerly known as Terratech Group, says it believes it is able to continue as a going concern, despite a disclaimer opinion by the company’s independent auditors Messrs Ernst & Young LLP in the group’s FY19 financial statements.
Going concern is an accounting term for a company that has the resources needed to remain in business for the foreseeable future.
For the FY19 ended June, Capital World sank to a net loss of RM46.8 million ($15.3 million), reversing into the red from earnings of RM56.6 million a year ago.
The decline was led by a surge in general and administrative expenses, which more than trebled to RM126.6 million.
This was largely attributed to impairment of intangible assets of RM72.0 million mainly pertaining to the mining rights as well as goodwill arising from the reverse takeover of its mining business by the property business in 2017.
In addition, gross profit fell 26% to RM88.7 million in FY19, compared to RM120.6 million a year ago, even as revenue dipped 4% to RM137.2 million.
The group attributed the decline in revenue to a lower increase in percentage of completion, which is used for revenue recognition, as Capital City Mall, the retail podium component of the group’s mixed development in Johor, Malaysia, neared completion.
Capital World added that the lower sales of retail podium units amid weak market sentiments also contributed to the lower revenue.
Meanwhile, cost of sales increased in FY19 mainly due to the increase in construction cost towards the completion of the Capital City Mall in 2Q19.
Disclaimer opinion
Even as Capital World struggled with the challenging conditions affecting the property market in Johor, auditors Messrs Ernst & Young LLP flagged the company's high leverage and uncertainty to continue as a going concern.
As at end June, Capital World’s cash and cash equivalents stood at RM2.4 million, while its loans and borrowings amounted to RM44.6 million.
The auditors also noted the group's working capital comprised mainly inventory properties, and raised questions over the group's plans to resolve liquidity problems and its ability to cash in on these inventory properties amid the weak property market sentiments.
In a filing to SGX on Monday, Capital World says “the board is of the opinion that the group will be able to continue as going concern”.
The group says it has obtained approval to extend the repayment date of loans and borrowings of RM26.5 million, which was due at the end of this month, by a further 12 months to Oct 31, 2020.
It adds that it has also, in July this year, entered into a term sheet for the proposed allotment and issuance of some 916 million new shares in the company to two new subscribers, which would raise proceeds of approximately $17.6 million. “The subscribers are currently in the midst of completing the due diligence process,” the group says.
Further, the group says it has reached an agreement with a key supplier to set an upper limit on payment, and to defer the payment for construction services to be rendered by this supplier over the next 15 months from July 2019 to September 2020.
Capital World adds that the deferred revenue of RM3.1 million which comprises advance payments from customers for inventory properties sold by the group for the Capital City mall and Capital Suites “will be recognised as revenue based on the percentage of completion method and will not entail cash outflow”.
In addition, it notes that the RM24.3 million for cost of land owed to Achwell Property will not need to be paid during the construction phase of the development project.
“The above considerations,” Capital World says, “would allow the group to generate sufficient cash flows and meet its obligations as and when they fall due.”
SGX query
Messrs Ernst & Young LLP’s disclaimer opinion and uncertainty over Capital World’s ability to continue as a going concern comes as SGX also raised questions over the group’s finances.
On Oct 4, SGX had issued a query to Capital World over what seems to be “a cycle of convertible bonds/loans with increasing interest rates which will have a very dilutive effect, and high arranger fees which are to be paid in cash to the arranger”.
The interest rate for the convertible bonds and convertible loans were at 10% and 15, respectively.
The market regulator also asked Capital World to indicate when it anticipates that the business will start bringing in operational cashflow.
In response to queries from SGX, the group on Oct 10 said it had been “trying very hard to obtain financing from [financial institutions and banks] without any success to date”.
The group added that it had accepted the terms of the convertible loan “to prevent a situation of default” as the property market in Johor has not recovered in the last two years.
“[The] company has been exploring financing with the FIs/Banks but had not been successful due to the weak real estate market sentiments in Malaysia. The company had been discussing with private funds for the financing, and the indications from private funds was that their interest rates would be between 15% to 18% per annum,” Capital World said in the bourse filing.
Meanwhile, it noted that its cashflow had been affected by the “slow” sales of units for the Capital City Mall and Serviced Suites.
It added that it expects to launch the Serviced Apartments in early 2020, and is “cautiously optimistic” that this would help improve its cashflow.
As at 1pm on Tuesday, shares in Capital World are trading at 0.1 cent lower, or down 6.3%, at 1.5 cents – hovering just above its 52-week low of 1.2 cents. Year-to-date, the counter has plunged more than 69%.
