Company : ASTRAL SUPREME BERHAD ( ASB or Company ) Subject : Non-Related Party Transactions Description : Letter of award to Astral Supreme Construction Sdn. Bhd. ( ASC ) by Kuasa Lumpadang Sdn. Bhd.( KLSB ) to undertake subcontract works ( Award ) 1. INTRODUCTION The Board of Directors of ASB ( Board ) wishes to announce that its wholly-owned subsidiary, ASC has today received a Letter of Award ( LOA ) from Kuasa Lumpadang Sdn.Bhd.( KLSB ) to undertake subcontract works for a total contract value of approximately RM80.53 million in relation to Program Perumahan Rakyat Project at Ulu Perasan, Kota Belud, Sabah ( Kota Belud Project ). 2. INFORMATION OF KOTA BELUD PROJECT On 3 November 2015, ASC has received a LOA from KLSB to undertake subcontract works for a total contract value of approximately RM80.53 million for Kota Belud Project. ASC will not enter into any definitive contracts or agreements with KLSB as the LOA is comprehensive and legally binding. The details of the Kota Belud Project and salient terms of the LOA are set out below:- Date of LOA 3 November 2015 Design and Building Contractor Main Contractor Owner of the project Nature of sub contract and scope of work Contract sum Contract cost Estimated gross profit ( GP ) margin Status of the project Duration of the contract Expected commencement date and completion date of the project ASC KLSB Jabatan Perumahan Negara To supply material, labour, necessary tools and equipment to carry out design, build and deliver 900 units single storey terrace house and other related works at Ulu Perasan, Kota Belud, Sabah. ASC will undertake the main building works (except for earthwork) which includes structure, architecture and mechanical and electrical works complete with ancillary building, landscaping and infrastructural works. RM80.53 million Estimated RM75.05 million 6.80% Earthwork is in progress and part of the earthwork is completed and ready for the sub-structure works of the main building works. 24 months Commencement date: 4 th Quarter 2015 Expected completion date: 24 months from the commencement 1
The salient terms of the LOA are as follows: (i) Subcontract sum The awarded subcontract sum shall be fixed at a lump sum of approximately RM80.53 million. The agreed terms and conditions as stipulated in the main contract of the Kota Belud Project ( Main Contract ) shall be on back-to-back basis. The back-to-back arrangement shall mean that the subcontract between ASC and KLSB shall be based on the agreed terms stipulated in the Main Contract, as follow: (a) (b) (c) The Main Contract is based on firm price tender for the execution for the whole of the construction works for the Kota Belud Project, and no adjustment will be made to the contract sum and rates for any fluctuations, and the contractor will not be reimbursed; The defect liability period ( DLP ) is 24 months from the date of practical completion; and The liquidated and ascertained damages ( LAD ), wherein, if the subcontractor fails to furnish any cause of the delay and is unable to complete the whole subcontract works by the date of completion in accordance to the agreed work program or any extended date of completion thereof, the subcontractor shall pay at a rate of 0.018% of the total contract value per day. The total contract value of approximately RM80.53 million for the Award, comprises the following:- RM( 000) Preliminaries site expenses (1) 4,210 Main building works 47,782 Electrical works 4,536 Mechanical services 4,721 Civil works 16,832 Piling works 1,048 Provisional sum 1,396 Total contract value 80,525 Note: (1) Preliminaries site expenses include, amongst others, the supply of plant and machinery, site management, site storage, scaffolding, site office and equipment, electricity, water, telephone and fax, workers accommodation, clearing and cleaning, survey, shop drawings and as-built drawings, sample submission, mock-up unit, testing and commissioning and site security. (ii) Subcontract and construction period The completion date shall be in accordance with Main Contract of KLSB. The subcontract is for a period of 24 months. (iii) Insurances ASC is required to purchase all the necessary insurances except the coverage of Contractor All Risks and Workman s Compensation which is covered under the Main Contract. (iv) LAD The LAD of the subcontract shall be based on back-to-back basis of the Main Contract terms and conditions contained thereof. If the subcontractor fails to furnish any cause of the delay and is unable to complete the whole subcontract works by the date of completion in accordance to the agreed work program or any extended date of completion thereof, the subcontractor shall pay to KLSB at a rate of 0.018% of the total contract value or approximately RM14,495 per day. 2
(v) DLP The DLP of the subcontract shall be based on back-to-back basis of the Main Contract terms and conditions contained thereof. (vi) Withdrawal of subcontract KLSB reserves the right to withdraw the whole or part of the subcontract works should the progress of the work is not satisfactory in accordance to its requirement. 3. INFORMATION OF KLSB KLSB was incorporated in Malaysia on 13 June 2011 under the Companies Act 1965 of Malaysia as a private limited company with an authorised share capital of RM1,000,000 comprising 1,000,000 ordinary shares of RM1.00 each, of which 775,000 ordinary shares have been issued and fully paid-up. KLSB is engaged in the business of general contractor, land and housing developer, interior design and other construction works. It is registered with Kementerian Pembangunan Sumber dan Kemajuan Teknologi Maklumat with bumiputera status and is a registered Grade G7 contractor with Construction Industry Development Board ( CIDB ). The Directors of KLSB are Encik Ahmad Farduain Bin Ismail ( AF ) and Mr Richa Sipaina Jusilie ( RSJ ). The shareholders of KLSB are set out below:- Shareholders No. of KLSB shares held % AF 53,475 6.90 Roney Julius 395,250 51.00 RSJ 326,275 42.10 Total 775,000 100.0 4. RATIONALE FOR THE AWARD In March 2014, ASC commenced its construction activities by undertaking two (2) subcontract works for a total contract value of RM105.0 million for the Melaka Projects. The Melaka Projects are ASC s maiden projects in its foray into construction sector and are expected to be completed by the 1st quarter of 2016. Following thereto, the Award presents an opportunity for the Group to replenish its order book and is expected to provide the Group with additional source of revenue for the next three (3) financial years, considering the near completion of the Melaka Projects. The Award demonstrates the Board s initiative in pursuing continuing growth in its construction business. The Board believes the Award will lead to an expansion of the Group s construction activities in the future and contribute positively to the Group s financial performance. Further, as a relatively new player in the construction sector, the Award provides an opportunity for the Group to enhance their credentials in the construction segment and open up new opportunities in the state of Sabah. The Group intends to source the funding of the Award through internally generated funds. 5. INDUSTRY REVIEW AND PROSPECTS OF THE ASTRAL GROUP 5.1 Overview of the Malaysian economy The Malaysian economy recorded a growth of 4.9% in the second quarter of 2015 (Q1 2015: 5.6%), driven mainly by private sector demand. On the supply side, growth was underpinned by the major economic sectors. On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.1% (Q1 2015:1.2%). 3
The private sector remained the key driver of growth during the quarter. Private consumption expanded at a more moderate rate of 6.4% (Q1 2015: 8.8%) as households adjust to the implementation of the Goods and Services Tax (GST). Private investment grew more moderately by 3.9% (Q1 2015: 11.7%), due to a decline in spending on machinery and equipment, especially in the transportation segment, and slower investment in dwelling services. Growth in public investment turned negative in the second quarter (-8.0%; Q1 2015: 0.5%), attributed mainly to the near completion of a few projects by public enterprises, which more than offset the positive growth of capital expenditure by the Federal Government. Meanwhile, public consumption recorded a higher growth of 6.8% (Q1 2015: 4.1%) following the stronger expansion in supplies and services expenditure amid sustained growth in emoluments. On the supply side, the major economic sectors registered more moderate growth during the quarter. The construction sector recorded lower growth due to a moderation in real activity in the residential, non-residential and civil engineering sub-sectors. (Source: Economic and Financial Developments in the Malaysian Economy in the Second (2nd) Quarter of 2015, Bank Negara Malaysia) 5.2 Overview of the construction, property investment, and project management services industries in Malaysia The construction sector continues to expand driven by ongoing private investment and Tenth Malaysia Plan (10MP) projects. In addition, the residential subsector is expected to expand with steady demand for affordable houses. Value-added of the construction sector grew at a moderate pace of 7.7% during the first half of 2015 (January June 2014: 14.5%) on slower civil engineering and residential activities. The highest share was contributed by the residential (27.7%) followed by civil engineering (27.1%), non-residential (26.4%) and specialized construction activities (18.8%) subsectors. The total value of construction work completed during the first half of 2015 expanded by 11.6% to RM56.0 billion with 20,056 construction projects registered (January June 2014: 15.7%; RM50.0 billion; 19,649 projects). The private sector continued to dominate construction activities with a share of 67.7% in the first half of 2015. Amid the moderate growth outlook, the construction sector is expected to expand by 8.8% in 2015 (2014: 11.8%). The residential subsector expanded moderately by 9.8% (January June 2014: 22.1%) partly due to the decline in new housing approvals which decreased by 32.9% to 66,770 units (January June 2014: 37.3%; 99,461 units), reflecting cautious sentiment among housing developers amid a challenging environment. However, the moderation was cushioned by the steady growth in incoming supply at 13.8% (January June 2014: 10.3%). The take-up rate for residential units increased to 31.4% to 8,542 units in the first half of 2015 (January June 2014: 23.8 %; 11,588 units). (Source: Economic Report 2015/2016, Ministry of Finance) 5.3 Overview of the construction, property investment, and project management services industries in Sabah Sabah property market saw a recovery in the first half of 2014. A total of 4,405 transactions worth RM2.37 billion were recorded, up by 1.7% and 9.2% in volume and value respectively against the first half of 2013. Residential property spearheaded the overall market activity, dominating 56.8% of the total volume. Prices of residential property were generally stable across the state with movements noted in choice locations served with better infrastructure and social facilities. In the primary market, 917 units were launched. Sale performance was quite encouraging at 47.3%. On the other hand, the residential overhang volume increased. There were 248 units worth 4
RM134.20 million, up by 10.2% in volume against the first half of 2013. However, value of primary market was down by 7.0%. On similar upward trend, the unsold under construction increased to 2,405 units, up by 3.4% while the unsold not constructed units grew more than double to 500 units. The construction sector was promising. Both residential and shops sub-sectors recorded more completions, starts and new planned supply against the first half of 2013. The industrial sub-sector was inactive with no completion, starts and new planned supply. In the first quarter of 2015, the non-residential subsector rose by 17.4% (Q4 2014:16.9%) bolstered by the construction of factories, particularly in Sabah and Sarawak as well as the construction of buildings for education. The residential subsector increased by 15.3% (Q4 2014: 15%) mainly due to higher housing construction activities amid favourable economic and business conditions. This indicates an upward trend in the Sabah construction sector for 2015. (Source: Property Market Report First Half 2014, Valuation and Property Services Department, Ministry of Finance and Malaysia Economy First Quarter 2015, Ministry of Finance) 5.4 Prospects of the Astral Group The Board takes cognisance that Malaysia s construction sector, based on the total value of construction projects awarded, has registered healthy growth rates historically, having grown from RM60.9 billion in 2006 to RM156.8 billion in 2014 at CAGR of 12.5%. Both residential as well as commercial and industrial construction sectors witnessed high growth between 2006 and 2014, having registered CAGR of 12.5% and 17.9% respectively over the period. Although the residential, commercial and industrial construction sectors are expected to be adversely impacted by an anticipated slower economic growth in Malaysia in the next one (1) to two (2) years, any fall in construction project values awarded is expected to be short-term, and these sectors are anticipated to witness growth in following years as economic conditions improve in the country, based on historical trends. As stated in Section 4 of this announcement, the Award presents an opportunity for the Group to replenish its order book and is expected to provide the Group with additional source of revenue for the next three (3) financial years, considering the near completion of the Melaka Projects. The Kota Belud Project is a property development under Malaysia Government s Program Perumahan Rakyat or People s Housing Program initiative which aims to provide affordable housing for low income group (source:http://www.kpkt.gov.my). Therefore, the Group is of the view that the Award would provide a platform to further improve its credentials in the construction segment and to venture into the property related activity, in the state of Sabah, eventually enabling the Group to continue to accumulate experiences and credentials in construction industry. After taking into consideration the favourable prospects of the construction industries in Malaysia and Sabah as stated in Sections 5.2 and 5.3 of this announcement and in line with the Group s long term objectives in venturing into the property and construction industry, the Board is of the view that the Award would augur well for the Group s performance. 6. RISK FACTORS The Board of Astral does not foresee any material change to the risk profile of the Group as a result of the Award as ASC has previously commenced its construction activities by undertaking two (2) subcontract works for a total contract value of RM105.0 million for the Melaka Projects. The Melaka Projects are ASC s maiden projects in its foray into construction sector and is expected to be completed by the 1st quarter of 2016. Notwithstanding the above, the additional risks specific to the Award, which are by no means exhaustive are set out below:- 5
(a) Risk of non-payment by KLSB The Award provides that the progress for the subcontract works would be valued and certified by KLSB, and the disbursement of the payment shall be made by KLSB within two (2) months upon receiving the claim submitted by ASC. Notwithstanding the above, there is no assurance that ASC will receive the payment although the risk of non-payment by KLSB is low given that KLSB s financing for the project is in place and whether such non-payment by KLSB will not have any material adverse effect on our Group s financial performance in the future. To mitigate the risk of such non-payment, the Board will monitor the outstanding amount closely by analysing the monthly aging report and follow-up closely with KLSB. (b) Adequacy of insurance coverage In ASC s business there can be no assurance that all liabilities incurred will be sufficiently covered by insurance and as such, claims for damages arising from ASC s operations which are not adequately covered by ASC s insurance coverage may have an adverse impact on ASC s financial conditions or results of operations. Nevertheless, ASC believes that it has adequate insurance coverage on its assets, employees and construction projects. It is also ASC s practice as well as a condition imposed by the Main Contractor on ASC to commence subcontract works to take up, amongst others, contractors all risk insurance and public liability insurance in ensuring risks of under-coverage are minimised. ASC reviews its insurance policies on a regular basis to ensure that there is adequate coverage on its assets, employees and construction projects. Such policies include contractors all risk insurance, fire insurance, workers insurance and public liability insurance to mitigate any potential losses which may arise due to unforeseen circumstances For information purposes, ASC has not filed any claim for damages against the insurers arising from its operations in the past. (c) Ability of ASC to manage the costs of the Kota Belud Project The profits derived from the Kota Belud Project are dependent on ASC s ability to manage the costs of the project meticulously and deploy its resources efficiently to ensure timely delivery of the subcontract. There can be no assurance that ASC is able to sustain the profitability of the Kota Belud Project given the continuing weakening of RM against USD due to the possible hike of importing construction material. If ASC is unable to maintain the cost of the Kota Belud Project, this may have a material adverse impact on Astral Group s future profitability, financial performance and prospects. 7. EFFECTS OF THE AWARD 7.1 Issued and paid-up share capital and substantial shareholders shareholdings The Award will not have any effect on the issued and paid-up share capital and the substantial shareholders shareholdings of ASB as the Award does not involve any issuance of new shares in ASB. 7.2 Net assets ( NA ) and gearing The Award is not expected to have any material effects on the NA and gearing of the Group for the financial year ended / ending ( FYE ) 31 May 2016. For illustrative purposes, the pro forma effects of the Award on the NA and gearing of the Group are as follows:- 6
Audited As At FPE 31 May 2015 After the Award (RM 000) (RM 000) Share capital 58,372 58,372 Share premium 6,994 6,994 Capital reserve 5,527 5,527 ICULS 331 331 Warrants reserve 4,418 4,418 Accumulated losses (59,542) (54,066) (1) Equity attributable to owners of the Company/ 16,100 21,576 NA No. of Shares in issue ( 000) 291,859 291,859 NA per Share (RM) 0.06 0.07 Total borrowings (RM 000) 785 785 Gearing (time) 0.05 0.04 Note: (1) The pro forma effects of the Award to the NA and gearing of the Group is depicted herein for illustrative purposes only, assuming that the Kota Belud Project is completed within FYE 31 May 2015 and the expected net profits from the Award of approximately RM5.48 million (being the contract value of approximately RM80.53 million less estimated cost to be incurred of approximately RM75.05 million) have been fully realised as at 31 May 2015. 7.3 Earnings and EPS Barring any unforeseen circumstances, the Award is expected to contribute positively to the earnings and earnings per share of the Group for the next three (3) financial years as the earnings would be realised in stages over the tenure of the subcontract based on the progress of the project. Any profits attributable to the Group would be realised in stages over the tenure of the subcontract based on the progress of the subcontract. 7.4 Convertible securities The Award is not expected to have any effect of the existing Warrants 2011/2016, Warrants 2013/2018 and ICULS of ASB. 8. APPROVAL REQUIRED The Award is not subject to any approvals from the shareholders of the Company and any other relevant authorities and/or parties. In addition, the Award is not conditional upon any other proposals undertaken / to be undertaken by the Company. 9. INTERESTS OF DIRECTORS, MAJOR SHAREHOLDERS AND/OR PERSONS CONNECTED WITH THEM None of the Directors and/or major shareholders of ASB and/or persons connected to them has any interest, either direct or indirect, in the Award. 10. DIRECTORS STATEMENT The Board, having considered all aspects of the Award including the rationale and effects, is of the opinion that the Award is in the best interest of ASB. 7
11. DOCUMENTS AVAILABLE FOR INSPECTION A copy of the LOA is available for inspection at the registered office of the Company at No. 2-1, Jalan Hartamas 8, Sri Hartamas, 50480 Kuala Lumpur during normal business hours from 9.00 a.m. to 5.00 p.m. from Monday to Friday (excluding public holidays) for the period of three (3) months from the date of this announcement. This announcement is dated 3 November 2015. 8