The Case of United Engineers Malaysia (UEM) Berhad

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THE 10

^th

ISLAMIC BANKING, ACCOUNTING, AND FINANCE INTERNATIONAL CONFERENCE 2022

(iBAF 2022)

Post Corporate Restructuring Analysis: The Case of United Engineers Malaysia (UEM) Berhad

Nur Ainna Ramli

Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Bandar Baru Nilai, 71800 Nilai, Negeri Sembilan Malaysia

Tel: +606 798 6413 E-mail: [email protected]

Fauzias Mat Nor

Tel: +606 797 8660 E-mail: [email protected]

Ainulashikin Marzuki

E-mail: [email protected]

Norazlan Alias

Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), 43600 Bangi, Selangor Malaysia

E-mail: norazlan @ukm.edu.my

Mohd Hasimi Yaacob

Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), 43600 Bangi, Selangor Malaysia

E-mail: [email protected]

Abstract

The case study aims to examine the post-Malaysian corporate restructuring of United Engineers Malaysia Berhad. This case also will highlight the overview of the United Engineers Malaysia Berhad for the pre-and post-corporate restructuring. The financial performance of the company will be discussed specifically for the post-corporate restructuring. The post period for the selected United Engineers Malaysia Berhad case is from 2006 to 2020.UEM and Renong were taken private and delisted from Bursa Malaysia, Kuala Lumpur Stock Exchange (KLSE) in 2001 and 2003 respectively. On 14 November 2003, UEM World took over the listing status of Renong Berhad as the newly listed flagship of UEM Group-debt restructuring exercise was completed in November 2003. Overall, it can be concluded that debt management after corporate restructuring was more prudent which consequently make the companies have better performance.

Keywords: Post corporate restructuring; United Engineers Malaysia Berhad

1. Introduction

Over the past decade, corporate restructuring has increasingly become a staple of business and a common occurrence around the world. An unprecedented number of companies across the world have reorganized their divisions, restructured their assets, and updated their operations in a bid to stimulate company performance. It has facilitated copious organizations to react rapidly and more effectively to new opportunities and unanticipated pressures. This case study has tried to study the corporate restructuring of one publicly listed company in Malaysia, United Engineers Malaysia (UEM). The post period for the selected United Engineers Malaysia Berhad case is from 2006 to 2020.

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2. Background UEM

UEM Group Berhad (UEM Group), formerly known as United Engineers (Malaysia) Limited, was established on 10 March 1966 under the Companies Act 1965 to assume the Malaysian operations of United Engineers Ltd., a Singapore-listed construction business. United Engineers Ltd changed its name to United Engineers (Malaysia) Sdn Bhd on April 15, 1966. Later, on 10 July 1975, they were listed on the Kuala Lumpur Stock Exchange's Main Board (KLSE) and this resulted in a new name, United Engineers (Malaysia) Berhad. The company adopted its current name, UEM Group, on January 23, 2007. In 1990, Renong Berhad acquired UEM including all other companies related to the organization’s fundamental structuring. As a subsidiary of Renong Berhad, UEM was involved in a few significant businesses, including expressway, manufacturing, trading and transportation, project management, engineering and construction, energy and oil & gas, and project management. Their primary strengths include undertaking large privatization projects, the first of which was the North-South Expressway, which was finished 15 months early.

Malaysia was hit hard by the 1997 Asian financial crisis. The company and its shareholder, Renong, were severely tested and challenged by difficulties such as huge corporate debts and cash flow constraints during a persistent recessionary economy. In response, debt and management restructuring was implemented. However, the restructuring remained unresolved and in July 2001, the Government, through Khazanah Nasional Berhad and its wholly owned subsidiary Danasaham, offered to take over United Engineers (Malaysia) Berhad in a RM3.8 billion transaction. In September 2001, the conditional voluntary offer to purchase all outstanding shares and warrants was successfully completed. This included the acquisition of Renong's entire 37.9 percent ownership of the company. The company was turned private on 15 October 2001 and was delisted from Kuala Lumpur Stock Exchange (KLSE). By the end of 2003, the company’s debt burden had reduced significantly. Since the Danasaham rescue and subsequent corporate restructuring of Renong, they have not only restored investors’

confidence but also emerged on a firmer foundation.

3. Overview of Corporate Restructuring

The term corporate restructuring refers to any change in capital structure, ownership, or in operation, which is outside the ordinary course of the business. Norley et al. (2001) define restructuring as the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable and better organized for its present needs. In a broader perspective, corporate restructuring involves a major change in the composition of a firm’s assets combined with a major change in its corporate strategy as corporate restructuring is not mutually exclusive but frequently occurs together. Corporate restructuring is also a complex and multidimensional phenomenon. Figure 1 briefly outlines the definition and scope that is commonly used to describe corporate restructuring.

Figure 1. Definition and scope of corporate restructuring

4. Pre-Corporate Restructuring

The selected financial data for UEM/Renong for pre-corporate restructuring is selected from the year 1990 until 2001. Ofek (1993) and Baek, et al. (2001) use two basic variables, capital structure, and profitability, when examining the responses of financially distressed firms to poor performance. Most of the capital structure characteristics used by Ofek (1993) are adopted including leverage, liquidity ratios, and market value of equity (MVE).

CORPORATE RESTRUCTURING

Change of ownership/corporate

control

Change in capital structure/ Restructuring

debt 1. Leveraged buyouts

2. Debt restructuring -leveraged -recapitalisations 3. Debt for equity swaps

4. Share repurchase

Change in operation/

activites/operational restructuring 1. Changes in the organizational structure 2. Change of business level

3. Retrenchment 4. Reorganized 5. Downsizing

Portfolio restructuring/changing

assets structure

1. Divestiture - selloff or assets

- Spinoff - Equity carve out

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4.1 Financial performance

In the summary descriptive analysis for the pre-corporate restructuring between 1990 and 2001, UEM's assets increased by 36 times from RM729.6 million in 1990 to 26.588 billion in 2000. While its paid-up capital increased from RM184.470 million to 408.530 million (more than two times). Renong's assets increased from RM75.267 million in 1990 to RM11.537 billion (153 times) while its paid-up capital increased from RM 54.968 million to 1.161 billion (about 21 times). The ROE, ROTA, and Tobin’s Q for both firms are at their worst in the year of the financial crisis (1997 and 1998). The corporate restructuring in the year 1998 has somewhat stabilized their financial performance except for the year 2001 for Renong. However, both firms have been delisted for UEM in the year 2001 and Renong in year 2003.In October 1998, Renong announced it has been unable to meet its interest and fee obligations totaling RM12.03 billion and subsequently announced a debt restructuring arrangement in March 1999. These scenarios were consistent with Gilson, John & Lang (1990) where higher leveraged firms are most likely to experience corporate restructuring once default occurs.

4.2 Corporate structure of UEM and Renong before 2001

Figure 2 show Syarikat Danasaham Sdn Bhd (“Danasaham”), a wholly owned subsidiary of Khazanah Nasional Berhad, made a Conditional Voluntary Offer (“CVO”) to purchase the entire shares and warrants of United Engineers (Malaysia) Berhad (“UEM”), which included Renong’s 37.9% interests in UEM in 2001. The acceptance of this offer by Renong and other shareholders of UEM has resulted in Danasaham becoming effectively a substantial shareholder of Renong by virtue of UEM’s 31% stake in Renong. This will bring UEM to be delisted from the stock exchange of Bursa Malaysia.

Figure 2. Corporate structure of UEM and Renong before 2001

5. Post-Corporate Restructuring

The discussion for the pos-corporate restructuring is selected from the year 2006 until 2020¹⁷. UEM and Renong were taken private and delisted from Bursa Malaysia, Kuala Lumpur Stock Exchange (KLSE) in 2001 and 2003 respectively. On 14 November 2003, UEM World took over the listing status of Renong Berhad as the newly listed flagship of UEM Group-debt restructuring exercise was completed in November 2003. Later, as part of a restructuring exercise undertaken by UEM World Berhad, UEM Land Holdings Berhad was incorporated on 20 August 2008. The restructuring was undertaken to move UEM Land Holdings to the next growth paradigm and unlock value for shareholders, as well as allow direct equity participation in the Company by public investors.

This culminated in the successful public listing of UEM Land Holdings on Bursa Securities on 18 November 2008. In 2011, UEM land Holding Berhad acquired Sunrise Berhad (“Sunrise”) which is now known as UEM Sunrise. Meanwhile, Faber Group Berhad which is also one of the listed flagships of UEM Group, changed the company name to UEM Edgenta Berhad in 2014. The reason for changing the name is Faber Group Berhad has merged with “Projek Penyelenggaraan Lebuhraya Berhad” and Opus Group Berhad. The transformation to the new company name enables the company to focus entirely on the asset and facility management business in terms of better service offering to the customers. Figure 3 shows the corporate structure of both companies after corporate restructuring.

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5.1 UEM Sunrise Bhd

UEM Sunrise Berhad formerly known as UEM Land Holdings Berhad was incorporated in 2008 pursuant to the Restructuring which resulted the company becoming the holding company of UEM land Group. UEM Land was incorporated as a public limited company under the name of Renong in 1982. The UEM Land Group originally focused on a range of infrastructure-related businesses, including real estate investment business and acquired extensive reserves of land in Johor, known as Nusajaya during mid-1990s. UEM Land was a subsidiary of UEM World which, in turn, was a subsidiary of UEM Group. Prior to the restructuring, UEM Sunrise’s operations were carried out under the UEM Land Group. Upon completion of the Reorganization on 4 September 2008, UEM Sunrise held the entire issued and fully paid-up ordinary share capital in UEM Land. Also, as a part of the Restructuring, UEM World will distribute (in the form of dividend) its entire shareholding in UEM Land of 71.46% to the Entitled Shareholders to enable them to have direct participation in the equity of UEM Land (UEM Land prospectus, 2008). UEM World also sell its stakes in four of its subsidiaries to its shareholders and will focus on property development in the booming southern region of Johor.

5.2 UEM Edgenta Bhd

In 2000, UEM Berhad acquired Faber group Berhad and currently the Faber Group Berhad is now known as UEM Edgenta Berhad which started to list in Bursa Malaysia in 2017, a new brand that redefines the asset management industry. Listed on the Main Market of Bursa Malaysia Securities Berhad, the company believe that they are a leader in Total Asset Management providing asset consultancy services, healthcare services and infra services amongst others.

Listed at Bursa Malaysia as at 2020

Figure 3. Corporate structure of UEM Group 2022 Source: Bursa Malaysia 2022

Figure 3 shows UEM Sunrise and UEM Edgenta, subsidiaries of UEM Group which in turn is wholly owned by Khazanah, an investment holding company of the Government. Upon restructuring in 2008, UEM Sunrise’s operations were carried out under UEM Land. Meanwhile, UEM Edgenta is also subsidiary of UEM Group listed on the Main Market of Bursa in 2017.

5.3 Financial Performance

UEM Sunrise’s assets increased by 38 times from RM354.2 million in 2006 to 13.480 billion in 2020. While its paid-up capital increased from RM121.4 million to 496 million (more than two times). UEM Edgenta’s assets increased from RM851.1 million in 2006 to RM2807.4 billion but its paid-up capital decreased from RM298 million to RM268.1 million. Earning before tax, interest, and depreciation (EBITD) for both companies report positive figure until 2020. It seems that both UEM Sunrise and UEM Edgenta have more financial stability after corporate restructuring of UEM Land in 2008 and Faber Group in 2014. These key financial data of both companies for the period of 2006 to 2020 are reported in Table 1 and Table 2.

Khazanah National

UEM Group

Projek Lebuhra ya Us a ha s a ma Bhd

Projek Lebuhra ya Uta ra -Sel a ta n Bhd Li nkedua Ma l a ys i a

Bhd Others (not listed)

UEM Builders CIMA

Opus Group Bhd

Edgenta PROPEL Bhd

UEM La nd Bhd

Sunri s e Bhd

Others

(not listed) Others

(not listed) UEM Sunrise UEM Edgenta

PLUS Malaysia

100%

51%% 100% 50.38% 69.14% 69.56%

100%

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Table 1. Summary of Key Financial Data of UEM Sunrise Berhad for the period of 2006-2020

Year

Total Assets

Total Equity

Paid–up

Capital Price Market Value

Total Debt

Total Bank Debt

EBITD NTAB Dividend (%) (RM

00‘000)

(RM

‘000)

(RM

‘000) (RM) (RM

‘000)

(RM

‘000)

(RM

‘000)

(RM

‘000) (%) (%) 2006 354,200 15,000 121,400 1.79 887,600 339,200 244,500 141,434 0.12 #N/A 2007 271,800 118,500 121,400 4.04 1,704,800 153,300 55,000 457,726 0.98 #N/A 2008 306,100 125,100 121,400 0.44 534,160 181,000 59,100 73,036 1.03 #N/A 2009 353,300 152,600 121,400 1.23 139,620 200,700 69,100 111,622 1.26 #N/A 2010 397,100 268,700 182,100 2.44 361,798 128,400 40,800 184,357 1.48 #N/A 2011 779,400 483,700 216,200 2.42 917,850 295,700 112,300 373,264 2.24 #N/A 2012 908,600 531,500 216,400 2.10 1,046,308 377,100 149,000 498,707 2.46 #N/A 2013 980,900 601,900 226,900 2.36 930,523 379,000 172,200 601,746 2.65 3.00 2014 1,111,000 633,300 226,900 1.41 1,070,834 477,700 212,000 532,627 2.79 4.00 2015 1,189,500 680,800 227,700 1.12 648,853 508,700 222,800 309,443 2.99 3.00 2016 1,294,000 683,300 227,700 1.05 508,192 610,700 240,400 225,430 3.00 1.60 2017 1,363,300 688,900 511,000 1.04 476,430 674,400 273,400 508,489 1.35 #N/A 2018 1,412,400 707,700 511,000 0.67 499,118 704,700 239,500 482,275 1.38 1.00 2019 1,344,900 726,400 511,000 0.71 301,739 618,500 235,800 497,649 1.42 #N/A 2020 1,348,000 690,200 496,000 0.50 322,158 657,800 260,900 529,410 1.39 #N/A

Table 2. Summary of Key Financial Data of UEM Edgenta Berhad for the period of 2006-2020

Year

Total Assets

Total Equity

Paid–

up Capital

Price Market Value

Total Debt

Total Bank Debt

EBITD NTAB Dividend (%)

(RM

‘000)

(RM

‘000)

(RM

‘000) (RM) (RM

‘000)

(RM

‘000)

(RM

‘000)

(RM

‘000) (%) (%) 2006 851,100 261,800 298,000 0.55 162,410 589,300 253,500 133,750 0.88 N/A 2007 890,000 296,300 363,000 1.30 470,448 593,700 197,900 125,740 0.82 2.00 2008 759,400 318,100 363,000 0.63 226,875 441,300 187,500 140,247 0.88 3.00 2009 890,500 389,200 363,000 1.50 544,863 501,300 177,500 166,523 1.07 4.00 2010 989,600 448,900 363,000 2.37 859,584 540,700 161,200 155,739 1.24 6.00 2011 1,103,300 488,000 90,800 1.55 1,409,216 615,300 71,000 147,992 5.37 8.00 2012 949,700 518,000 90,800 1.26 114,226 431,700 13,000 218,440 5.70 28.00 2013 2,616,800 1,391,800 90,800 2.21 2,008,496 1,225,000 163,700 118,312 15.33 10.00 2014 2,646,000 1,159,400 203,400 2.37 4,816,512 1,486,600 314,500 383,090 5.70 10.00 2015 2,617,400 1,339,900 203,400 3.08 626,472 1,277,500 329,500 375,815 6.59 23.00 2016 3,529,300 1,368,800 207,900 3.21 667,359 2,160,500 761,100 178,666 6.58 15.00 2017 3,006,000 1,583,400 268,100 2.33 6,236,006 1,422,600 442,500 231,198 5.91 15.00 2018 2,877,700 1,502,300 268,100 2.72 729,232 1,375,400 408,000 253,652 5.60 29.00 2019 2,912,800 1,572,000 268,100 3.01 806,981 1,340,800 384,700 307,979 5.86 14.00 2020 2,807,400 1,500,700 268,100 1.91 512,071 1,306,700 346,500 109,801 5.60 8.00

According to Table 3, during the restructuring of UEM Sunrise under UEM Land in 2008, the company’s debt to total equity was low from the year 2009 to 2020 while its debt to total assets ratios decreased and recorded a ratio below 50% until 2020. Its bank loan to total debt is also below throughout the year. Following the restructuring of Faber in 2014, the company’s total debt to equity ratio showed a low ratio except for the year 2016 and its total debt to a total asset also showed a ratio below 50% from 2014 until 2020 except for the year 2016. Meanwhile, its bank loan to total debt was lower. A good debt ratio is said to be below 40% and both companies, UEM Sunrise and UEM Edgenta showed a ratio below 40%. The lower bank loan to total debt has made both companies less tied to fixed obligations. Overall, it can be concluded that debt management after corporate restructuring was more prudent which consequently make the companies to have better performance.

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Table 3: Laverage Ratio of UEM Sunrise and UEM Edgenta for the period of 2006 to 2020.

Year UEM Sunrise UEM Edgenta

TD/TA TD/TE BL/TA BL/TD IC TD/TA TD/TE BL/TA BL/TD IC

2006 95.77 2.26 69.03 72.08 #N/A 69.24 2.25 29.78 43.02 -34.10

2007 56.40 1.29 46.41 35.88 #N/A 66.71 2.00 66.79 33.33 -18.11

2008 59.13 1.45 19.31 32.65 -6.36 58.11 1.39 24.69 42.49 -19.19

2009 56.81 1.32 45.28 34.43 -9.33 56.29 1.29 45.61 35.41 -22.08

2010 32.33 0.48 10.27 31.78 -12.19 54.64 1.20 16.29 29.81 -20.27

2011 16.47 0.61 23.22 37.98 -9.14 49.01 1.26 1.45 1.15 -19.71

2012 41.50 0.71 16.40 39.51 -12.81 45.46 0.83 0.00 0.00 -42.14

2013 38.64 0.63 28.61 45.44 -15.05 46.81 0.88 11.76 13.36 -12.14

2014 43.00 0.75 19.08 44.38 -11.06 56.18 1.28 11.89 21.16 -35.33

2015 42.77 0.75 32.73 43.80 -7.20 48.81 0.95 24.59 25.79 -31.27

2016 47.19 0.89 18.58 39.36 -3.28 61.22 1.58 21.57 35.23 -6.12

Note: TD/TA is total debt divided by total asset, TD/TE is total debt divided by total equity, BL/TA is bank loan divided by total asset, BL/TD is bank loan by total debt, IC is interest coverage.

UEM Sunrise’s current ratios as shown in Table 4 was high throughout the year with a ratio over 2.0% and improve in 2016 onwards with the lowest in 2020 while UEM Edgenta also recorded a high ratio throughout the year except in the year 2011 and 2016 onwards. This indicates that current liabilities for both companies have enough liquid assets to cover their short-term liabilities. Meanwhile, UEM Sunrise’s acid test ratios as shown in table 10 recorded ratios below 1.0 from 2016 onwards while UEM Edgenta’s acid test ratios recorded ratios above 1.0 throughout the year until 2020. The continuously declining acid test ratio to less than 1 illustrated by UEM Sunrise shows an inability to strongly cover its working capital for running its daily operations and vice versa for UEM Edgenta.

Table 4: Liquidity Ratio of UEM Sunrise and UEM Edgenta for the period 2006-2020

UEM Sunrise UEM Edgenta

Year CR QR CR QR

2006 5.22 2.63 2.02 1.64

2007 2.74 1.15 2.62 2.38

2008 2.18 0.98 3.11 2.89

2009 2.04 1.1 2.8 2.50

2010 6.86 3.74 2.72 2.43

2011 4.3 2.65 1.69 1.54

2012 2.67 1.97 2.52 2.26

2013 3.41 2.51 2.58 2.47

2014 4.23 2.93 2.13 2.00

2015 3.02 1.45 2.54 2.31

2016 1.77 0.85 1.89 1.74

2017 1.89 0.77 2.19 1.90

2018 1.55 0.66 1.94 1.79

2019 1.53 0.78 1.90 1.81

2020 1.33 0.77 1.75 1.75

Notes: CR is the current ratio, QR is the quick ratio

6. Conclusion

The case study examines the proposed corporate restructuring of United Engineers Malaysia Berhad specifically during post-corporate restructuring. United Engineers Malaysia Berhad was subsidiary of Renong Berhad before Asian Financial Crisis in 1997. Debt and management restructuring were implemented after both of the companies were in huge debt after the crisis. However, the restructuring remained unresolved and in July 2001, the Government, through Khazanah Nasional Berhad and its wholly owned subsidiary Danasaham, offered to take over United Engineers (Malaysia) Berhad. Later, prior to restructuring in 2008, UEM Sunrise was incorporated which resulted in UEM Sunrise becoming the holding company of UEM Land formerly known as Renong in 1982. UEM Sunrise and UEM Edgenta, subsidiaries of UEM Group which in turn wholly owned by Khazanah, an investment holding company of the Government. Upon restructuring in 2008, UEM Sunrise’s operations were carries out under UEM Land. Meanwhile, UEM Edgenta also subsidiary of UEM Group listed on the Main Market of Bursa in 2017.

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7. Acknowledgement

We would like to thank the editors and the anonymous referees of the proceeding for constructive comments and suggestions, which have significantly helped to improve the contents of the case study. Furthermore, special thanks to the matching grant research code (P2-1-209-72421-LUAR-UKM-FEM) by Universiti Sains Islam Malaysia as the organization that funded the case study.

References

Gilson, Stuart C., Kose John, and Larry H. P. Lang, 1990, Troubled debt restructurings: An empirical study of private reorganization of firms in default, Journal of Financial Economic 27, 419-444

Baek, J., Kang, J. & Park, K.S. 200!. Economic shock, business group and determination of firm value and restructuring: Evidence from the Korean Crisis, Social Science Research Network:1-51.

L. Norley, J. Swanson and P. Marshall, (2001). A Practitioner’s Guide to Corporate Restructuring, City Planning Publishing

Ofek, Eli. (1993). Capital structure and firm response to poor performance: An empirical analysis, Journal of Financial Economics, 34, 3-30.