General Announcement::Response to Queries Raised by the Securities Investors Association (Singapore)
08/30/2021 | 05:33am EDT
CAPITAL WORLD LIMITED
(Incorporated in the Cayman Islands)
(Company Registration No.: CT-276295)
RESPONSE TO QUERIES RAISED BY THE SECURITIES INVESTORS ASSOCIATION
The Board of Directors (the "Board" or the "Directors") of Capital World Limited (the "Company", and together with its subsidiaries, the "Group") refers to the Company's announcement of annual report for the financial year ended 30 June 2020 ("FY2020") dated 16 August 2021, would like to provide the following responses to queries raised by SIAS dated 23 August 2021.
Q1. For the financial year ended 30 June 2019, the independent auditors included in their Independent Auditors' Report a "disclaimer opinion related to going concern" in respect of the group's audited financial statements for FY2019. The auditors did not express an opinion on the financial statements because of the significance of the matter described in the Basis for disclaimer of opinion, which was the use of the going concern assumption. The independent auditor's report was dated 11 October 2019 (published on 14 October 2019), just four months before the suspension of trading of the company's shares on SGX- ST.
In the auditor's report, as at 30 June 2019, the group's loans and borrowings amounted to RM44.6 million, all of which were classified as current liabilities, and exceeded its cash and cash equivalents of RM2.4 million. The company's loans and borrowings amounted to RM18.1 million, all of which were classified as current liabilities, and exceeded its cash and cash equivalents of RM47,000.
The auditors highlighted the following:
However, we are unable to obtain sufficient appropriate audit evidence to conclude whether the use of the going concern assumption to prepare the financial statements is appropriate as the outcome of the group's plans to resolve its liquidity problems cannot be determined at this time and its ability to realise the inventory properties at the expected value and timing is inherently uncertain.
Notwithstanding the above, the directors, in October 2019, had the view that it was appropriate to prepare these financial statements on a going concern basis after considering the following:
Approval of extension of repayment date
Cap payment and defer construction by key supplier
Accrued payment for land (with no cash payment)
Completion of the project and achieve projected sales for its inventory properties
Trading of the company's shares on SGX-ST was abruptly suspended with effect from
14 February 2020, following the announcement of the unaudited financial statements for the second quarter ended 31 December 2019 on 13 February 2020.
Can the audit committee (AC) help shareholders understand if it was appropriate
to prepare the audited financial statements for the financial year ended 30 June 2019 on a going concern basis given the material uncertainties faced by the group and as highlighted by the independent auditors?
AC would like to make reference to the FY2019 Independent Auditor's Report where:
"In preparing the financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters relating to going
concern and using the going concern basis of accounting unless management intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so."
As at 30 June 2019 (financial year end) and 11 October 2019 (date of the FY2019 annual report), management did not intend to liquidate the Group or to cease operations and it should also be noted that as at 30 June 2019, the Group had inventory property of RM223.3million, exceeding the Group's loans and borrowings of RM44.6million.
The Company was also in negotiation for a settlement with land owner Achwell Property Sdn Bhd ("APSB") with the intention to release the land title and retail units for the purpose to secure financing from financial institutions and investors to resolving the working capital needs, even though the first settlement eventually lapsed as announced in 1 April 2020.
The then-directors were of the views that it was appropriate to prepare the FY2019 financial statements on a going concern basis after considering the factors set out in paragraph 2.1 on page 56-57 of the FY2019 Annual Report.
How did the conditions on the ground change by 2Q FY20 that necessitated the company to propose a restructuring via a Scheme of Arrangement and thus suspend the trading of the company's shares on SGX-ST in February 2020, four months after the board had concluded that the use of the going concern assumption was appropriate?
Since fourth quarter of 2019, the acute oversupply condition in property market in Malaysia coupled with Covid-19 pandemic has caused unprecedented disruptions to all nations including Malaysia and Singapore. The overall impact on global economies including property markets in Malaysia is extremely profound and unheard of till to date.
Please refer to the Company's announcement on 13 February 2020 for details on the Board's consideration in its assessment of the Group's ability to continue as a going concern, leading to its decision to apply to the High Court of the Republic of Singapore to propose a Scheme of Arrangement for the purposes of implementing and facilitating the restructuring of the debt obligations and liabilities and the voluntary suspension under Catalist Rule 1303(3).
Did the company provide timely disclosure of material information to allow the operation of a fair, orderly and transparent market between October 2019 to February 2020? During this time, the company announced the first quarter results in November 2019, and saw the cessation of an executive director and the chief financial officer in December 2019.
To the best of the Board's knowledge, all material information have been disclosed in a timely manner between October 2019 to February 2020 as required under the Catalist listing rules. Please also refer to announcements made on 18 October 2019, 13 November 2019, 20 November 2019, 1 January 2020 and 13 February 2020.
For the financial year ended 30 June 2020, the independent auditor of the company expressed a qualified opinion in respect of the carrying amounts of inventory properties ("IP") and property, plant and equipment ("PPE"); and an emphasis of matter in respect of the material uncertainty related to going concern.
The auditors have stated the following in their Basis for qualified opinion:
Management has assessed that the net realisable value of these IP and the recoverable amount of these PPE are higher than their carrying amounts and therefore no write down or impairment is necessary as at 30 June 2020. We were, however, not able to obtain sufficient appropriate audit evidence to assess the reasonableness and appropriateness of the assumptions used in establishing the net realisable value and the recoverable amount of these IP and PPE respectively. We were also not able to
conduct alternative procedures to assess the net realisable value and the recoverable amount of these IP and PPE respectively. Consequently, we were unable to determine whether any adjustments to the consolidated financial statements for the current financial year ended 30 June 2020 were necessary.
How did management carry out the assessment of the net realisable value of the inventory properties and the recoverable amount of the PPE? Please disclose the assumptions used and show the sensitivity analysis of the net realisable value of the inventory properties.
The Company would like to refer to details of the assessment of the net realizable value ("NRV") of the IP and the recoverable amount of the PPE in note 9 and 17 of the financial statements for FY2020.
The auditor's qualification on the IP refers to the service suite under construction and serviced apartment under construction of RM190,603,000; while the auditor's qualification on the PPE refers to hotel under construction of RM36,294,000 respectively.
NRV refers to forecasted selling price less the projected construction cost of the IP and PPE.
The bases of assumptions for management's NRV assessment are as follows:
The sales of IP and PPE is projected to start between second half of 2022 to 2024.
The forecasted selling price for the IP and PPE is made by reference to the latest available transacted selling price considering factors such as state of economy and market sentiment for similar type of IP and PPE surrounding Capital City Mall ("CCM") and/or southern part of Johor at the forecasted sale time.
For example, for retail units that are forecasted to be sold in second half of 2022 with reference to the transacted sale price of the sold units as well as the selling price used by the judicial manager in the restructuring exercise to settle debts.
The projected total cost of construction for the uncompleted part of the IP and PPE, which included actual cost incurred to date and projected cost to be incurred until completion based on inputs from professionals
As for forecasted selling price for the hotel under construction, management has forecasted with reference to similar type of hotel i.e. a 3 star hotel within the state in the southern part of Malaysia.
Management has assessed that the NRV of these IP (serviced suites and serviced apartments)
and the recoverable amount of these PPE (hotel under construction) are higher than their
carrying amounts and therefore no write down or impairment on these IP (serviced suites and
serviced apartments) and PPE (hotel under construction) is necessary as at 30 June 2020. The
impairment review is subject to sensitivity test of key assumptions regarding discount rates and
terminal value of the IP and PPE.
What audit evidence has been requested by the independent auditors to enable them
to assess the reasonableness and appropriateness of management's assessment?
Why were the auditors not given sufficient appropriate audit evidence?
In light that the management's assessment above were premised on future sales and cashflows
projections, the auditors were not able to obtain sufficient appropriate audit evidence to assess
the reasonableness and appropriateness of the management's assumptions used in
establishing the net realisable value and the recoverable amount of these IP and PPE
respectively. They were also not able to conduct alternative procedures to assess the net
realisable value and the recoverable amount of these IP and PPE respectively. Consequently,
they were unable to determine whether any adjustments to the consolidated financial
statements for the current financial year ended 30 June 2020 were necessary.
What assistance did the AC render to the external auditors during the audit? How will the AC resolve the issue?
The assessment of NRV is largely based on expectations of future selling prices which the Board to commence from second half of 2022 onwards and this forecast remains impacted by the effects of an uncertain recovery from the acute weak and profound battled economy, depressed property market led by the continued Covid-19 pandemic. As these are market driven information beyond the control of management and the Audit Committee, the management were unable to provide such sufficient appropriate audit evidence for FY2020.
In the foreseeable future, the management and the Board is of the view that the same macroeconomic circumstances remain largely similar and the assessment of NRV of IP and PPE remains challenging. The Company remains committed to selling the inventory property and PPE for the best available market-driven pricing. The Audit Committee will continue to support the management in achieving such objectives.
Q2. As noted in the statement by the executive director and CEO, the High Court of Singapore sanctioned the company's Scheme of Arrangement [on 24 June 2021] for the repayment to the creditors and extension of moratorium to 30 September 2021 (the "Restructuring"). The company is preparing to obtain shareholders' approval to issue new shares to the creditors, and is concurrently working on the submission of the resumption of trading proposal to SGX-ST.
Other than the EGM, what are the other milestones in the restructuring before the resumption of the trading of the shares of the company on SGX- ST?
Can the board provide an estimated timeline?
Please refer to announcement dated 24 June 2021 for the restructuring milestones and indicative timelines.
The Board is currently exploring fund raising to improve the cash, working capital position and operating cash flow of the Group. Discussions are on-going but at a preliminary stage. The Board aims to complete negotiations and seek relevant shareholders and SGX approval if required.
The other key milestone that the management and the Board are actively working on the preparation and would be the submission of resumption of trading and the approval from the SGX-ST for the resumption proposal by 31 December 2021. The resumption proposal would be conditional upon the successful completion of the Scheme and issuance of Scheme Shares to extinguish substantial liabilities.
The Company is making its best effort and aims to submit the resumption proposal by the end of December 2021 and resume trading of its shares by the first half of 2022.
In addition, can management provide shareholders an update of the ground sentiments in Johor Bahru, given the Movement Control Order and the recent political changes?
Would the board consider it opportune to carry out a strategic review of the group's core strengths and capabilities, management depth and track record and the competitive landscape in the core business so as to safeguard shareholders' interest and to refocus and reposition the group for long-term value creation?
Due to the outbreak of the COVID-19 in Malaysia, Malaysian government had implemented movement control order ("MCO") throughout the whole Malaysia. The continuous MCOs have gravely weakened the economic situation as well as affected the consumer sentiment in Malaysia including Johor Bahru. With the prolonged closed border between Singapore and
Malaysia, all economic sectors in Johor Bahru are greatly affected. While the vaccination program in Malaysia is progressing at a slow pace due to the restriction on its supply, the escalating COVID-19 situation in Malaysia has created a gloomy prospect as to the bringing of the COVID-19 situation under successful control. As such, the Group is expecting the property market in Johor to remain gravely depressed and to experience lackluster demand in the near term.
The Board is mindful of the challenges facing the Group in its core property business and remains cautiously optimistic about the longer term outlook for the CCM in view of the healthy financial position of the Group post-Restructuring. The Board may at the appropriate and opportune time decide to carry out a strategic review of the group's core business and its strengths and capabilities, management depth and track record to safeguard shareholders' interest and embark on the positioning of the Group for long-term value creation.
The Board is open to consider any proposal to reposition the group for long-term value creation.
In the statement to shareholders, the executive director and CEO continues to place high hopes on the Capital City project.
Please provide shareholders with a comprehensive update on the current status of the Capital City project, including the operating status of the Capital City Mall, the uncompleted hotels, serviced suites and serviced apartments. Please include recently taken photographs of the mall and of the construction sites.
Presently, CCM is temporarily closed and has been well kept by the joint management body of the CCM.
In anticipation that the Covid 19 pandemic will be under control by end of 2021, the Company plans to re-open the retail mall in September 2022 and is currently working with asset management company for the re-opening preparation.
For the uncompleted hotel, serviced sites and serviced apartments, the Company is exploring potential joint venture with potential candidates for the purpose of resuming the construction of these buildings.
Please refer to Appendix 1 for the recent photographs of CCM and the construction sites.
Should the Scheme of arrangement proceed as planned, what is the financial position of the group? How much of the mall, the apartments and hotel will be retained and owned by the group?
Should the Scheme proceed as planned, substantial liabilities of the Group will be extinguished.
Shareholders should note that the upcoming AGM to be convened on 31 August 2021 is for FY2020. Quarterly financial results for the financial year ended 30 June 2021 will be announced by 30 September 2021.
Sales of the inventory properties will be subject to broader economic and property market considerations which is expected to remain challenging.
Shareholders should note that post Restructuring, the Group is able to assume ownership and continue the sales of IP but legal retention and ownership is bound by the Settlement Agreement entered with APSB dated 28 July 2021. For details about the Settlement Agreement, please refer to announcement dated 3 August 2021. Further details will be provided to shareholders in due course.
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Capital World Ltd. published this content on 30 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 30 August 2021 09:31:08 UTC.