Auditors issue disclaimers of opinion on Pacific Star Devt, Capital World FY19 results

Singapore

THE auditors of both Capital World and Pacific Star Development have flagged uncertainties in their ability to continue as going concerns in relation to their financial statements for the year ended June 30, 2019.

Both companies, which are Catalist-listed property firms with developments in Johor, Malaysia, were audited by Ernst & Young.

The auditing firm, in separate disclaimers, said the firms have a high leverage and are facing headwinds in a challenging Johor property market, Capital World and Pacific Star disclosed in separate announcements before the market opened on Monday.

Both companies also said they can continue as going concerns, regarding the disclaimers of opinion.

As at June 30, Capital World's loans and borrowings amounted to RM44.6 million (S$14.6 million), all of which were current liabilities, and exceeded its cash and cash equivalents of RM2.4 million. The auditor noted the group's working capital comprised mainly inventory properties.

Capital World's FY2019 financial results were "adversely affected by the challenging conditions affecting the property market in Johor" said Ernst & Young, with the property firm recording a net loss of RM45.6 million.

"These factors and the continuing challenges affecting the property market in Johor, Malaysia, could continue to negatively impact the realisation of the group's inventory properties," added the auditor.

It said the group's plans to resolve liquidity problems and its ability to cash in on inventory properties at the expected value and timing are uncertain.

The SGX had in early October queried Capital World on the sustainability of entering into a cycle of loans with increasing interest rates and high arranger fees.

The board said the extension of a RM26.5 million loan by a year and its issuance of S$17.6 million worth of new shares to two new investors are among the reasons it will be able to generate sufficient cash flows and meet its obligations as and when they fall due.

Other factors such as a deal with a key supplier to set an upper limit on payment and defer payment for the supplier's construction services over the next 15 months, will also help the firm to continue as a going concern.

Certain current liabilities such as RM3.1 million in deferred revenue will be "recognised as revenue based on the percentage of completion method and will not entail cash outflow".

The cost of land owed to Achwell Property Sdn Bhd totalling RM24.3 million, accrued based on the group's forecasted receipts from the progress billings and projected sales of Capital City mall and Capital Suites, will not need to be paid during the construction phase of the development project, Capital World added.

For the year ended June 30, Pacific Star's current liabilities exceeded its current assets by S$12.7 million. It also incurred a net loss of S$123.1 million. The firm's loans and borrowings had amounted to S$117.8 million, with S$4.1 million classified as current liabilities. In addition, the group is in net cash deficit position of S$446,000.

Its current assets, meanwhile, stood at S$175 million, comprising mainly of development properties amounting to S$136.2 million.

The auditor report added that the firm's fiscal 2019 results were "adversely affected" by the weak property market in Johor, Malaysia, with the company incurring a net loss of S$25.2 million.

Notwithstanding the disclaimer of opinion, the board of Pacific Star said the use of going concern assumptions was appropriate.

To continue as a going concern, the firm is dependent on the continued financial support from PSD Holdings - a company wholly-owned by one of its directors and controlling shareholder Glen Chan.

While the S$11.52 million loans granted by PSD Holdings is subordinated to the S$70 million facility agreed on in 2018, PSD Holdings has undertaken to provide up to S$5.72 million of loans to support its short-term cash shortfall if needed, the firm said.

Continuing as a going concern is also dependent on the sale and profit of unsold units at Puteri Cover Residences (PCR) in Iskandar Puteri, Malaysia.

Pacific Star spoke of various divestment opportunities for PCR, including the en bloc sale of its Tower 3 for which it has received an offer.

From July 1 to Oct 11, it signed eight sales and purchase agreements for PCR units for a total net contract value of RM11.1 million, of which RM7 million has been collected. It has also collected another RM0.5 million from its trade receivables as at June 30.

The firm's ability to continue as a going concern is also reliant on the refinancing of its investment via its joint venture Posh Twelve project in Bangkok.

To this, the group said it is working to secure a refinancing package for Posh Twelve, subject to consent of lenders of a S$70 million facility. If this materialises, the group will receive some S$18.7 million in capital and loans repatriation, based on current projections.

Capital World shares on Monday ended unchanged at 1.6 Singapore cents while Pacific Star shares were untraded.