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Home > Articles > PN4s - What's Went Wrong?

PN4s - Jutajaya Holdings


Jutajaya Holding (Juta) was listed on the KLSE Second Board on 10 Dec 1991 and is a manufacturer of fishing and industrial nets and ropes. Sales were made to the domestic and export markets. In the mid-1990s, it ventured into property development and the construction business. But in late 1998, Juta had to exit from both the manufacturing of nets & ropes and construction industry. Left with property development, which was making losses, Juta ventured into the manufacturing of sports garments and managing a fishing complex. However, in 2001, massive provisions for doubtful debts, arising from its failed construction business, resulted in negative shareholders' funds of RM33.01 mln. Thus, Juta was deemed an affected company under PN4/2001 as at 7 Dec 2001.

Focus & Focus & Give Up

Unlike the previous companies featured in this section, Juta stayed focus on its core business. By mid-1992, Juta had captured a 40% market share of the local nets and ropes industry. By 1993, Juta had started sales of the 8-strand rope, in which it was the only local producer. Focusing on its core business, Juta in 1995 acquired a 100% interest in Norsan Fishing Net Industries S/B (Norsan) for RM10.38 mln cash, and entered into a joint venture with Thai Lian Dessicated Coconuts Produce S/B. These represented a horizontal integration as both Norsan and the joint venture were engaged in the manufacturing of fishing nets, ropes, etc. Table 1 and Table 2 show the key financial highlights for the period 1990-1995.

Table 1 : Key financial data for the nets and ropes division (RM mln)

Table 2 : Key financial ratios for the nets and ropes division (%)

Despite sticking to what it knows best, Juta's performance revealed a disturbing trend. Both pretax and net profit peaked in 1992 and started to decline even as sales rose. Margins followed suit. This is in spite of the new product, the 8-strand rope and an aggressive push into the export markets. The drop in profit margins was due to the reduction in tariffs on imports in the fishing net industry, which sharply increased competition and the tight labour market in the mid-Nineties, which increased staff costs. Perhaps this is a reflection of the poor economics of the overall industry that a company like Juta can only remain competitive and profitable as long as the tariffs are in place. Perhaps it is with these thoughts that large shareholders of Juta cashed out and significantly reduced their stakes in Juta in 1996. By 1996, a new set of shareholders and management came in. Juta then decided to diversify into property development and the construction business.

New Shareholder, New Business

In Sep 96, Juta paid RM26.0 mln cash to acquire a 100% interest in Dataran Khas S/B, a company involved in developing 187 units of 3 storey shoplots in Seremban estimated to be worth RM67 mln. The said project was completed in 1997. In Aug 97, Juta's 100% owned subsidiary, JVentures S/B, entered into a profit sharing agreement with BCM Development S/B to develop a mixed housing project on Juta's land in Johor which had a gross development value of RM109 mln. In Mar 97, Juta ventured into the construction industry by acquiring a 100% interest in Jutajaya BuildTech S/B (Jutajaya) from Kemayan Corporation (Kemayan) and Far-East Century S/B for RM120.0 mln, settled via 11.428 mln new Juta shares. Kemayan made a profit guarantee of RM49.22 mln for 3 years ended May 2000 in relation to Jutajaya's performance.

Table 3 : Segment results (RM mln)

Table 3 shows that the construction diversification showed potential, at least initially. However, what is more important than profitability in this case is liquidity. Why ? In times of economic uncertainty, and especially in the property development and construction business where a significant portion of assets are in the form of illiquid development projects, a company's financial flexibility is critical in ensuring its survival. Juta's current ratio was at an uncomfortable level, and its interest coverage had dropped due to increased borrowing costs. Juta was also highly geared, with total borrowings to total shareholders' funds at 230% in 1996 compared with only 39% in 1995.

Table 4 : Credit ratios

An important point not shown in the figures above is Juta's over-reliance on a single client, Kemayan. Out of the RM3.3 bln construction works outstanding then, RM2.1 bln was contracted from Kemayan. It was clear that Juta would sink or swim with Kemayan. When it became clear that Jutajaya was unable to achieve its profit targets, Juta arranged for an early settlement of the profit guarantee, amounting to RM49.22 mln, to be paid by Kemayan. Unfortunately, Kemayan was in no position to do so. In 1996, Kemayan had more than RM500 mln in loans. By 1997, this surged to almost RM700 mln. In 1998, Kemayan suffered a massive net loss of RM397 mln and by 1999, Kemayan had a deficit in its shareholders' funds of RM609 mln. By 2002, Kemayan was still bleeding massively.

No Safety Nets

Unable to sustain the losses in its core manufacturing and construction divisions, Juta proceeded to sell its subsidiaries. In 1997, it sold Haiyan for RM1.54 mln cash. In late 1998, Juta sold Jaya Nets S/B for RM3.2 mln with all existing liabilities, thus marking its exit from the manufacturing of nets and ropes. Around the same time, Juta also sold Jutajaya to Sky Global S/B for RM0.3 mln cash, which also marked its exit from the construction industry.

Another Attempt, Another Failure

Juta then decided to venture into the manufacturing of sports garments on an OEM basis and the privatisation and rehabilitation of the fishing facilities in Labuan. However, its attempt to return to profitability was unsuccessful as the profits earned from the new businesses were not able to even service the interest expense from its huge debt load. As the losses kept on increasing, it became clear that the group very much depended on its ability to collect debts amounting to RM44.3 mln as at 2001, of which RM38.8 mln was owed by Kemayan. Not surprisingly, Juta had to provide them as doubtful debts, which resulted in negative shareholders' funds of RM33.01 mln by 2001. Table 5 shows the assets that were provided as doubtful debts or written off for the period 1998-2001.

Table 5 : Write off and provisions (RM mln)

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