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Asian Journal of Case Research 1(2): 130 143 (2008)

Turnaround Strategy: A Case of Hillview Sdn Bhd

NURUL DIANA INTAN ZAFIRAHa, ANNUAR MD NASSIRb*, ABU SOFIAN YAAKOBc AND AZHAR MOHD NASIRd

Hillview Sdn Bhd (a government owned company) was instructed by the Ministry of Finance, to bail out Tegajana Sdn Bhd, a financially troubled company with consecutive losses since its inception in 1998. The takeover was crucial to ensure that the requirement in the Bills of Guarantee of Cyberjaya as the hub of Multimedia Super Corridor (MSC) Malaysia is met and the development of Cyberjaya will run smoothly. However, Hillview need to safeguard its interest in the takeover and help Tegajana to improve its sales and create profit. As at 2007, Tegajanas total loss amount to RM3.7 million and is expected to escalate in the near future due to increase in operating cost. In order to minimize the risk of depletion in Hillview Groups profit, thereby affecting Hillviews shareholders wealth, Encik Razli and his team were determined to turnaround Tegajana to improve its financial standing. The turnaround of Tegajana was important as to maintain shareholders trust towards the management of Hillview. Hillview is the backbone of the development of Cyberjaya, the hub of MSC Malaysia. Keywords: Financially troubled company, turnaround, Malaysian Multimedia Super Corridor.

ABSTRACT

It was Friday morning the 3 of July 2008. Encik Razli was deep in thoughts. The instruction given was very clear to him that Hillview must bail out Tegajana, a financially troubled company. He knew that he could not say no to the instruction. His Key Performance Indicators (KPI) depended on what he could achieve in the
rd

THE DILEMMA

Cyberview Sdn Bhd, Cyberjaya Department of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia * Corresponding author. Email:annuar@putra.econ.upm.edu.my, Phone: 603-89467600
a b,c & d

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takeover. The rumors had been going on for some time and Dato Abdul, Ministry of Finance (MoF) hinted to him several times before the formal instruction. Mentally, Encik Razli was prepared to deal with the news. However, preparation and evaluation needed to be done to ensure that Hillview was sheltered from any major impacts to its financial standing as a result of the takeover. From the instruction, Encik Razli knew that his challenge was to turnaround the company and improve the current situation to greater heights. Encik Razli decided to call for an urgent meeting with his key personnel. Encik Razli called his Personal Assistant, Tasha, please call Irdatul and Saliha to see me immediately. Its about the takeover. Puan Irdatul is currently the General Manager of Finance and Corporate Services Department. She graduated from University of London (Finance) in 1994 and continued with her professional study after graduation. Before working with Hillview, she had various experience working in big companies and audit firms. However, she gained more experience working with few property development companies, local and foreign. In Hillview, she was asked by Encik Razli to join the team in 2006. Encik Razli knew very well of her capability and he had entrusted her to manage the fund entrusted to Hillview by the Government. She was also in charge of the Human Resource Unit. Encik Razli said that she was the calming factor of the company. In Hillview, she managed 5 subordinates ranging from the Senior Managers to non executives. Puan Saliha was the youngest manager in Hillview. She graduated from Multimedia University in the year 2002. She was trained by Encik Razli from the start of her career. Encik Razli believed in her capability in delivering tasks that he wanted. She was the Head of Department for Legal and Corporate Investment Unit. All of you were there when the Ministry of Finance (MoF) gave the instruction in the meeting. However, they have yet to send us a letter to formalize the instruction. I guess well have to make the necessary steps now to ensure that Hillview will not be affected with Tegajanas losses and at the same time, turnaround the company. This year is going to be a tough year for us, with projects that were required to deliver and our existing deliverables. I hope all of you are prepared for a stressful year ahead especially Irdatul. Numbers and figures will be our main indicators of how were doing in the coming years. I need the two of you to come up on Monday with some concrete plans to turnaround the company. Submit to me in three days for I have to present to the boards meeting on the 7th of July. Thank you. Irdatul and Saliha left and pondered what can be done.

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THE BACKGROUND Company Background Pendinginan Tegajana Sdn Bhd

Pendinginan Tegajana Sdn Bhd (Tegajana) is the sole provider of district cooling service in Cyberjaya for air conditioning. The principal activities of Tegajana are to carry on the business of developing, owning, operating, maintaining, promoting, selling, managing and servicing district cooling system, co-generation system band electricity distribution system. The company was incorporated on 1 September 1998, with an authorized paid up capital of RM25 million shares at RM1 each. The paid up capital to date is 16.4 million shares at RM1 each. Effective from 30 March 2007, Tegajana is wholly owned by Hillview Sdn Bhd, a Government Linked Company incorporated in Malaysia. Hillview has taken over the entire shares of Tegajana from the previous shareholders, Seseni Niaga Sdn Bhd (51%), a member of Tetratacorp Berhad and NTD Capital Bhd; and TNB Energy Services, a wholly owned subsidiary of TNB (49%), for a consideration of RM2. At the acquisition date, the shareholders equity of Tegajana showed a deficit close to RM4.4 million (please refer to Appendix I: Balance Sheet, Shareholders Equity). The purpose of the take-over of Tegajana was to turnaround the company from a loss making company to a healthy company within 5 years. It was necessary for Hillview to turn around the company due to the survival of Tegajana was important to ensure that the 10 Bills of Guarantee (BOG) offered to companies located in Cyberjaya prevails. In the BOG, it is stated that there must be 99.9% availability of chilled water supply in Cyberjaya. As the sole provider of chilled water supply, sustainability of Tegajana was crucial.

The District Cooling System (DCS)

Basically, a district cooling system (DCS) distributes thermal energy in the form of chilled water or other media from a central source to multiple buildings through a network of underground pipes for use in space and process cooling. The cooling or heat rejection is usually provided from a central cooling plant, thus eliminating the need for separate systems in individual buildings. A DCS consists of three primary components: the central plant, the distribution network and the consumer system. The central plant includes the cooling equipment, power generation and thermal storage. The distribution or piping network is often the most expensive portion of the DCS and warrants careful design to optimize its use. The consumer system would usually comprise of air handling units and chilled water piping in the building.

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Hillview Sdn Bhd (Hillview)

Established in 1996, Hillview Sdn Bhd, a government owned company and land owner of Cyberjaya has been mandated to spearhead the development in Cyberjaya. To this end, Hillview put its utmost effort towards ensuring Cyberjaya continues to progress in line with the Governments aspiration. Its mission is to realize Cyberjaya as a nucleus of the MSC Malaysia and as a global hub and preferred location for ICT, Multimedia and Services for innovation and operations; and to fulfill specific Government initiatives in support of Malaysias Vision 2020. Hillviews main objective is to ensure the development of Cyberjaya in accordance with Governments guidelines and aspirations and to also advise the Government on MSC/Cyberjaya development related matters. Hillviews roles in developing Cyberjaya are: Ensure Cyberjaya is developed in accordance with MSC Guidelines Provision of assistance/support in co-ordinating joint activities with organisation in Cyberjaya Attend to all Cyberjaya land administration matters Advise the Government on MSC/Cyberjaya development matters Build enterprise buildings to be leased/rented/sold to companies Build supporting amenities for the Cyberjaya community Undertake rehabilitation/maintenance work in Cyberjaya

The Multimedia Super Corridor (MSC)

The Multimedia Super Corridor (MSC) is a 15km wide by 50km long corridor that runs from KLCC in the North down to KLIA in the South. The MSC is the brainchild of our former Prime Minister, YAB Dato Seri Dr. Mahathir Mohamad. Located 25km South of Kuala Lumpur and 20km North of KLIA Sepang, Cyberjaya is designed as an integrated township to house the MSC leading edge firms. The 2894 hectare Flagship Zone is seen as the catalyst for the development of the MSC and shall provide the impetus for the country to leap into the next millennium. It aims to be an integrated, eco-friendly township development with four specialized precincts; Enterprise, Commercial, Residential and Public area. Upon completion, the whole development will be supported by advanced physical and telecommunications infrastructure, top quality business facilities, low density environment and convenient transportation. The financial and non-financial benefit is the main attraction for MSC companies to locate in Cyberjaya.

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The Bills of Guarantee (BOG)

The BOGs are a package of commitment by the Malaysian Government to ensure the success of MSC Malaysia status companies. The 10 major trusts of BOGs are: i. ii.

Provide a world-class physical and information infrastructure Allow unrestricted employment of local and foreign knowledge workers iii. Ensure freedom of ownership by exempting companies with MSC Malaysia Status from local ownership requirements iv. Give the freedom to source capital globally for MSC Malaysia infrastructure and the right to borrow funds globally v. Provide competitive financial incentives, including no income tax for up to 10 years or an investment tax allowance, and no duties on import of multimedia equipment vi. Become a regional leader in intellectual property protection and cyberlaws vii. Ensure no internet censorship viii. Provide globally competitive telecommunication tariffs ix. Tender key MSC Malaysia infrastructure contracts to leading companies willing to use the MSC Malaysia as their regional hub x. Provide an effective one-stop agency- the Multimedia Development

THE SITUATION The Instructions

Hillview was instructed by Ministry of Finance (MoF) to look into the predicament of Tegajana Sdn Bhd which currently is facing financial difficulties. With current mode of operation, it would appear that Tegajanas status as a going concern could be seriously jeorpardized, resulting in severe complications that would impair Cyberjayas status as a preferred premier city of MSC Malaysia. At a meeting room in MoF, Encik Razli was discussing the take over issues with MoF representatives. Encik Razli was accompanied by Puan Irdatul in the meeting room. Dato, on the accounting implication, we might be facing problems dealing with goodwill and consolidation. Furthermore, more administrative work may have to be done after the takeover materializes because previously it was done by NTD Capital. We have already come up with the steps that need to be taken subsequent to the takeover, Dato, Encik Razli handed over a stack of documents to the committee; Documents of the strategy of prior and post takeover. 134

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The MoF representatives glanced through the documents and discussed the outcome of each steps presented. In the meeting with Treasury General, the representatives of MOF unanimously agreed on the selection of Encik Razli to handle the mission impossible task based on his track record. A committee consisted of Hillview personnel and representative from MoF were set up to manage the planning and implementation of the takeover. Before the takeover is fully materialized, NTD Capital shall hand over the management control to the committee. Therefore, it is proposed that Hillview to take over Tegajana shares at RM2 from the shareholders.

Residential Development in Cyberjaya

The current population in Cyberjaya is 39,000 people. The working community (MNCs, foreign-owned and local developed companies with MSC status) account for 15,000 or 39% of total population in Cyberjaya, student population stood at 13,000 or 33% (Multimedia University, Lim Kok Wing University College of Creative Technology and Cyberjaya University of Medical Sciences) and local residents contribute to another 11,000 or 28%. This proportion will change significantly in the next 10-15 years when the residence population is expected to increase to about 180,000 or 64% of the total population in Cyberjaya, while the working and student population will also increase to 70,000 (25%) and 30,000 (11%) respectively.
Table 1 Current vs Target Population 2007 Working Student Residence Total 15,000 13,000 11,000 39,000 Target 70,000 30,000 180,000 280,000

Source: Setia Bina Sdn Bhd, March 2006.

As of 2005, Cyberjaya still lacks significant residential properties apart from the DMelor condominiums, the Cyberia condominiums and townhouses. This results in de-population of the area when office workers commute home every night. However, this issue will be resolved soon with the launch of more than 900 units of affordable housing comprising of various type houses by Hillview. This development, which will be developed in phases, is expected to have a population of more than 3,600 residents once it is fully developed. 135

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Tegajanas Plant Capacity and Its Customers

Tegajanas plant is located at 3 acres land, Lot 12150 Cyberjaya. However, only 1 acre was utilized. In the original plan, the plant was to be developed in 2 phases. Phase 1 of the plant consisted of 10 units of 1,000 RT Heat Exchangers, 1 unit of 7,500 RT Ice Storage Tank, 5 km of underground chilled water piping network and 4 units of 500 RT base chillers. The second phase involves installation of 4 units of 2,250 RT of Heat Exchangers, 1 unit of 500 RT base chiller, 7 km of underground chilled water piping network and 1 unit of 100,000 RT Ice Storage Tank. Tegajanas customer base was dependent on the capacity of its plant. Currently, the facilities used are from Phase 1 development. Its customers were separated to two stages. Stage 1 includes Telekom Complex, Century Square and NTT-MSC Office. Stage 2 comprises of DHL Building, Enterprise buildings, Ericsson, MDeC, Cyberjaya City Command Centre, Century Square Phase 2, Malaysia Communication & Multimedia Commission, Measat, Satyam Global Development Centre and Telekom R&D Centre. Its customer base is reliant on the capacity of chill water that Tegajana is able to generate. In the original Business Plan of Tegajana, the company will be benefiting from the off peak electricity charges to recharge the chill water and later to be supplied to its customers. The off peak TNB tariff is cheaper than the peak tariff. However, with limited plant capacity, the recharging of chill water supply was done during peak period with higher tariffs.

Source: Tegajanas Company Profile.

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Tegajanas Projects and Activities Done in 2007

Tegajana has involved in several projects in 2007. The activities are presented in the table below:
No 1 2 3 4 Area Electrical Items Install additional Fluorescence lamps at SSB LV room + wiring Install Fluorescence lamps at MSB4 HT room + wiring Painting epoxy layer to the HT room floor area Construct holes on the concrete walls & install exhaust fans for HT & LV room (improve ventilation to reduce equipments heat radiation). Safety Make sand beds for wiring drain at LV & HT room Install steel plate to cover wiring drainage at HT transformer room & LV room. Cover & tie cable trench in S/S1 Install hard plastic covers at SSB Inverter Stg1 (safety maintenance). Cooling Towers Modification on infills steel casings CT1 Stg1 by lifting up the base ~4in. (clear mud & dirts & improve water flow) Replace new infills CT Stg 1 Replace wire trunking (rusted & broken) Facilities Service & modification on all FCU drainage piping system inside office (prevent leakages) Modification white board & wall plug to the meeting roomwall. Welding & repainting main trash bin to make good. Customers metering room Install power surge regulator for Energy meter & Flow meter at customers metering room. 4 units Quantity 3 units 9 units

5 6 7 8 9 10 11 12 13 14 15

6 tonnes 2 rooms 1 set 1 set 3 cells 9 cells 5 pcs 5 units 1 unit I unit 19 units

Source: Tegajanas Key Performance Indicator 2007.

Historical Financial Results of Tegajana

Please refer to Appendix 1 for Income Statement, Balance Sheet and Cash Flow Statement.

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THE ISSUES Gearing Ratio Pre Takeover

The interest rate imposed for the loans used for the operations of Tegajana amounting to RM65.6 million was at 7.5% per annum. The payment for the interest is from RM400,000 to RM500,000 monthly. Total outstanding loan was RM65.6 million at the interest rate of 7.5% per annum. 30% of the total loan was financed by its creditors. The balance of the loan is then refinanced at an interest rate of 7% per annum. As security for the loan, Tegajanas land and building was charged as collateral.

Funding

Tegajanas previous major shareholders, TNB and Tetracorp refused to inject money to fund the purchase of its fixed assets in order to increase capacity. TNB has its wholly owned subsidiary to supply DCS and Tegajana was seen as the competitor. Tegajana was in dire need of cash injection to increase capacity. With TNBs refusal, Tetracorp was reluctant to inject cash inflow as well. Due to its financial performance, banks declined Tegajanas application for loans. The company had no collateral to secure the loans. These increased the burden to the companys unstable financial standing.

Perceptions and Slow Growth

From the survey done by consultants to analyse the sales of DCS in Cyberjaya, it was the perception of the building owners in Cyberjaya of the rates charged by Tegajana are not competitive as opposed to the desired effect of having a district cooling plant. This has deterred investors to come to Cyberjaya and caused some building owners to opt for alternative air conditioning methods to lower their operating cost. One of the key reasons for this is the very small scale ice ball machine installed at the plant. The plant used water which is chilled during off-peak hours and is therefore insufficient to provide chill water to customers during peak period. As such, peak rate charges have to be incurred, thereby driving up the cost. The revenue for Tegajana remains low for the past few years as a result of slow development in Cyberjaya over the past years. However, since the takeover of development activities by Hillview from Setia Bina in early 2006, the development of Cyberjaya has increased. More building are being built in Cyberjaya and the demand for chill water has increased tremendously. As Tegajana is a wholly owned subsidiary of Hillview, the parent company has increased its promotion of chill water to its clients. The demand of chill water rely on Hillviews role as the land owner of Cyberjaya since the takeover. 138

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Amount Owed to Creditors

Tegajana was sent a letter by TNB on its 7 day notice of payment for the services that Tegajana has rendered amounting to RM11.58 million (amount owing to TNB). Tegajana has appealed for a 30-day settlement timeline, for Tegajanas shareholders to continue discussions with MoF on the possibility of full takeover by Government. The outstanding amount owed to TNB amounting to RM13 million as at 30 April 2007:
Balance Outstanding Principal Interest Total Contra with transformer Waive the penalty interest Total amount outstanding Amount (RM) 15,414,012.30 3,655,875.17 19,069,887.47 (2,000,000.00) (3,655,875.17) 13,414,012.30

The amount was spread to 10 years at RM1,341,401.23 per annum. Monthly payment will commence in May 2010 at RM11,783.44 per month.

The Meeting and Delegation of Duties

After the meeting on the 3rd of July: I know Razli. We will be burdened by Tegajanas debts and this will lower down our overall return to shareholder if we are not able to come up with bulletproof strategies. Our KPI will be affected. All these years we are able to increase our dividends to shareholders by 2%. You dont have to worry. I will work something up with Saliha and my assistant. Miracle could happen!, Irdatul said with a smile and nodded knowingly at Saliha. Saliha, please help Irdatul on the Business Plan for Tegajana. We need to determine its way forward after the takeover. And dont forget to draft the Conditional Sales and Purchase Agreement (SPA). I need to look at the terms. Please get legal advice from our panel lawyer. We have a lot of work to do since this is our first subsidiary, and its not a good deal either. We have to deliver what was expected of us but we also need to cover ourselves. If not, you and me will be browsing advertisements on Jobstreet again! While managing and developing Cyberjaya is a full time responsibility, other special tasks as assigned by MoF need to be carried out as well. Most employees work round the clock to ensure that their job is done. 139

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As the landowner of Cyberjaya, Hillviews mission is to realize Cyberjaya as a nucleus of the MSC Malaysia and as a global hub and preferred location for ICT, Multimedia and Services for innovation and operations; and to fulfill specific Government initiatives in support of Malaysias Vision 2020. Its work culture embraces speed and excellence as well as ideas contribution by everyone, regardless of their position.

After the takeover, the Management of Tegajana, the committee members and Hillviews top management tried to resolve the situation that has been hindering Tegajanas growth. Encik razali knew that if he is capable of doing a major turnaround of Tegajana in 2 years or less, it will be marked as a great success. However, if the turnaround failed to materialized, Tegajanas losses will affect Hillviews financial position tremendously. Therefore, it will affect Hillviews shareholders wealth. As major shareholder of Hillview, MoFs investment in Hillview will be affected. Hillviews operation is based on Governments grants and financial support from the ministry. If the ministry has lost trust in Hillview, the development of Cyberjaya might be derailed. Hillview is the only organization that was entreusted to spearhead the development of Cyberjaya to realize the Governments aspiration of an intelligent city. His challenge now was greater than anything that he had done before. Tegajanas previous shareholders gave up hope on this company and the experts predicted that Tegajana will be insolvent in the near future. The future of Cyberjaya will be dependent on his credibility to make the right decisions to turnaround the company. He could not failed this time. He continued his work until very late at night. With the takeover, he had not taken a day off ever since. Until the clouds are cleared, he will do his best and double up his efforts. It was a do or die situation. Some pertinent questions that need to be addressed: i. To increase sales within Cyberjaya through packaging of Tegajanas products and services with Hillviews development activities, hence improving the cash flow position of Tegajana, ii. To negotiate with creditors for favourable terms on existing and additional loans.

THE TURNAROUND

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APPENDIX A
TEGAJANA FINANCIAL STATEMENT INCOME STATEMENT 2003 (000) Revenue Cost of Sales Gross Profit Other Income Administrative Expenses Profit/Loss Finance Cost Profit/Loss before tax Taxation Net loss for the year BALANCE SHEET 2003 (000) Non-current Asset Property, Plan and Equipment Fixed deposit Total non-current asset Current Asset Trade receivables Other receivables Tax recoverable Cash and bank Total current asset Current Liabilities Trade payables Other payables Retention sum Due to corporate shareholder 962 4,932 3,163 830 4,800 993 2,879 830 7,055 2,015 2,668 830 11,351 2,115 1,868 830 17,689 2,449 1,468 5,083 57 17 474 5,631 3,195 305 31 200 3,731 4,108 336 30 76 4,550 1,926 326 573 2,825 2,001 327 957 3,285 86,257 776 87,033 82,814 1,053 83,867 78,834 603 79,437 75,697 622 76,319 71,501 644 72,145 2004 (000) 2005 (000) 2006 (000) 2007 (000) 6,226 (2,826) 3,400 432 (2,606) 1,226 (1,181) 45 (7) 38 2004 (000) 2005 (000) 2006 (000) 2007 (000) 11,890 (5,510) 6,380 231 (7,746) (1,135) (6,049) (7,184) (7,184) 10,294 (6,038) 4,256 446 (5,759) (1,057) (4,700) (5,757) (5,757) 11,251 (6,189) 5,062 294 (5,605) (249) (4,589) (4,838) (4,838) 12,247 (8,310) 3,937 2,599 (5,594) 942 (4,625) (3,683) (3,683)

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Asian Journal of Case Research (AJCR) 2003 (000) Amount due to a related company Borrowings Total current liabilities Net current liabilities Represented by: Share capital Accumulated losses Shareholder equity Non Current Liabilities Borrowings Amount due to holding company 64,395 1,023 65,418 81,876 CASH FLOW STATEMENT 2003 (000) Cash flow from operating activities Loss/profit before taxation Adjustments for: Bad debts written off Depreciation Interest expense Interest income Waiver of debts from shareholders Loss of disposal of Property, plan and equipment Operating profit before working capital changes Decrease/increase in receivables 1,722 1,171 (78) 17 2,877 (2,600) 1,372 5,210 6,036 (34) 5,400 267 367 4,219 4,670 (28) (121) 3,981 (1,311) 50 4,284 4,583 (20) 4,057 2,142 4,298 4,618 (20) (2,501) 54 2,767 (76) 45 2004 (000) 2005 (000) 2006 (000) 2007 (000) (7,184) (5,126) (4,840) (3,682) 65,198 1,023 66,221 75,496 61,998 1,673 63,671 67,819 58,198 1,673 59,871 59,180 54,398 54,398 50,024 16,420 38 16,458 16,420 (7,145) 9,275 16,420 (12,272) 4,148 16,420 (17,111) (691) 16,420 (20,794) (4,374) 1 900 10,788 (5,157) 81,876 2004 (000) 2005 (000) 2006 (000) 2007 (000) 2,600 12,102 (8,371) 75,496 3,600 16,168 (11,618) 67,819 3,800 19,964 (17,139) 59,180 3,800 25,406 (22,121) 50,024

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Turnaround Strategy: A case of Hillview Sdn Bhd 2003 (000) Decrease/increase in payables Inter-company indebtedness Increase in corporate shareholder Cash generated from operations Interest paid Interest received Taxes paid Net cash (used in)/generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Construction in progress Proceeds from disposal of property, plant & equipment Placement of fixed deposits Net cash used in investing activities (238) (45,934) 28 (776) (46,920) (1,767) (1,767) (1,580) 1,46 (119) (1,147) (1,147) (156) (156) 1,905 1 10 2,193 (1,171) 78 (44) 1,056 2004 (000) 2005 (000) 2006 (000) 2007 (000) (384) (1) 5,282 (6,036) 35 (13) (732) 3,066 650 6,386 (4,670) 28 1,744 3,596 9,795 (4,582) 20 31 5,264 6,271 (2) 8,960 (4,618) 20 4,362

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