A Case of Hillview Sdn Bhd - Universiti Putra Malaysia

C A S E 3Asian Journal of CaseResearch1(2): 130 – 143 (2008)Turnaround Strategy: A Case of Hillview Sdn BhdNURUL DIANA INTAN ZAFIRAH a , ANNUAR MD NASSIR b *, ABUSOFIAN YAAKOB c AND AZHAR MOHD NASIR dABSTRACTHillview Sdn Bhd (a government owned company) was instructed bythe Ministry of Finance, to bail out Tegajana Sdn Bhd, a financiallytroubled company with consecutive losses since its inception in 1998.The takeover was crucial to ensure that the requirement in the Billsof Guarantee of Cyberjaya as the hub of Multimedia Super Corridor(MSC) Malaysia is met and the development of Cyberjaya will runsmoothly. However, Hillview need to safeguard its interest in thetakeover and help Tegajana to improve its sales and create profit. Asat 2007, Tegajana’s total loss amount to RM3.7 million and is expectedto escalate in the near future due to increase in operating cost.In order to minimize the risk of depletion in Hillview Group’sprofit, thereby affecting Hillview’s shareholders’ wealth, Encik Razliand his team were determined to turnaround Tegajana to improve itsfinancial standing. The turnaround of Tegajana was important as tomaintain shareholders’ trust towards the management of Hillview.Hillview is the backbone of the development of Cyberjaya, the hub ofMSC Malaysia.Keywords: Financially troubled company, turnaround, MalaysianMultimedia Super Corridor.THE DILEMMAIt was Friday morning the 3 rd of July 2008. Encik Razli was deep in thoughts. Theinstruction given was very clear to him that Hillview must bail out Tegajana, afinancially 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 theaCyberview Sdn Bhd, Cyberjayab,c & dDepartment of Accounting and Finance, Faculty of Economics and Management, UniversitiPutra Malaysia*Corresponding author. Email:annuar@putra.econ.upm.edu.my, Phone: 603-89467600130

Asian Journal of Case Research (AJCR)THE BACKGROUNDCompany Background – Pendinginan Tegajana Sdn BhdPendinginan Tegajana Sdn Bhd (“Tegajana”) is the sole provider of district coolingservice in Cyberjaya for air conditioning. The principal activities of Tegajanaare to carry on the business of developing, owning, operating, maintaining,promoting, selling, managing and servicing district cooling system, co-generationsystem band electricity distribution system.The company was incorporated on 1 September 1998, with an authorizedpaid up capital of RM25 million shares at RM1 each. The paid up capital to dateis 16.4 million shares at RM1 each.Effective from 30 March 2007, Tegajana is wholly owned by Hillview SdnBhd, a Government Linked Company incorporated in Malaysia. Hillview hastaken over the entire shares of Tegajana from the previous shareholders, SeseniNiaga Sdn Bhd (51%), a member of Tetratacorp Berhad and NTD Capital Bhd;and TNB Energy Services, a wholly owned subsidiary of TNB (49%), for aconsideration of RM2. At the acquisition date, the shareholders’ equity ofTegajana 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 froma loss making company to a healthy company within 5 years. It was necessaryfor Hillview to turn around the company due to the survival of Tegajana wasimportant to ensure that the 10 Bills of Guarantee (“BOG”) offered to companieslocated 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 chilledwater supply, sustainability of Tegajana was crucial.The District Cooling System (DCS)Basically, a district cooling system (DCS) distributes thermal energy in the formof chilled water or other media from a central source to multiple buildings througha network of underground pipes for use in space and process cooling. The coolingor heat rejection is usually provided from a central cooling plant, thus eliminatingthe need for separate systems in individual buildings.A DCS consists of three primary components: the central plant, thedistribution network and the consumer system. The central plant includes thecooling equipment, power generation and thermal storage. The distribution orpiping network is often the most expensive portion of the DCS and warrantscareful design to optimize its use. The consumer system would usually compriseof air handling units and chilled water piping in the building.132

Hillview Sdn Bhd (“Hillview”)Turnaround Strategy: A case of Hillview Sdn BhdEstablished in 1996, Hillview Sdn Bhd, a government owned company andland owner of Cyberjaya has been mandated to spearhead the development inCyberjaya. To this end, Hillview put its utmost effort towards ensuring Cyberjayacontinues to progress in line with the Government’s aspiration.Its mission is to realize Cyberjaya as a nucleus of the MSC Malaysia andas a global hub and preferred location for ICT, Multimedia and Services forinnovation and operations; and to fulfill specific Government initiatives in supportof Malaysia’s Vision 2020.Hillview’s main objective is to ensure the development of Cyberjaya inaccordance with Government’s guidelines and aspirations and to also advise theGovernment on MSC/Cyberjaya development related matters.Hillview’s roles in developing Cyberjaya are:• Ensure Cyberjaya is developed in accordance with MSC Guidelines• Provision of assistance/support in co-ordinating joint activities withorganisation 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 CyberjayaThe Multimedia Super Corridor (“MSC”)The Multimedia Super Corridor (“MSC”) is a 15km wide by 50km long corridorthat runs from KLCC in the North down to KLIA in the South. The MSC isthe brainchild of our former Prime Minister, YAB Dato’ Seri Dr. MahathirMohamad.Located 25km South of Kuala Lumpur and 20km North of KLIA Sepang,Cyberjaya is designed as an integrated township to house the MSC leading edgefirms. The 2894 hectare Flagship Zone is seen as the catalyst for the developmentof the MSC and shall provide the impetus for the country to leap into the nextmillennium. It aims to be an integrated, eco-friendly township development withfour specialized precincts; Enterprise, Commercial, Residential and Public area.Upon completion, the whole development will be supported by advancedphysical and telecommunications infrastructure, top quality business facilities,low density environment and convenient transportation. The financial andnon-financial benefit is the main attraction for MSC companies to locate inCyberjaya.133

The Bills of Guarantee (“BOG”)Asian Journal of Case Research (AJCR)The BOGs are a package of commitment by the Malaysian Government to ensurethe success of MSC Malaysia status companies.The 10 major trusts of BOGs are:i.ii.iii.iv.v.vi.vii.viii.ix.x.Provide a world-class physical and information infrastructureAllow unrestricted employment of local and foreign knowledgeworkersEnsure freedom of ownership by exempting companies with MSCMalaysia Status from local ownership requirementsGive the freedom to source capital globally for MSC Malaysiainfrastructure and the right to borrow funds globallyProvide competitive financial incentives, including no income tax forup to 10 years or an investment tax allowance, and no duties on importof multimedia equipmentBecome a regional leader in intellectual property protection andcyberlawsEnsure no internet censorshipProvide globally competitive telecommunication tariffsTender key MSC Malaysia infrastructure contracts to leadingcompanies willing to use the MSC Malaysia as their regional hubProvide an effective one-stop agency- the Multimedia DevelopmentThe InstructionsTHE SITUATIONHillview was instructed by Ministry of Finance (“MoF”) to look into thepredicament of Tegajana Sdn Bhd which currently is facing financial difficulties.With current mode of operation, it would appear that Tegajana’s status as a goingconcern could be seriously jeorpardized, resulting in severe complications thatwould impair Cyberjaya’s status as a preferred premier city of MSC Malaysia.At a meeting room in MoF, Encik Razli was discussing the take over issueswith MoF representatives. Encik Razli was accompanied by Puan Irdatul in themeeting room.“Dato’, on the accounting implication, we might be facing problems dealingwith goodwill and consolidation. Furthermore, more administrative work mayhave to be done after the takeover materializes because previously it was done byNTD Capital.”“We have already come up with the steps that need to be taken subsequentto the takeover, Dato,” Encik Razli handed over a stack of documents to thecommittee; Documents of the strategy of prior and post takeover.134

Turnaround Strategy: A case of Hillview Sdn BhdThe MoF representatives glanced through the documents and discussed theoutcome of each steps presented. In the meeting with Treasury General, therepresentatives of MOF unanimously agreed on the selection of Encik Razli tohandle the “mission impossible” task based on his track record.A committee consisted of Hillview personnel and representative from MoFwere set up to manage the planning and implementation of the takeover. Beforethe takeover is fully materialized, NTD Capital shall hand over the managementcontrol to the committee.Therefore, it is proposed that Hillview to take over Tegajana shares at RM2from the shareholders.Residential Development in CyberjayaThe current population in Cyberjaya is 39,000 people. The working community(MNCs, foreign-owned and local developed companies with MSC status) accountfor 15,000 or 39% of total population in Cyberjaya, student population stood at13,000 or 33% (Multimedia University, Lim Kok Wing University College ofCreative Technology and Cyberjaya University of Medical Sciences) and localresidents contribute to another 11,000 or 28%. This proportion will changesignificantly in the next 10-15 years when the residence population is expected toincrease to about 180,000 or 64% of the total population in Cyberjaya, while theworking and student population will also increase to 70,000 (25%) and 30,000(11%) respectively.Table 1 Current vs Target Population2007 TargetWorking 15,000 70,000Student 13,000 30,000Residence 11,000 180,000Total 39,000 280,000Source: Setia Bina Sdn Bhd, March 2006.As of 2005, Cyberjaya still lacks significant residential properties apart fromthe D’Melor condominiums, the Cyberia condominiums and townhouses. Thisresults in de-population of the area when office workers commute home everynight.However, this issue will be resolved soon with the launch of more than 900units of affordable housing comprising of various type houses by Hillview. Thisdevelopment, which will be developed in phases, is expected to have a populationof more than 3,600 residents once it is fully developed.135

Asian Journal of Case Research (AJCR)Tegajana’s Plant Capacity and Its CustomersTegajana’s plant is located at 3 acres land, Lot 12150 Cyberjaya. However, only 1acre 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 of7,500 RT Ice Storage Tank, 5 km of underground chilled water piping networkand 4 units of 500 RT base chillers. The second phase involves installation of4 units of 2,250 RT of Heat Exchangers, 1 unit of 500 RT base chiller, 7 km ofunderground chilled water piping network and 1 unit of 100,000 RT Ice StorageTank.Tegajana’s customer base was dependent on the capacity of its plant.Currently, the facilities used are from Phase 1 development. Its customers wereseparated to two stages. Stage 1 includes Telekom Complex, Century Square andNTT-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 GlobalDevelopment Centre and Telekom R&D Centre. Its customer base is reliant onthe capacity of chill water that Tegajana is able to generate.In the original Business Plan of Tegajana, the company will be benefitingfrom the off peak electricity charges to recharge the chill water and later to besupplied 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 wasdone during peak period with higher tariffs.Source: Tegajana’s Company Profile.136

Turnaround Strategy: A case of Hillview Sdn BhdTegajana’s Projects and Activities Done in 2007Tegajana has involved in several projects in 2007. The activities are presented inthe table below:No Area Items Quantity1 Electrical • Install additional Fluorescence lamps at SSB LV room +wiring3 units2 • Install Fluorescence lamps at MSB4 HT room + wiring 9 units3 • Painting epoxy layer to the HT room floor area4 • Construct holes on the concrete walls & install exhaustfans for HT & LV room (improve ventilation to reduceequipments heat radiation).4 units5 Safety • Make sand beds for wiring drain at LV & HT room 6 tonnes6 • Install steel plate to cover wiring drainage at HT transformerroom & LV room.2 rooms7 • Cover & tie cable trench in S/S11 set8 • Install hard plastic covers at SSB Inverter Stg1 (safetymaintenance).9 Cooling Towers • Modification on infills steel casings CT1 Stg1 by lifting upthe base ~4in. (clear mud & dirts & improve water flow)1 set3 cells10 • Replace new infills CT Stg 19 cells11 • Replace wire trunking (rusted & broken)5 pcs12 Facilities • Service & modification on all FCU drainage piping systeminside office (prevent leakages)13 • Modification white board & wall plug to the meetingroomwall.5 units1 unit14 • Welding & repainting main trash bin to make good. I unit15 Customers’metering room• Install power surge regulator for Energy meter & Flowmeter at customers’ metering room.19 unitsSource: Tegajana’s Key Performance Indicator 2007.Historical Financial Results of TegajanaPlease refer to Appendix 1 for Income Statement, Balance Sheet and Cash FlowStatement.137

Amount Owed to CreditorsTurnaround Strategy: A case of Hillview Sdn BhdTegajana was sent a letter by TNB on its 7 day notice of payment for the servicesthat Tegajana has rendered amounting to RM11.58 million (amount owing toTNB). Tegajana has appealed for a 30-day settlement timeline, for Tegajana’sshareholders to continue discussions with MoF on the possibility of full takeoverby Government.The outstanding amount owed to TNB amounting to RM13 million as at 30April 2007:Balance OutstandingAmount (RM)Principal 15,414,012.30Interest 3,655,875.17Total 19,069,887.47Contra with transformer (2,000,000.00)Waive the penalty interest (3,655,875.17)Total amount outstanding 13,414,012.30The amount was spread to 10 years at RM1,341,401.23 per annum. Monthlypayment will commence in May 2010 at RM11,783.44 per month.The Meeting and Delegation of DutiesAfter the meeting on the 3 rd of July:“I know Razli. We will be burdened by Tegajana’s debts and this will lower downour overall return to shareholder if we are not able to come up with bulletproofstrategies. Our KPI will be affected. All these years we are able to increase ourdividends to shareholders by 2%. You don’t have to worry. I will work somethingup with Saliha and my assistant. Miracle could happen!”, Irdatul said with asmile and nodded knowingly at Saliha.“Saliha, please help Irdatul on the Business Plan for Tegajana. We needto determine its way forward after the takeover. And don’t forget to draft theConditional 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 sincethis is our first subsidiary, and it’s not a good deal either. We have to deliver whatwas expected of us but we also need to cover ourselves. If not, you and me will bebrowsing advertisements on Jobstreet again!”While managing and developing Cyberjaya is a full time responsibility, otherspecial tasks as assigned by MoF need to be carried out as well. Most employeeswork round the clock to ensure that their job is done.139

Asian Journal of Case Research (AJCR)As the landowner of Cyberjaya, Hillviews mission is to realize Cyberjayaas a nucleus of the MSC Malaysia and as a global hub and preferred location forICT, Multimedia and Services for innovation and operations; and to fulfill specificGovernment initiatives in support of Malaysia’s Vision 2020.Its work culture embraces speed and excellence as well as ideas contributionby everyone, regardless of their position.THE TURNAROUNDAfter the takeover, the Management of Tegajana, the committee members andHillview’s top management tried to resolve the situation that has been hinderingTegajana’s growth.Encik razali knew that if he is capable of doing a major turnaround of Tegajanain 2 years or less, it will be marked as a great success. However, if the turnaroundfailed to materialized, Tegajana’s losses will affect Hillview’s financial positiontremendously. Therefore, it will affect Hillview’s shareholders’ wealth. As majorshareholder of Hillview, MoF’s investment in Hillview will be affected. Hillview’soperation is based on Government’s grants and financial support from the ministry.If the ministry has lost trust in Hillview, the development of Cyberjaya might bederailed. Hillview is the only organization that was entreusted to spearhead thedevelopment of Cyberjaya to realize the Government’s aspiration of an intelligentcity.His challenge now was greater than anything that he had done before.Tegajana’s previous shareholders gave up hope on this company and the expertspredicted that Tegajana will be insolvent in the near future. The future of Cyberjayawill be dependent on his credibility to make the right decisions to turnaround thecompany. He could not failed this time.He continued his work until very late at night. With the takeover, he had nottaken a day off ever since. Until the clouds are cleared, he will do his best anddouble up his efforts. It was a do or die situation.Some pertinent questions that need to be addressed:i.ii.To increase sales within Cyberjaya through packaging of Tegajana’sproducts and services with Hillview’s development activities, henceimproving the cash flow position of Tegajana,To negotiate with creditors for favourable terms on existing and additionalloans.140

Turnaround Strategy: A case of Hillview Sdn BhdAPPENDIX ATEGAJANA FINANCIAL STATEMENTINCOME STATEMENT2003 (‘000) 2004 (‘000) 2005 (‘000) 2006 (‘000) 2007 (‘000)Revenue 6,226 11,890 10,294 11,251 12,247Cost of Sales (2,826) (5,510) (6,038) (6,189) (8,310)Gross Profit 3,400 6,380 4,256 5,062 3,937Other Income 432 231 446 294 2,599Administrative Expenses (2,606) (7,746) (5,759) (5,605) (5,594)Profit/Loss 1,226 (1,135) (1,057) (249) 942Finance Cost (1,181) (6,049) (4,700) (4,589) (4,625)Profit/Loss before tax 45 (7,184) (5,757) (4,838) (3,683)Taxation (7) - - - -Net loss for the year 38 (7,184) (5,757) (4,838) (3,683)BALANCE SHEET2003 (‘000) 2004 (‘000) 2005 (‘000) 2006 (‘000) 2007 (‘000)Non-current AssetProperty, Plan and Equipment 86,257 82,814 78,834 75,697 71,501Fixed deposit 776 1,053 603 622 644Total non-current asset 87,033 83,867 79,437 76,319 72,145Current AssetTrade receivables 5,083 3,195 4,108 1,926 2,001Other receivables 57 305 336 326 327Tax recoverable 17 31 30 - -Cash and bank 474 200 76 573 957Total current asset 5,631 3,731 4,550 2,825 3,285Current LiabilitiesTrade payables 962 4,800 7,055 11,351 17,689Other payables 4,932 993 2,015 2,115 2,449Retention sum 3,163 2,879 2,668 1,868 1,468Due to corporate shareholder 830 830 830 830 -141

Asian Journal of Case Research (AJCR)2003 (‘000) 2004 (‘000) 2005 (‘000) 2006 (‘000) 2007 (‘000)Amount due to a relatedcompany1 - - - -Borrowings 900 2,600 3,600 3,800 3,800Total current liabilities 10,788 12,102 16,168 19,964 25,406Net current liabilities (5,157) (8,371) (11,618) (17,139) (22,121)81,876 75,496 67,819 59,180 50,024Represented by:Share capital 16,420 16,420 16,420 16,420 16,420Accumulated losses 38 (7,145) (12,272) (17,111) (20,794)Shareholder’ equity 16,458 9,275 4,148 (691) (4,374)Non Current LiabilitiesBorrowings 64,395 65,198 61,998 58,198 54,398Amount due to holdingcompany1,023 1,023 1,673 1,673 -65,418 66,221 63,671 59,871 54,39881,876 75,496 67,819 59,180 50,024CASH FLOW STATEMENTCash flow from operatingactivities2003 (‘000) 2004 (‘000) 2005 (‘000) 2006 (‘000) 2007 (‘000)45 (7,184) (5,126) (4,840) (3,682)Loss/profit before taxation - - - - -Adjustments for:Bad debts written off - 1,372 367 50 -Depreciation 1,722 5,210 4,219 4,284 4,298Interest expense 1,171 6,036 4,670 4,583 4,618Interest income (78) (34) (28) (20) (20)Waiver of debts fromshareholdersLoss of disposal of Property,plan and equipmentOperating profit beforeworking capital changesDecrease/increase inreceivables- - - - (2,501)17 - (121) - 542,877 5,400 3,981 4,057 2,767(2,600) 267 (1,311) 2,142 (76)142

Turnaround Strategy: A case of Hillview Sdn Bhd2003 (‘000) 2004 (‘000) 2005 (‘000) 2006 (‘000) 2007 (‘000)Decrease/increase in payables 1,905 (384) 3,066 3,596 6,271Inter-company indebtedness 1 (1) 650 - (2)Increase in corporateshareholderCash generated fromoperations10 - - - -2,193 5,282 6,386 9,795 8,960Interest paid (1,171) (6,036) (4,670) (4,582) (4,618)Interest received 78 35 28 20 20Taxes paid (44) (13) - 31 -Net cash (used in)/generatedfrom operating activities1,056 (732) 1,744 5,264 4,362Cash flows from investingactivitiesPurchase of property, plantand equipment(238) (1,767) (1,580) (1,147) (156)Construction in progress (45,934) - - - -Proceeds from disposal ofproperty, plant & equipment28 - 1,46 - -Placement of fixed deposits (776) - - - -Net cash used in investingactivities(46,920) (1,767) (119) (1,147) (156)143