Frankly Speaking

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WHY so much difference?

It's not common for companies to announce a deviation in their unaudited and audited results. Listing requirements state that an announcement has to be made when the variance is more than 10%.

But when a company announces a variance of close to 60%, it is inevitable that questions will arise on the reliability of its future announcements, especially where financial performance is concerned.

During the week of Aug 5-11, MTD-ACPI Engineering Bhd announced a 59.4% deviation in its unaudited and audited net profit for FY2013 ended March 31. The audited net profit of RM14.89 million revealed on July 31, was significantly lower than the unaudited net profit of RM36.7 million, revealed on May 28.

According to the company, the variance was due to under-provisioning for tax, additional provisioning for slow-moving stock and bad debt, and also over-recognition of profit from the Second Penang Bridge project.

Some adjustments were also due to under-recognition of profit from its projects in the Philippines and Abu Dhabi, but they we were small. While the company may have a view on how it treated certain accounting entries when it released its unaudited results, the external auditor obviously did not agree with it.

This probably led to the significant deviation. In the world of accounting, it is common to find auditors whose opinions differ when it comes to matters such as tax or booking of profits from projects. But the difference is rarely glaring.

MTD-ACPI is a medium-sized company in the construction sector. It certainly cannot afford to have a significant deviation in results.

Couldn't Telekom have dealt directly with MKH?

During the week of Aug 5-11, MKH Bhd announced that its subsidiary Pelangi Seri Alam Development Sdn Bhd (PSAD) had entered into an agreement to acquire 100% of Puncak Alam Resources Sdn Bhd for RM30.6 million, from Tan Sri Rozali Ismail and Nur Dayana Rozali.

Puncak Alam has the exclusive development right for about 550 acres in Kuala Selangor that belong to TM Facilities Sdn Bhd — a subsidiary of Telekom Malaysia Bhd.

Puncak Alam was awarded the right pursuant to a joint land development agreement (JLDA) and supplemental JLDA in 2005 and 2011, according to MKH's announcement.

MKH says the land is located in the Northern Growth Corridor and is opposite the existing UiTM Puncak Alam campus, and easily accessible via major highways — the Guthrie Corridor Highway and New Klang Valley Expressway.

The land will be developed into a new township comprising residential and commercial components, with an estimated gross development value of RM1 billion over five years. The question is, why couldn't Telekom award the development right to MKH instead of going through Puncak Alam? The RM30.6 million would have gone to TM, unless of course Puncak Alam had done work to add value to the land.

Another question is, did the joint development start in 2005? If so, what is the progress?

It is worth noting that MKH's subsidiary PSAD, was awarded a turnkey contract by Puncak Alam in 2012, for the construction of residential and commercial units on the 550 acres.

Obviously, Puncak Alam could not make much progress in developing the land and decided to sell the right to MKH. If Telekom had enforced a time limit on developing the property, it could have exited the joint development and looked for a partner on its own.FELDA's eyebrow-raising investment

Iris Corp Bhd's shareholders are probably relieved that the Federal Land Development Authority (FELDA) is willing to pay a premium for a 20% stake in the company, through a share placement exercise.

According to an announcement by the IT company on Aug 1, it received an offer from FELDA to take up its new share at 28 sen each. The subscription price is at a 40% premium Iris' closing price on the day of the announcement. The premium is even more based on the one-year average price of 17.6 sen.

Iris' shareholders will not have much to quibble about because the RM110.32 million proceeds raised from the placement will come in handy to pare down debt and finance capital expenditure, and working capital.

The additional capital will help strengthen its finances and enable it to take on more projects that utilise its integrated building system (IBS), which the company claims it has mastered.

Currently, Iris has a number of projects that use its prefabricated building panels that are mostly used to develop Rimbunan Kasih (RK) projects. RK projects are essentially modern farming villages for the poor, which is in line with FELDA's objectives.

Last year, the company secured a RM22 million contract from the Pahang government, to establish an RK development in Kuala Lipis. There appears to be some synergy between FELDA and Iris' RK technology.

But why is FELDA paying a premium for a stake in Iris? How will it benefit from the investment? It is worth noting that FELDA does not hold a controlling stake in the company, so it cannot dictate the operations.

How FELDA plans to derive value from its investment in Iris, is anyone's guess. It will need more than a steady stream of dividends for the kind of premium it has paid.

This story first appeared in The Edge weekly edition of Aug12-18, 2013.