KUALA LUMPUR (Feb 21): A more than two-year delay in completing the Pacific Star Business Hub by JAKS Resources Bhd (pictured) has been cited as the reason for Star Media Group Bhd to call on a RM50 million bank guarantee for the project.
Now, both parties appear to be pointing fingers at each other for causing the delay. The project was expected to be completed in 2016.
JAKS has accused Star of preventing the completion of Tower A under the project by the agreed Feb 15 deadline, and said its 51%-owned subsidiary JAKS Island Circle Sdn Bhd (JIC) should have been given a time extension to complete the project.
However, a source close to Star pointed out that Tower A is not the only component that has yet to be developed. The source said the remaining commercial and residential parts of the project are also behind schedule.
“There were defects in the building which Star [had] asked to be rectified, but I don’t think that amounts to changes requiring over two years’ delay,” the source said.
Yesterday, Star said in a Bursa Malaysia filing that JAKS had failed to deliver vacant possession of Tower A by Feb 15, following the latest extension agreed by the two parties.
“As JAKS had failed to deliver vacant possession of Tower A by the stipulated deadline, the company had in accordance with its rights under the SPA (sale and purchase agreement) and [the] terms of [two] bank guarantees pledged as security, made a demand on the bank guarantees from the financial institutions amounting to RM50 million,” it added.
The explanation came after JAKS said on Monday it would file an injunction in the High Court to restrain two financial institutions from releasing the bank guarantees to Star. It said Star’s call on the guarantees was “baseless”.
In August 2011, JAKS signed an SPA to buy 6.04 acres (2.44ha) of land in Section 13, Petaling Jaya for RM135 million from Star.
In return, it would construct the Pacific Star Business Hub, with the irrevocable and on-demand bank guarantees made as security to ensure developer JIC completes and delivers Tower A within three years from the vacant possession date or the date of the plans’ approval for the tower.
A spokesman for JAKS said the group has no further comment until the injunction is filed. Meanwhile, analysts covering JAKS remain sanguine on whether the company can weather any impact from the bank guarantees being called.
“There is unlikely to be any short-term impact as we believe the court process will take some time,” Affin Hwang Capital Research analyst Ng Chi Hoong said. “[Even] if the court does not rule in JAKS’ favour, they have the cash to meet the payment from their recent land disposal,” he told The Edge Financial Daily.
Ng added that the injunction does not represent the final verdict on the responsible party for the delay, although JAKS will need to complete the project before any decision can be made on who should bear responsibility.
He also pointed out that JAKS had contingent liabilities of RM20.78 million as at Sept 30, 2017.
Another analyst with a local investment bank shared that the delay had been caused by requested changes to the building design.
“As JAKS is confident they have a case against Star, there is no need for a provision,” said the analyst, declining to be named, adding that the delay was not unexpected.
JAKS is now selling the development, dubbed the Pacific Star Business Hub, for RM240 million to another of its 51%-owned subsidiary, Fortress Pavilion Sdn Bhd, after signing an SPA with the latter on Aug 9. The remaining 49% stake in both subsidiaries, JIC and Fortress Pavilion, is held by Island Circle Development Sdn Bhd (ICD).
According to ICD’s website, the development comprises five towers: two are commercial blocks — one 14-storey and the other 16-storey; while three are serviced apartment blocks between 24 and 33 storeys, with four storeys of retail space as well as basement and elevated car parks.
JAKS shares fell six sen or 3.26% to RM1.78 yesterday, with a market capitalisation of RM880 million. Star shares slid one sen or 0.73% to RM1.36, with a market capitalisation of RM1 billion.
This article first appeared in The Edge Financial Daily, on Feb 21, 2018.
With regard to the story entitled “JAKS, Star Media at loggerheads over project delay” that was published on Wednesday, construction of Tower A has started but yet to be completed and is behind schedule by over two years, and not as reported. The error is regretted.