Business

Saturday September 19, 2009

Unlocking value in GLCs

By TEE LIN SAY


Govt shows focus in wanting to lower its corporate holdings and attract investors.

SO, the Government is putting its money where its mouth is. Recent developments seem to suggest that it is finally ready to reduce its shareholding in the government-linked companies (GLCs), something that has been talked about for a long time.

Michael Chang says a sovereign fund won’t sell for the sake of trading gains.

A strong indication surfaced on Sept 10, when Khazanah Nasional Bhd placed out a 5% stake, or 55 million shares, in Malaysia Airports Holdings Bhd. Rumours began swirling as to which investee company of Khazanah will be next to see a similar share sale.

At the same time, two other Khazanah-related companies, namely CIMB Group Holdings Bhd (in which Khazanah owns 28.4%), and Pos Malaysia Bhd (32.2%), reported large off-market share placements.

On Sept 10 as well, 30 million CIMB shares, or a 0.8% stake, changed hands at RM10.38 per share. It was reported that the seller is Takrif Aspirasi Sdn Bhd. CIMB’s eight largest shareholder. The following day, Utilico Emerging Markets Ltd sold 25 million Pos Malaysia shares, or a 4.7% stake.

While these two off-market transactions are unrelated to Khazanah, they support the argument that now may be a good time for the government investment arm to sell shares in the GLCs.

That aside, market watchers believe that Prime Minister Datuk Seri Najib Razak, who is also Finance Minister, is serious about wanting the Government to lower its corporate holdings and attract new investors.

“He is thoughtful in allowing the private sector to discover its own path and for the local bourse to eventually flow with liquidity,” says one observer.

A good move?

MCIS Zurich Insurance Bhd head of fixed income Michael Chang sees the Government’s desire to pare down its stake in GLCs as very positive. “We’ll get more participation, and in an overall sense, there’s greater market liberalisation. This also profiles Malaysia as an institutional haven for global investors,” he says.

Choong Khuat Hock ... ‘It shows that Malaysia is open to Chinese investments.’

He argues that the stock market needs more shareholder diversity, and this means fewer shares in the hands of the usual local institutional funds.

He adds that long-term shareholders such as sovereign wealth funds that have a strategic interest will be value adding for the GLCs in many different aspects.

“A sovereign fund won’t sell for the sake of trading gains. In fact, they may increase their stake over time, as they always need to be invested,” Chang explains.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng says it is true that for a country to have long-term stability, it still needs its own capital base and local investors.

“However, foreign investors create competition, which is needed to put everyone on the treadmill. Otherwise, there is a tendency to lie down or stand still,” he quips.

On a more serious note, Yeah says that with foreign participation, Malaysia will have the benefit of exposure to foreign views and perspectives. This is because, apart from the capital infusion, what is just as important is the value brought by the new investors.

Chris Eng says a lowering of Khazanah’s stake in Pharmaniaga is almost a certainty.

“A foreign investors can contribute by enhancing many different aspects such as market access, higher technology and new management. This leads to higher productivity and competitiveness. These are key ingredients to fast track our economy to global heights,” he says.

Yeah points out that the private sector has to play its part in reinvigorating the economy and creating some crowding-in effect.

While people may be concerned about foreign control, he says this should not be an issue, especially when the positive effects on the industries and companies become tangible.

For instance, should Volkswagen AG (which is a world leader in its segment), takes up a stake in national car maker Proton Holdings Bhd, it immediately creates greater global value. “Upon signing on the dotted line with its new partner, Proton becomes a global player instantly!” says Yeah.

While hot money is sometimes viewed negatively, it has its benefits.

“First of all, it increases optimism and confidence levels. Hot money is inevitable in any market, although, yes, too much of it isn’t good. But in Malaysia’s case, we are at the stage where we need more foreign direct investments (FDI),” he says.

Sime Darby in the news

Data from the Malaysian Industrial Development Authority (Mida) shows a declining trend in FDI. In 2008, foreign direct manufacturing investments rose 37.9% to RM46.1bil compared to the 65.2% jump in 2007.

Up to the first half of 2009, FDI has fallen 53.9% year on year (y-o-y) to RM10.7bil, in line with the slump in the global economy.

Of more concern, however, is the continued slide in domestic manufacturing investment. Local investments declined 37% to RM16.7bil in 2008 after rising 2.9% in 2007. For the first half of 2009, local manufacturers continued to stay on the sidelines.

Hence, approved manufacturing investments fell 44.1% y-o-y to RM5.2bil.

Earlier in the month, there had been talk about Malaysia offering China a stake in conglomerate Sime Darby Bhd. It was reported that a plan to sell up to 10% of Sime Darby had been brought up at a recent Cabinet meeting. This rumour has since been shot down by the Prime Minister.

However, it is widely known that China is taking advantage of the economic downturn to go on a major shopping spree. It is investing in energy and other natural resources that can give it an economic advantage it has never had before.

Are there pros in selling Sime Darby shares to China? Kumpulan Sentiasa Cemerlang Sdn Bhd director of research Choong Khuat Hock says such a move would be positive as it reflects the Malaysian leadership’s will to attract investors to Malaysia.

“It shows that Malaysia is open to Chinese investments. China also has a lot of money. We may get to see more Chinese companies coming here,” he says.

Yeah of RAM says it will be mutually beneficial for both countries. He opines that with the 10% capital from China, Sime Darby could actually expand its resource base and emerge as a even bigger company than before. “Such a deal will also provide greater market access to China. As Sime Darby is a conglomerate, there are other areas where joint ventures and strategic partnerships can be forged. The opportunities are unlimited,” he says.

A fund manager from a foreign house says that with Sime Darby being the largest capitalised company on FBM KLCI, with a 10.42% weightage, a paring down of its stake by the Malaysian government would definitely be a good thing.

“It increases the free float and quality of the company, apart from bringing more international investors to Malaysia. Through Sime Darby, international investors will have a chance to own a stake in the biggest palm oil company in the world,” he says.

He adds that such a move, if it happens, also shows that Najib is focused and serious about making Malaysia an investable market.

“On a macro level, this immediately improves Malaysia’s attractiveness as a investing destiny. You add depth and breadth to the market. You get more quality investors and real foreign direct investments coming in. It also shows more transparency and no protectionism,” says the fund manager.

So who’s next?

With Khazanah’s stake in MAHB recently pared down, who’s next on the list?

OSK Investment Research associate director Chris Eng believes that the likely candidates are companies in which Khazanah has high ownership levels and whose share prices are not significantly below investment costs. In addition, they should have stable financial footing.

“Based on these criteria, we feel that healthcare player Pharmaniaga Bhd, property developer UEM Land Bhd and MAHB are the potential candidates,” he says.

Khazanah owns a 86.81% in Pharmaniaga. With the company not meeting its public shareholding spread, Eng says that a lowering of Khazanah’s stake is almost a certainty.

As for UEM Land, while Khazanah may want to remain in the driver’s seat, given UEM Land’s importance as the developer of Nusajaya in Johor, Eng believes Khazanah can afford to reduce its stake substantially from its present 77.1%.

“The tripling of its share price since listing is an added incentive to sell,” he says.

As for MAHB, the Sept 10 share sale may not necessarily be the last by Khazanah, given that it still holds 67.7% of the airport operator.

“With the company on a much firmer footing now that its financial restructuring has been completed, we may see more placements, especially to foreign longer-term investors,” he says.

  • E-mail this story
  • Print this story