Saturday July 9, 2011

Divesting interest in GLCs

By CECILIA KOK
cecilia_kok@thestar.com.my

A measure to define the Government's role in business, improve liquidity in capital market and provide more private investment opportunities

DATUK Seri Idris Jala told a press conference after his presentation at the seventh Economic Transformation Programme briefing: “We took a bet among ourselves on which of the slides would attract the most questions. And it seems we got it right.”

The Minister in the Prime Minister's Department and CEO of the Performance Management and Delivery Unit (Pemandu) was, of course, talking about the GLIC (government-linked investment company) divestment plan piquing the curiosity from analysts and journalists alike.

Sadly though, apart from how many GLCs will be involved in the planned divestment exercise, nothing else was released. Apparently, a “gag rule” is in place due to the non-disclosure agreement between the government agencies and the GLICs involved.

Announcements would be only made at the appropriate time by the respective organisations, said Pemandu, which added that each of the GLCs involved in the exercise was currently at different stages of preparation for divestment.

The Government has revealed that it has identified 33 companies under six GLICs as ready for divestment. Under the plan to rationalise the portfolio of GLCs, the Government has said it would reduce its stake in five of the identified companies, list seven of them, and sell the remainder 21 companies. Of the 33 GLCs, 24 are expected to be involved in the divestment exercise between this year and 2012.

According to Pemandu, the recent listing of the Federal Land Development Authority's (Felda) MSM Malaysia Holdings Bhd had already incorporated four of the seven companies identified for listing under the GLC divestment programme. This leaves three more GLCs which are expected to be listed by the end of 2012.

Right positioning

The GLIC divestment plan, which is already in place, is part of the Government's Strategic Reform Initiative (SRI) to define its role in business. The aim is to establish a clear regulatory and business function to avoid conflict of interests as well as to encourage a level-playing field that will encourage greater private-sector investment.

“This is a good thing, it's a long-overdue development,” says an economist from a foreign-based research house.

“The Government shouldn't have its hands in business in the first place because it's never the Government's business to be in business,” he adds.

CIMB Research team, headed by Terence Wong, in their recent report say this is the first time that the objectives in rationalising the Government's role in business are being laid out systematically. The objectives, which include to avoid crowding out the private sector, to increase liquidity in capital market and to improve the Government's fiscal position, are not new, they say, adding that they have been brought up by the Prime Minister on many occasions.

Pointing to the Invest Malaysia conference in June 2009 as an example, CIMB Research recaps the Datuk Seri Najib Tun Razak's directive to GLCs to operate only in sectors in which they can be competitive and to divest companies that operate in sectors or scale of activities best undertaken by entrepreneurs.

“GLCs must compete on a level-playing field with the private sector and the Government will not provide assistance to GLCs to the detriment of private-sector competition. Also, GLCs will play a complementary role with the private sector in enhancing the competitiveness of the country,” the local research outfit notes.

Difficult puzzle

At this juncture, identifying which GLCs under which GLICs earmarked for the divestment exercise remains a difficult puzzle to solve.

The Employees Provident Fund (EPF), Khazanah Nasional Bhd, Permodalan Nasional Bhd (PNB), Lembaga Tabung Haji (LTH), Kumpulan Wang Persaraan (KWAP) and Lembaga Tabung Angkatan Tentera (LTAT) are identified as among the country's main GLICs. Companies controlled by the Government include the non-listed Petroliam Nasional Bhd (Petronas), Felda, KTM Bhd and state-level companies, while listed ones include some of Petronas' and Felda's subsidiaries, as well as Affin Holdings Bhd, Axiata Group Bhd, BIMB Holdings Bhd, Chemical Co of Malaysia Bhd, Malaysia Airlines (MAS), Malayan Banking Bhd (Maybank), Tenaga Nasional Bhd, the UEM Group, TH Plantations Bhd and Sime Darby Bhd, among others.

While it is difficult to pinpoint which companies the GLICs would choose to divest, several analysts are putting their bets on some of the more prominent GLCs, such as MAS, Malaysia Airports Holdings Bhd (MAHB), Proton Holdings Bhd, Malaysia Building Society Bhd, Axiata, UEM Land Holdings Bhd, RHB Capital Bhd and CIMB Group Holdings Bhd, as the likely candidates in which GLICs would pare down their stakes.

Maybank Investment Bank Research in its recent report says it believes future listing could involve subsidiaries of Petronas and companies under Khazanah, while adding a relisting of PLUS Expressways Bhd is not an impossibility. It also stresses that the market has been expecting the separate listing of Sime Darby's operating units for a while now. It is interesting to note that the same research house had also recently highlighted the merits of privatising MAS and listing the national airline's operating units such as FlyFirefly Sdn Bhd, MAS Engineering & Maintenance Sdn Bhd, MASkargo Sdn Bhd and even its terminal services to unlock value.

OSK Research, which says it prefers not to jump on the bandwagon (in speculation), on the other hand, only says in its report that it believes the immediate beneficiaries of the GLIC divestment exercise would be banks, particularly those with stronger investment banking franchise such as CIMB.

Merits to divest

Market analysts believe GLC restructuring is a multi-year theme for the local stock market.

CIMB Research in its report says: “The Government appears to have a well-thought-out plan for the divestment of its holdings in listed companies. We view the divestment programme as timely, as it will help improve liquidity and free float in the market at a time when the FMB KLCI is scaling new all-time highs on a daily basis.”

“If executed properly in a rising market, the sale of sizeable stakes will not only raise liquidity, but boost interest in GLCs and their share prices,” it explains, while pointing out that Malaysia's relatively poor liquidity has often been cited as one of the main reasons foreign investors shun the market.

Affin Research in its report says, “In our view, there has been good progress made in Malaysia's transformation programmes. Starting from the capital market, under a 10-year transformation programme, which began in 2004, many of the GLCs under Khazanah and other GLICs have since been reformed. They are showing improving profitability, reduced gearing, more robust cash flow generation and, importantly, higher returns to shareholders. Indeed, a number have now positioned themselves as regional champions such as CIMB, Maybank and Axiata.”

The research outfit adds that the recent listings of GLCs have also helped expand the depth and breath of Malaysia's stock market.

“Collectively, the GLCs account for a significant weighting on the FBM KLCI. It is important to stay invested in GLCs that have sound business models,” it says.

According to Idris Jala, the GLICs have identified a “strike price” for each of the GLCs to ensure that the Government could get the maximum value from its assets divestments. The divestment exercise will be triggered once the “strike price” is hit, he says.

The amount that the Government could potentially raise from its GLC divestment exercise remained a “trade secret”.

But the understanding is that proceeds from the exercise will be channelled to the Federal Government Divestment Account or a state account to service the country's fiscal deficit, invest in existing funds and facilitate the Government's involvement in certain businesses. To that, the Government has said it would still be involved in businesses that meet four criteria.

These include when the private sector needs co-investment in projects that are gross national income-positive to the nation such as the regional corridor developments; the business has to be owned domestically in the interest of national security, such as defence and rice-production industries; the business involve large capital investment and require long gestation period such as nano-technology; and national infrastructure projects such as renewable energy and public transport system are involved.

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Saturday July 9, 2011

Divesting interest in GLCs

By CECILIA KOK cecilia_kok@thestar.com.my

By CECILIA KOK
cecilia_kok@thestar.com.my