Malaysian corporate landscape hit by the ‘perfect storm’ in 2018

As of this year, Khazanah’s portfolio of companies has been underperforming in line with the weak sentiment in the local bourse in contrast to a year ago when surging share prices drove the value of Khazanah’s investments to a record high. — AFP pic
As of this year, Khazanah’s portfolio of companies has been underperforming in line with the weak sentiment in the local bourse in contrast to a year ago when surging share prices drove the value of Khazanah’s investments to a record high. — AFP pic

KUALA LUMPUR, Dec 20 — The Malaysian corporate landscape in 2018 was hit by the “perfect storm” with major colossal losses and shake-up in government-linked corporations (GLC) amid the multi-billion ringgit debt scandal weighing on 1Malaysia Development Bhd (1MDB), as well as, the misappropriation of funds and operational issues in other major corporates.

It is the loss in trust and confidence placed on these institutions which were set up with noble objectives, that resonated with the Malay idiom “harapkan pegar, pegar makan padi”, which describes the abuse of power for personal gain among board members and those entrusted with authority.

The magnitude of the problem is so great that it required government attention and resources to resolve the mounting debt and financial fiasco inflicting these corporations.

Troubled entities

The Federal Land Development Authority (Felda), set up to transform the lives of settlers and eradicate poverty, along with its other subsidiaries namely FGV Holdings Bhd and Felda Investment Corporation Sdn Bhd, wasted billions between 2013 and 2017, on acquisition deals that were questionable and drew a lot of criticism.

As for sovereign investment fund,1MDB, the government is planning to take legal action against alleged perpetrators on the misused of funds in the multi-billion ringgit scandal.

And the latest “to join the foray”, is Malaysia’s pilgrim fund, Lembaga Tabung Haji (TH), a statutory body set up to facilitate Muslims to perform the haj pilgrimage, which is now subject to public scrutiny after incurring a deficit of RM4 billion in deposits, suggesting that the management falsified accounts in order to justify dividend payment.

This was pointed out by former Bank Negara Malaysia governor Tan Sri Zeti Akhtar Aziz who rightly pointed out that the fund, since 2012, was paying higher dividends than it could afford and warned that for every ringgit of liability, it had 98 sen in assets.

Referring to an audit finding, a local daily reported that the dividends could have been paid by depositors’ savings.

Former executives were implicated for lack of proper regulatory oversight and alleged misuse of funds for political motives.

Impact of financial scandals

In the 2019 Budget speech, Finance Minister Lim Guan Eng said the new government is saddled with a worrying state of financial affairs with RM1,065 billion in debt and liabilities, as at June 2018, nearly RM350 billion higher than officially announced by the previous government.

The trillion ringgit debt followed financial scandals and mega debts related to inflated mega projects due to corrupt deals.

It was discovered that the previous government was secretly paying debts of 1MDB amounting close to RM7 billion as at April 30, 2018.

To settle all of 1MDB’s debts, the government may also be liable to pay an additional RM43.9 billion.

Lim said the new government, which took power after winning the 14th General Election on May 9, would seek to reduce its ownership control in GLCs as it wanted the private sector to take a leading role in driving the economy.

He also stressed on the need for GLCs to improve their performance and have proper corporate governance.

Politicians are no longer allowed to be appointed to the board of GLCs and Lim emphasised that this was an important step in order for these companies to focus on business and performance, away from political motives.

As it is, many GLCs had performed poorly, deepening scandals and misappropriation of funds that had led to billions of value lost in assets and investors confidence.

In July, the country’s sovereign fund, Khazanah Nasional Bhd, announced the resignations of nine members of its board including managing director Tan Sri Azman Mokhtar.

The move was seen as a major shake-up to facilitate the transition to the new government.

As of this year, Khazanah’s portfolio of companies has been underperforming in line with the weak sentiment in the local bourse in contrast to a year ago when surging share prices drove the value of Khazanah’s investments to a record high.

Khazanah’s listed banking and telecommunications companies also saw the resignations of several key personnel including CIMB group chairman Datuk Seri Nazir Razak who wil leave the group on Dec 31, as well as, Telekom Malaysia’s acting group chief executive officer Datuk Bazlan Osman who left in November.

Khazanah recently announced the divestment of a 16 per cent stake in IHH Healthcare Bhd to Japanese conglomerate Mitsui & Co Ltd.

Meantime, government agency, Felda weighed by allegations of mismanagement and mounting debts, begun disposing its non-strategic assets to offset debts.

The process of selling its non-strategic assets will run until the middle or end of next year.

This came on the heels of its listed unit, FGV, which instituted legal action against 14 former directors and top officers alleged to be responsible for the RM514 million loss from the RM1.1 billion acquisition of London-listed Asian Plantation Ltd

Corporate financial results

For the third quarter ended Sept 30, 2018, FGV, the world’s biggest palm oil producer and oil palm plantation operator, posted a net loss of RM849.3 million due to plantation losses and impairment versus a net profit of RM41.5 million for the same period last year.

Telekom Malaysia Bhd, reported its first quarterly loss for the third quarter financial year 2018, due to impairment on network assets.

FTSE Russell and Bursa Malaysia announced two changes to the constituents of the FTSE Bursa Malaysia KLCI, with Top Glove and AMMB Holdings replacing KLCC Prop & Reits — Stapled Sec and Telekom Malaysia.

The announcement was made on Dec 6, following the semi-annual review of the FTSE Bursa Malaysia index series.

Part of the FTSE Bursa Malaysia Index Series, the FTSE Bursa Malaysia KLCI, is widely used by investors as the primary benchmark for the Malaysian market.

MIDF Amanah Investment Bank Bhd research head Mohd Redza Abdul Rahman said the poor corporate financial results in the third quarter, more often than not, was caused by poor revenue from lower commodity prices and delayed recognition of income and changes to policies or regulation.

“Not all bad results come from poor governance but more like, the not so exciting results, made this issue more prominent,” Mohd Redza told Bernama in responding to a question of whether the dissapointing financial results were due to poor governance and weak operational issues.

He said the increase in cost from raw material imports due to the ringgit’s depreciation and high oil prices, impacted corporate earnings.

“While earnings affect profitability and cause share prices to decline, the decline is also caused by concerns over geopolitics such as trade war and also the high outflow of foreign funds due to many factors including the US Federal Reserve interest rate hike,” he said.

“We can’t rule out the impact of geopolitics on the market’s performance (downward pressure on price) and earnings of exports and importers,” he added.

Mohd Redza said in general, the risk on the domestic front started to settle after the mid-term review of the 11th Malaysian Plan and the announcement of the 2019 Budget.

“So, the clarity would help beaten down sectors, for example telecommunication and construction counters, which will see some price recovery.

We don’t see heightened risk from the shake-up in GLCs because of the good intentions behind it as it would help instil better confidence in investors,” he said.

Meanwhile, Kenanga Research, however, saw another round of negative revisions.

For all 146 stocks under its coverage, Kenanga Research reduced the Financial Year 2018/19 (estimate) net earnings by 9.1 per cent/6.4 per cent on average.

“These earnings revisions are much larger in contrast to FBMKLCI constituents,” according to Kenanga Research in its market strategy report.

Impact of political changes on corporate transactions

Srividya C. Gopalakrishnan, managing director of global advisory firm Duff & Phelps Singapore Pte Ltd, said Malaysia has seen a major reduction in corporate deals this year.

Total deals in mergers and acquisitions (M&A), private equity/venture capital (PE/VC) and initial public offerings (IPO) amounted to US$12.5 billion compared with record levels last year with deals worth US$20.3 billion.

She said this could be due to political changes and businesses taking a wait-and-see approach on strategic growth initiatives.

“It is also imperative to note that in most economies, government policies, outlook and regulations do have an impact on deal activity—which sectors see more activity and how such deals are structured,” she pointed out.

Hence, it is understandable that for any change in government, there will be a short term ‘‘wait-and-watch’’ policy among businesses, especially those with decisions involving significant strategic investments.

This could be one of the reasons why the momentum for deals picked up significantly in the later part of the year, she explained.

“In 2018, we saw significant M&A deals driven by the healthcare and industrial sectors and investments driven by the education sector,” she added.

Outlook for transactions in 2019

As for 2019, Srividya said the outlook for transactions in Malaysia looked reasonably healthy and robust.

“In 2019, we expect to see more M&A activity from sectors such as energy, utilities, healthcare and industrial.

“We hope to see more PE/VC investments into technology with Malaysia following the trend set by Singapore and Indonesia in this space,” she said.

Srividya observed that globally, business cycles were getting shorter, disruptions were here to stay and regulatory changes will remain, leading to more global uncertainties and volatilities.

“These have also impacted Southeast Asia and Malaysia.

Organic growth opportunities for businesses are hence, a major challenge, which makes businesses look for inorganic growth opportunities to become the key driver for M&As and investments,” she added.

Turnaround plans

Malaysian GLCs that started with noble objectives, had a bigger task in hand to win the trust of the people and focus on its turnaround plans in weathering turbulent storms and emerging from mammoth losses towards the path of recovery.

Due to legal matters that need to be resolved, the tabling of Felda’s white paper, has been postponed to next year.

The white paper will provide a comprehensive picture of the troubles surrounding Felda.

As for TH, its underperforming assets, worth an estimated RM19.9 billion, would be taken over by a special purpose vehicle (SPV) under the Ministry of Finance.

Corporate fundamentals remain strong

Franklin Templeton Investments said Malaysian corporate sukuk is in a ‘‘sweet spot” at the moment, where corporate fundamentals remain strong while default rates stay low.

“With a stable Overnight Policy Rate (OPR) and decent economic growth, we continue to favour corporate sukuk, which generally offers a higher yield pick up versus Malaysia Government Securities,” according to the global investment firm.

Franklin Templeton Investments is one of the first to invest in the sukuk asset class and is currently one of the largest independent investment managers for sukuk. — Bernama

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