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Saturday January 22, 2011

On the home stretch

IT has been said that transformation isn't for the faint of heart. Lest you forget, change efforts are near impossible to pull off without a band of believers. Perhaps, that explains why Tan Sri Azman Mokhtar, boss of Khazanah Nasional Bhd, has a coterie of 14 experts, armed with intimidating resumes, who line up his top management and power every crucial aspect of the state-owned investment fund's strategy.

Indeed, that's a deliberately wise strategy. Azman sits atop a fund which owns over RM113bil worth of assets, many of which are strategic jewels constantly on the radar of others while the fund itself has become an easy punching bag for critics. Some of its hard-won reform gains have also periodically been threatened by political hand-wringing and pressure by battle-hungry entrepreneurs.

It has been over half a decade since Azman led this charge to change, the outcome of which is more visible in some while there remains a few “stubborn apples”, to transform its investee companies under the banner Government-Linked Company Transformation Programme.

The entire process, riddled with rhetoric, countless templates and a maze of modalities, however, does have clap-worthy accomplishments and there's data to prove it.

As at the end of last year, Khazanah's overall portfolio's realisable asset value (mark-to-market) stood at RM113bil, up more than two fold since the change efforts back in 2004. In terms of performance, the fund's net worth adjusted (NWA) has also risen by 125% over the same period, resulting in a CAGR (compounded annual growth rate) of 13% per year.

From a headcount of 30 when Azman swooped into the hot seat of Khazanah in 2004, the fund today has a staff strength of 370 and growing.

Azman should have been elated to reveal these numbers at an annual review of the fund's performance over the week, in stark contrast to two years ago when it must have been unnerving to announce that the fund suffered a 20% drop in RAV and 36% decline in total shareholder return in the hands of the global crisis in 2008.

The “blip” in 2008 had led the Fund's portfolio to swing back to square one as some of the companies namely Malaysia Airlines, Axiata and UEM Group in its stable needed to top up their capital.

“Yes, we have to admit that some GLCs were impacted due to the slowdown in global demand. But we also need to acknowledge that the grouping has sailed through the financial storm relatively unscathed no one GLC has suffered a complete meltdown and had to be bailed out.

“In fact, the GLCs came out outpacing the market by a considerable margin and back on the growth track,” says Azman, in an email interview with StarBizWeek attributing that to the “reforms and hard work laid out and implemented under the GLC Transformation Programme prior to the crisis.

Two thirds into the journey

Emotionally, financially and operationally, the first wave of the reforms must have been most painful to pull off.

Amidst a public that was deeply sceptical and for good reason, wary, over the much touted reform process, Azman soldiered on, even as he was muscling up his own institution's waned human capital, to lead the clean up, sort out the legacy issues and roll out massive changes, which also included a face change at the helm of several GLCs to turn these entities into high performers, and in turn, improve shareholder value.

All of that, and some, came enveloped in a structured and staggered approach, articulated in reams and reams of guidelines which became the compass for the reform process.

The verdict, although the journey is not quite over, appears somewhat favourable.

“By any measure, the GLCs undertaking the GLC Transformation Programme have performed well as a group these past six and a half years. Numbers speak louder than words,” he says.

By numbers, he means this. Aggregate earnings of the G20 (selection of 20 largest GLCs controlled by Government Linked Investment Companies) in 2010 is forecast to nudge the peak achieved in 2007 of RM19.3bil and to rise further in 2011.

The grouping's annual total shareholder return has risen by 16.3% outperforming the rest of the KLCI by 2.2% per year.

The group comprises nine companies controlled by Khazanah which posted a total shareholder return of 17.4% per year, outperforming the rest of the KLCI by 3.4% per year.

Probably the two biggest growth stories worthy of chest thumping are CIMB Group Holdings Bhd and Axiata Group Bhd who have steadily and staunchly built up a regional presence and by doing so, have enjoyed the embraced of the investing fraternity.

In terms of branch networks, CIMB is the largest bank in South-East Asia and its market value is just shy of the dominant Singaporean banks.

Axiata has seen eye-popping growth in subscriber numbers from 5 million local subscribers less than 5 years ago, to 150 million subscribers in nine countries today.

Another prized asset is healthcare provider Singapore-listed Parkway Holdings Ltd, which Khazanah had to fight hard to wrest control last year from India's Fortis Group. The plans in the pipeline for the sector are no less ambitious.

Through its wholly owned Integrated Healthcare Holdings Sdn Bhd, Azman says Khazanah is hoping to build a more integrated regional healthcare platform. Simply put, it means leveraging on the various healthcare assets of the group and increasing its access to the regional markets in South-East Asia, China and India.

Azman promises there will be more to come.”

“There are also pockets of opportunities in the wellness market and medical tourism industry in the region which we have yet to fully tap on.”

Still, he says, “the programme journey is not fully done as yet and that success has not been uniformly achieved.”

The stubborn ones

The struggle to reform is clearly no where close to being over. There are some tough battles involving certain GLCs, which may have financially strengthened themselves, relatively speaking, that still remain be won due to several key factors.

Azman readily admits to that: “There are three major laggards as evidenced by their market underperformance TNB, MAS and Proton.”

He is however quick to point out that it's not a result of poor management but more because they involve sectors that have “many regulatory and industry challenges”.

“Still, that's not an excuse we need to review carefully how we could achieve breakthrough results here,” he adds.

TNB, under its steward Datuk Seri Che Khalib Mohamad Noh, had undertaken a brutal cost cutting exercise which had resulted in substantial savings for the national utility.

Click to view graphic

His appointment as TNB president and chief executive officer in July 2004 was in fact one of the first major CEO changes which took place under the transformation agenda.

His long-fought for tariff pass-through formula which would have enabled the utility to pass the cost burden of higher fuel to consumers has sadly, been in vain, to date.

The outcome despite having strengthened its financial and operational platforms, TNB is today battle-scarred and fails to attract the degree of investor attention it deserves as a result of such “regulatory uncertainty.”

Azman's frustration is somewhat palpable in his response to whether or not this issue has been frustrating: “TNB operates in a regulated environment that still faces several unresolved structural issues. We have submitted our views to the Government on how to resolve them and we will continue to work closely with the Government on the resolutions.”

Even if not, he has good reason to be disenchanted. Khazanah, it is believed had in fact, after months of slog and industry analysis, submitted a comprehensive energy plan to the Green Technology, Energy and Water Minister Datuk Seri Peter Chin on the way forward for the sector.

Most pertinent is the plan called for a clearly-articulated tariff mechanism which would take into account the market prices of fuels.

Interestingly, the plan was called MESI (Malaysian Electricity Supply Industry). But for some peculiar reason, the will to implement the plan has been feeble, partly perhaps implementing the plan could lead to higher tariffs which is never, politically speaking, a populist move.

Meanwhile, the absence of a cohesive energy plan or tariff formula, among other creases that have yet to be ironed out, has returned to haunt the utility again.

“TNB is facing severe headwinds from rising coal prices, dwindling gas supply and its silver bullet solution (tariff increases) is opaque at best,” Maybank IB Research shot out in a recent report.

Similar structural and regulatory hurdles, such as lack of a clear policy, are also faced by another key investee company Malaysia Airlines (MAS) but observers say the issues facing the national carrier are also related to operational issues such as ill-timed hedging policies in the past.

To add salt to injury, its rival, low-cost carrier AirAsia Bhd's market value has exceeded that of MAS (RM8.15bil vs RM6.98bil).

Then, there's Proton Holdings Bhd, a “rebel” investee company which is 43% owned by Khazanah.

In 2007, there was a plan, led by Khazanah to find a foreign partner for the national carmaker to lift up the latter's flagging financials.

After many rounds of protracted and intense talks with Germany's Volkswagen, the deal floundered.

Later, it would appear that both Khazanah and Proton's board and senior management were pulling in separate directions on whether or not the tie up was necessary.

Since then, Khazanah has “relinquished” its attempts to steer the carmaker, which makes up less than 1% of its portfolio of investments, leaving that instead to the current board and management of Proton.

In fact, since Datuk Mohammad Zainal Shaari, the executive director and chief operating officer of Khazanah stepped down from the board of Proton in April 2008, no Khazanah employee has been represented in Proton's board, which an industry observer says is “very telling.”

More recently, it was announced that Proton is finalising plans to secure loans and investments worth a massive RM2.4bil to turn around Group Lotus, which some analysts describe as a “costly distraction” from its core business making and selling cars.

Is the job done?

As in any hot-seat in Government-linked institutions, there has over the years been mounting speculation on how long Azman will stay on as Khazanah head honcho. Is he out? Is he in? Is he headed for bigger things? He himself is asked this question ever so often, never once drawing a satisfactory response for the interviewer and understandably so.

Truth is, Azman is at the start of his third term as managing director of Khazanah, which upon completion would mean nine years.

The transformation agenda, on the other hand, which began together with Azman's Khazanah-ship, is a ten-year programme. If the final leg of the reforms is critical, then Azman may have to stay to see it through. Even so, it's anybody's guess.

Asked if he's had enough and would stay on for another term, if asked, Azman predictably, opts to be vague: “When this current management team first started in 2004, we quickly outlined a ten-year transformation programme. This programme as we have mentioned is thankfully on track. It is however not completed as yet and we need to diligently stay on course. In that regard, I don't intend to understay, as much as I have zero intentions to overstay either!”

Related Stories:
Championing towards Project 515
Setting the priorities
Khazanah's Pos stake draws 8 or 9 bidders
In defence of assets

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