The potential of Valuecap


  • Business
  • Saturday, 01 Feb 2003

From-loaded pump priming targeted at the stock market is deemed the quickest way to fuel the economy. In a recent report, research house UOB Kay Hian explains why exactly.  

The Malaysian government recently launched a RM10 billion-asset management company – Valuecap Sdn Bhd – to buy shares on the Kuala Lumpur Stock Exchange (KLSE) and improve market liquidity. 

While unorthodox, allocating more financial resources to “pump-prime” the equity market would have a quicker impact on domestic demand than traditional expansionary fiscal measures.  

Valuecap’s RM10 billion can potentially send the Kuala Lumpur Composite Index (CI) to 750 (+18 per cent), based on a similar domestic situation in 2001 when Khazanah Nasional Bhd (Khazanah) mounted a takeover of United Engineers (UEM).  

Figure 1

Raising CI to 750 is equivalent to injecting RM6.9 billion into the domestic economy, which will likely add 2.0 percentage points to our 2003 gross domestic product growth forecast of 3.2 per cent. 

Improving liquidity in the KLSE will also turn domestic money more risk-seeking, potentially driving the CI even higher.  

Figure 2

Valuecap’s launch and the spate of corporate mergers and acquisitions recently announced provide clear evidence of the government’s intent to engineer a virtuous cycle. 

Figure 3

We are upgrading our trading range for the CI to 640-750 from 590-670. We continue to expect the CI to be range-bound till external visibility – both geopolitical and economic – improves.  

Our top picks remain Star Publications, Maxis, PPB Oil Palms, United Plantations, Globetronics, Public Bank and Maybank.  

In addition, the companies that could benefit from rising optimism in the weeks ahead include 1) companies controlled by Permodalan National Bhd (PNB), Khazanah and Kumpulan Wang Amanah Pencen (KWAP), 2) companies trading at significant discounts to their book values, 3) companies that would potentially benefit from impending fiscal pump-priming measures and 4) the warrants of blue-chips and index stocks. 

Valuecap’s mandate is to buy shares of KLSE companies – particularly undervalued ones – and to improve market liquidity. The fund is equally-owned by PNB, Khazanah and KWAP. While its establishment was widely expected, the speed with which it began operating caught the market by surprise. 

Figure 4

Most players had expected its establishment to require some form of parliamentary legislation and its active participation in the market only in the second half of 2003. 

Once again, concerns have arisen that the Malaysian government is artificially propping up the stock market and what’s more, on borrowed money. This move would only benefit foreign portfolio investors, allowing them to liquidate their positions at higher prices. However, we believe this unorthodox economic measure by Malaysia will eventually prove successful. 

Turning domestic money more risk-seeking 

There is almost RM48 billion of excess liquidity in the banking system. Unfortunately, domestic liquidity has turned risk averse since April 2002.  

Backing Valuecap with RM10 billion to purchase equities is equivalent to turning RM10 billion worth of domestic liquidity more risk-seeking. 

 

RM10 billion can potentially send the CI to 750 (+20)  

To estimate the impact of Valuecap on the CI, the closest proxy would be Khazanah’s RM3.7 billion-takeover of UEM in July 2001. (refer to figure 1).  

At that time, global markets were on a downtrend on the back of numerous corporate scandals in the US. And just like Valuecap, Khazanah’s takeover exercise involved a massive cash injection of RM3.7b into the equity market.  

The market rose 7.3 per cent (or 48 points) from 649 on Jul 20, 2001 to 697 by Sept 7, 2001. It would have climbed higher if not for the Sept 11 attacks. On a straight-line extrapolation basis, Valuecap’s RM10 billion-fund could propel the market up by 19.7 per cent to 748. (Figure 2) 

 

Engineering a virtuous cycle till a better 2004 arrives 

Raising the CI by 20 per cent is likely to boost financial wealth by RM29.6 billion (or 8 per cent of GDP), assuming a free-float of 30 per cent. Inadvertently, some of this wealth will translate into domestic consumption.  

Based on our econometric model, the CI’s rise to 750 could result in approximately RM6.9 billion being injected into the domestic economy.  

This could add 2.0 percentage points to our 2003 GDP growth forecast of 3.2 per cent. While a traditional RM10 billion-fiscal stimulus package has the potential to add some 2.5 per cent to GDP, there are foreign labour constraints and fiscal stimulus is typically back-loaded (i.e. there is a time lag between projects awarded and projects implemented). 

Setting up a massive fund to buy up shares in the market is an unorthodox economic measure. As can only be expected, bailout concerns have re-emerged.  

But we note the government’s excellent track record in managing Danamodal (to recapitalise the banking sector) and Danaharta (to manage non-performing loans). Also, Bank Negara Malaysia (BNM) has been very responsible in mopping up excess liquidity in the banking system and maintaining the integrity of the peg. Investors should give the Malaysian government more credit. 

 

KLSE is a “Buy 

We are upgrading our trading range for the CI to 640-750 from 590-670. We continue to expect the CI to be range-bound till geopolitical and economic visibility improves. Our top picks remain Star Publications, Maxis, PPB Oil Palms, United Plantations, Globetronics, Public Bank and Maybank. (Figure 3) 

With rising optimism, the following companies could also benefit in the weeks ahead. (Figure 4) 

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