The CEO Outlook 2008 series kicks off with three prominent leaders — Tan Sri Teh Hong Piow, Tan Sri Lee Shin Cheng and Datuk Seri Bashir Ahmad. Teh, the banker with an astute sense of timing, expects another good year for Public Bank Bhd with its high organic growth strategy. The supremo of IOI Corp Bhd, Lee says the biggest challenge in the plantation sector is finding suitable land for cultivation. Malaysia Airports Holdings Bhd is going through an exciting phase under Bashir's stewardship. Bashir believes planning for the future is vital for an airport.
TAN SRI TEH HONG PIOW
Public Bank Bhd
IS the third wave of bank consolidation happening? In your view, what will be the possible outcome?
Market participants continue to speculate that one or two more bank mergers may take place due to the competitive pressure and the need for some banking institutions to achieve economies of scale.
The timing is difficult to tell. The authorities still hold the view that any bank merger will be based on market forces.
The authorities also encourage strategic alliances and partnerships for domestic banks to enhance their capacity to offer a wider range of innovative products and services and compete more effectively.
Based on current developments, the banking industry will have stronger, dynamic and competitive players operating in a more liberal environment.
How vibrant is the regional theme in relation to your sector and bank?
The regional theme for the banking sector is still relevant. For some banking institutions, regional expansion will enhance shareholder value, if they have a viable business model with a well-executed business strategy.
Presently, the need to go regional is still strong because of the highly competitive domestic market and narrower interest margins.
Going regional, particularly to the emerging economies in which the banking business is still under-penetrated, is a good business decision.
The Ninth Malaysia Plan encourages domestic financial institutions to leverage on opportunities arising from greater regional integration among the economies in this region.
Budget 2007 provides tax incentives for domestic banks to set up operations overseas.
Public Bank is very active in expanding its overseas operations in Hong Kong and China, Cambodia, Laos, Vietnam and Sri Lanka. The group is confident that economic growth in these markets will continue to remain robust as they open up their economies and undertake further structural reforms.
By the end of this year, the group's overseas branches will increase to 90 from 71 at the beginning of this year due to rapid increases in new branches in Hong Kong and Cambodia.
Coupled with more focused business strategy, the branch expansion will increase the contribution of the overseas operations to the group's profit from the current 13%.
Do you think the regional theme is overtaking the consolidation focus?
For some banking institutions, the regional theme may be more important than the consolidation theme. Presently, some of the domestic financial institutions are already operating at an optimum size in terms of branch network and economies of scale in the domestic market.
They also have built their capability to a point at which they can compete effectively in a more liberal operating environment. For other financial institutions, the reverse may be true as they continue to build their critical size and capability to compete more effectively.
What are some of the lessons learnt in mergers and acquisitions (M&A)? Is it worth even though some M&As may initially be expensive?
The Public Bank group's acquisitions of former Hock Hua Bank (completed in March 2001) and former Asia Commercial Bank (completed in May 2006) had proceeded very smoothly. Public Bank did not face major operational problems and hurdles to complete the acquisitions.
In both acquisitions, we were well prepared to ensure a smooth business transition and integration without interrupting customer service. Public Bank made a lot of efforts to ensure that all staff of the acquired institutions were quickly assimilated into Public Bank’s corporate culture.
With close cooperation by all staff, the group achieved a complete business and backroom rationalisation within a short period of time.
Public Bank made sure the staff members of the acquired institutions were equipped with new skills to be more effective in the merged and bigger entity.
Valuation or pricing of an acquisition exercise is highly subjective and a complex process. In assessing whether a merger is expensive or otherwise, it should not be based only on the price/book multiple.
Pricing of an acquisition is determined by factors such as the quality and potential of the target institution, potential business synergy, prevailing economic condition and M&A markets prevailing during the acquisition exercise.
To complicate the process, the pricing decision has to take a long-term view for long-haul businesses such as banking and financing.
Thus, given the complexity of the factors in the pricing process, it is very difficult to reach a clear-cut conclusion whether an acquisition is expensive or otherwise.
Risk premiums are rising in the United States and Europe. Do banks in Malaysia share any of those pressing problems?
Risk premiums in the United States and Europe have elevated substantially, following the ongoing crisis in the US subprime mortgage market. The high-risk premiums are seen as the subprime credit problems have spread to other areas such as commercial papers, money market funds, hedge funds and structured finance.
Perhaps, the risk premiums will remain elevated for a while as the credit market in the US and Europe becomes tighter and market participants expect more uncertainties ahead. To date, market participants have yet to understand the full impact of the US subprime mortgage crisis on the real economy.
Risk tolerance is very low due to uncertainties. However, amidst this turmoil, there have been positive developments. Balance sheets of some of the large global financial groups are being repaired through capital injection. Central banks in the developed economies continue to provide short-term liquidity.
Despite the high-risk premiums arising from the subprime mortgage issues, Malaysia is spared from the calamities. Malaysian banks continue to be insulated from the fallout in the subprime mortgage market as reflected by the continued stability in the money and credit markets.
It has been widely reported that Malaysia only has a very small amount of indirect exposure to collateralised debt obligations. The banking system is on a sound and solid footing due to Bank Negara's strict and strong prudential regulation. The banking system is awash with liquidity.
In addition to regional expansion, M&As and consolidation, what are the next big moves for banks in Malaysia to strengthen their business in 2008?
Given the highly competitive banking and financial landscape, banks will continue to address the pressure on interest margins by pursuing growth strategies and diversifying their earnings base.
Most banks will continue to drive for higher contributions from fee-based activities such as sales of unit trust funds, transactional banking fees, wealth management and bancassurance.
Room for the domestic banks to improve staff productivity and cost-to-income ratio is ample. The average cost-to-income ratio for the banking industry is still high.
The Public Bank group will continue with its high organic growth strategy while maintaining its prudent policy in 2008. The group has budgeted a loans growth of 15% for 2008, to be supported by high growth of SME and consumer loans. The deposit-taking business will remain a priority.
To increase contributions from non-interest income, the group will intensify efforts to launch and sell new unit trust funds, distribute ING's bancassurance products, promote the card business and other fee-based activities.
Recently, Public Bank signed a 10-year strategic regional alliance with ING Group to distribute ING’s life, health and personal accident products in Malaysia and other countries in which Public Bank has a business presence.
The strategic alliance opens door for Public Bank to jointly develop the bancassurance and takaful businesses, wealth management and co-branded credit card services with ING Group. The group will also continue to grow its overseas business rapidly in 2008.
TAN SRI LEE SHIN CHENG
IOI Corp Bhd
YOUR views on the escalating risks in the plantation sector’s crucial growth parameters such as the scope of expanding oil palm areas, control of harvesting costs and maintaining high yields?
The most challenging factor for growth would be finding suitable land to cultivate. First, land prices have escalated. Second, not all agronomically-plantable land is suitable in today’s context.
We are all concerned about the environment and the impact businesses have on the environment. We need to ensure that business is conducted under sustainable business models. In the case of palm oil, the cultivation of oil palm should be in accordance with sustainability principles and criteria as prescribed by Roundtable of Sustainable Palm Oil, of which IOI is a founding member.
Among other things, this means for instance, that virgin forest or areas with “high conservation value” or peat areas more than 2m deep, should not be touched.
On the cost front, the most serious area of cost increases is fertilisers. Five years ago, we used to spend about RM800 per hectare per annum on fertilisers. Today, the amount has almost doubled and it's still going up. Fortunately, the strengthening ringgit has mitigated the increase.
As for maintaining high yields, we hope to not only maintain but to further improve as well. Oil yields per hectare can be further improved both in terms of FFB yield as well as extraction rates at the mills.
How do you foresee the 2008 growth outlook for biofuel/biodiesel industry in Malaysia amid the international trade limitations, higher feedstock (CPO) prices, sustainability and the food versus fuel debate?
The growth of the biofuel/biodiesel industry is mainly driven by Europe and the US. For these regions, the main consideration is energy security and therefore, governments are backing the development of the bio-energy sector either in the form of subsidies or mandated use.
There are clear targets in these countries and hence the growth trend is expected to continue. Besides, for the developed countries, food prices is not such a big issue. For poorer nations in Asia and Africa, escalating food prices is a serious concern.
In Malaysia, cooking oil is a price-controlled item and the bigger producers are required to contribute to a cooking oil cess. Hence, since we even have to subsidise cooking oil, we will not be ready for the biodiesel industry to take off in Malaysia as yet.
Globally, the amount of palm oil that is used for bio-energy is very low (less than 5%). Palm oil will continue to face obstacles as a feedstock for bio-energy in places like Europe.
However, despite all these, we see palm oil demand and palm oil prices going up. This is because as more rapeseed oil, soy oil and corn gets diverted to the bio-energy sector, more palm oil is needed to fill up the shortfall in the food and other sectors.
I see the food versus fuel debate continuing. Unfortunately, the world is hungry for both food and fuel. But as I said, actually, very little of palm oil goes to fuel at the moment.
Do you agree that the structural changes in the global commodities supply and demand pattern i.e. the biodiesel market, the fight for hectarage to plant corn for ethanol instead of soy bean and rapeseed in the US and South America, trans-fatty acid concerns, China and India relaxing their palm oil import tariffs, will lend support to higher CPO prices in 2008?
Prices of soft commodities in general are expected to remain high. In the case of vegetable oil, supply over the next 12 months, with the notable exception of palm oil, is expected to lag behind consumption again.
Hence, prices of soy oil, rapeseed oil and sunflower oil will remain high and will even go higher if projected production is cut by unfavourable weather.
Palm oil production growth, on the other hand, will be above average but this is not a bearish sign because its surplus supply is needed to make up for the deficits in the other oil.
Overall, for 2008, palm oil prices will follow the lead of other vegetable oil which prices are expected to be high.
Your company’s strategies in 2008 and the rationale behind it, i.e. overseas expansion, refineries, mills, biomass, biodiesel projects or carbon credit initiatives.
We are bullish about the long-term prospects of palm oil and will continue to invest at the appropriate time and in an appropriate manner to grow the business, both upstream and downstream.
We recently entered into a joint venture (JV) to invest in oil palm cultivation in Indonesia. Our effective interest in the JV is equivalent to about 70,000ha, which is nearly 50% increase to current planted hectarage in Malaysia. It is, therefore, a very significant addition and this will likely be the main area of focus in 2008 for the upstream sector.
We will also further invest in downstream operations in Malaysia as well as Europe and the US over the next two years to capture demand, further value add and innovate on the use of our palm oil fractions.
Also, not forgetting that we have a sizeable property business that should also see decent growth as the market is improving.
The current volatile CPO prices from RM2,900 to RM3,000 per ton have made it very difficult for planters to lock in their CPO selling prices. At what price would your company be “comfortable” with for FY2008 and FY2009? Kindly indicate your average cost of production annually.
We are “comfortable” with the current price levels but will not be aggressive on forward sales, as there are upside risks. Our production cost is about RM550 per tonne. However, cost of sales, after factoring in transport costs, Sabah sales tax and cooking oil cess, is about RM950 per tonne.
DATUK SERI BASHIR AHMAD
Malaysia Airports Holdings Bhd (MAHB)
PLEASE review your group’s performance since the government-linked company (GLC) revamp.
MAHB started its transformation in 2003 and this fell in line with the GLC Transformation Initiatives launched in July 2004. We started with our corporate and financial restructuring and concurrently continued to pursue operational and financial performance.
Since 2003, we have gained a substantial financial footing. While negotiations are still underway on our financial restructuring, we have managed to grow our net profit to RM170.9mil in financial year ended Dec 31, 2006 (FY06) from RM84.7mil in FY03, which reflects an average 25% growth per annum.
Revenue growth averaged 7% and costs averaged just 5% per annum. As at Sept 30, our cash reserves increased to about RM650mil from RM200mil. Retained earnings have more than doubled to over RM1bil.
The foreign shareholding grew from less than 2% to almost 12% now. Most importantly, for shareholders, our share price has more than doubled from RM1.30 to over RM3 now and we recently announced an attractive dividend policy of 50% payout as well. Currently, we have no borrowings.
Operationally, our highest achievement was when KL International Airport was awarded the World’s Best Airport (15 million-25 million passengers a year) by ACI-ASQ for 2005 and 2006. Another first in the world was when we received the Airport Service Quality certification recently.
Other notable achievements include Company of the Year from Chartered Institute of Logistics and Transportation. We continue to be the only airport in the world that is environment-friendly by receiving the Green Globe 21 certification. The LCCT also won a CAPA award for the Best Low Cost Airport of the Year 2006 after one year of operation.
On the international front, we have made significant headway into international ventures involving Hyderabad and Delhi Airports in India, Astana Airport in Kazakhstan and Sabiha Gokcen International Airport in Turkey.
Our vision and mission has been reviewed and we are now on a continuous improvement programme to improve operations and further invest in human capital to maintain a high performance culture.
What else are you looking at beyond KPIs?
We continue to review our strategies to enable KLIA to be the regional hub. In addition, a National Airport Master Plan is on the verge of completion which will provide a strategic framework for the development of airport capacity for at least the next 25 years.
The service levels and facilities are increasing public and stakeholders confidence in our business of managing airports while maintaining our ASQ-ACI ranking, which is the standard for service excellence.
We hope to achieve sustainable profit growth via human capital development and greater retail and land development. We are further developing our investor relations management as it is the cornerstone of any good PLC. Last but not least, ensuring that we continuously develop our CSR commitments and combine that with environment friendly initiatives.
Does your share price reflect the progress charted by your group?
We appreciate there is still some hesitancy from investors in taking up further stakes in MAHB pending the restructuring. But, even without restructuring, our share price has increased to above RM3 in 2007 from RM1.30 in 2003. However, I believe a newly restructured MAHB will unlock its true value.
What is the next big move you are planning that will bring more excitement to investors?
There is no doubt the dynamics of the aviation industry are such that airports are continuously under pressure to increase commercial revenue, despite increasing risks and enormous funding requirements for airport development.
MAHB has been able to achieve an aero:non-aero revenue ratio of 45:55, which means we are deriving more of our income stream from commercial operations.
Are there new challenges that you foresee and would that affect your revamp plans?
The airport business is part of a bigger aviation industry and an even bigger transportation industry.
MAHB operates almost all the airports in Malaysia except for Senai. Some of these are smaller airports which are not profitable but are necessary as they serve a socio-economic purpose to the nation.
Henceforth, it is crucial for MAHB to continue managing all airports in Malaysia as a whole system to enable cross subsidisation between the profitable and non-profitable ones. Ultimately, our aim is to ensure all airports are profitably run. It is important that this status quo remains.
Is it time to chart new directions for GLCs?
GLCs need to continue the drive towards world best standards. Phase 3 of the GLC Transformation from 2007-2010 is about producing tangible results. Phase 4, the last phase from 2010, is about a full national benefit, whereby the objective is to produce regional or even world champions on par with competitors.
We have been able to achieve that with KLIA receiving recognition as the World’s Best Airport for two consecutive years – in 2005 and 2006.
We are now in pursuit to make all our airports achieve world’s best status in their respective categories, and we will start with the Penang, Kota Kinabalu, Kuching and Langkawi airports.