Setting the priorities


  • Business
  • Saturday, 22 Jan 2011

IT was in high spirits that Tan Sri Azman Mokhtar (pic), managing director of Khazanah Nasional Bhd, revealed the performance of the state-owned investment fund over the week. The numbers were compelling enough. But the work, as he himself would admit, is not yet done.

In an email interview with the StarBizWeek, Azman talks about the strategy forward for the fund, the progress of its reform agenda thus far and the rationale behind the PLUS takeover.

StarBizWeek: Evidently, last year was a year of aggressive expansion not just by Khazanah’s investee companies but also the fund itself. What was the thinking behind this?

Azman: The investment stance for 2010 was actually fairly neutral in that total investments were at RM6.5bil, only slightly higher than total divestments of RM6.2bil.

No doubt there were some higher-profile transactions including Parkway, PLUS and UEM Land. The portfolio did indeed expand quite significantly, by RM21bil to a RAV (realisable asset value) of RM112.6bil (+23%) and more significantly a net worth adjusted jump of 39% to RM75bil, significantly outperforming all key benchmarks.

In other words, the big expansion of the portfolio was due to the significant rise in share prices of existing investments, as the investment stance for 2010 was neutral overall.

Hence, it was a very good year, thankfully, and perhaps a market vindication of much of the underlying work over the last 6½ years.

We saw the opportunities and merits in doing the deals, and we were also prepared. The healthcare investments, for example, had started as early as 2005 when we bought into Apollo Hospitals.

Consequently, we have stakes in International Medical University, Pantai and then Parkway, and last year we were able to strengthen the healthcare portfolio by integrating all these assets under one roof, Integrated Healthcare Holdings.

You mentioned that Khazanah will be “fairly cautious” this year and “nimble” in its investment strategy. You mean you would be prudent and will not actively seek to expand your asset portfolio unless opportunity knocks on your door? Does this mean the mandate you had started out with to expand will not be a focus this year?

Not quite. We will continue with our active investment – and for that matter, divestment – style and a combination of being both aggressive and prudent at the same time. It’s not a contradiction in terms, it’s quite possible and even required, we think. It has also worked well for us, thus far at least.

We can never have enough of being prepared. This means, among others, to rigorously follow through on our various key programmes. Being prepared, we have learned and continued to learn, making us ready to take advantage when opportunity knocks. In this market, opportunity will knock but one has to be very nimble as it is also a rather volatile and fleeting market.

Being prudent means recognising that a bird in hand is better than two in the bush, and a bird that lays eggs is even better. This means better capital management, disciplined dividend policy, selling into strength where appropriate and timing buying on dips. It’s a market that rewards preparedness and nimbleness.

A second set of beliefs is around the need to take risks, albeit calculated ones.

Khazanah, as an active strategic investment house, is a ship that is meant to sail and to undertake often difficult and complex assignments as our mandate requires us to not just make money but to do so in a manner that also creates much strategic value, especially at this time of national transformation.

What does the year hold for Khazanah and its investee companies?

As an investment house, we have to be on top of developments in the global and domestic economy.

We are concerned that there is still much uncertainty in the external environment. As such, we will continue with our cautious stance, managing our investments within appropriate risk and return parameters to create financial and strategic value for Khazanah and the nation.

We will continue with an orderly divestment of non-core assets and non-core holdings, which will lock in some of the value we have created and we hope to generate excitement in the market.

We will also intensify the execution of our plans for new economic investments, many of which are expected to start bearing fruit over the next 2 or 3 years.

Locally, the implementation of the Economic Transformation Plan and the 10th Malaysia Plan will provide a catalytic push for private investment in 2011.

We believe that the key sectors identified, including several sectors where Khazanah is building up exposure, such as leisure and tourism, healthcare and education, will benefit from this momentum.

More generally, we see that the five roles for GLICs and GLCs under the New Economic Model – staying the course, regionalisation, new economy investments, collaboration and level playing field – provide a framework for us to seek opportunities to grow and create financial and strategic value.

From a global perspective, while there are mixed signs of recovery in the West, the near-abundance of capital is likely to continue flowing into emerging Asia. Market volatility will rise, but this also supports asset valuation, which could present divestment opportunities for us.

Overall, we maintain the critical need to be cautious, yet alert and nimble to respond to macro conditions to benefit our new or existing investments.

Will there be more consolidation led by Khazanah (or its investee companies) in certain sectors like what we’ve seen with UEM Land and Sunrise and which sectors could this potentially involve?

The transaction between UEM Land and Sunrise is a takeover where the resulting combination creates value for both parties based on complementary strengths.

UEM Land has built a solid base with the Nusajaya development in Iskandar as evidenced by an almost five-fold increase in its share price over two years since listing even before the announcement of the takeover of Sunrise. So, there was already real and financial market validation of its work. Only then, did we see a possibility of expanding further by entering into a complementary and friendly takeover of Sunrise. The subsequent further increase in share prices of both UEM Land and Sunrise is a good vindication of this strategy.

In country or in sector consolidation, there is generally value accretive for all key parties if carefully crafted, at least in industries where concentration is not too high and especially in industries where there are too many players. There are a couple of smaller examples in our pipeline including the disposal of Pharmaniaga to Boustead Holdings and the Hong Leong’s proposed buyout of EON Cap.

Going forward, we will also be on the lookout for opportunities to acquire assets that could support the growth and more importantly, the regionalisation of our investee companies.

Our direct investments in Lippo Bank and Excelcomindo in Indonesia back in 2005 and its subsequent injection into CIMB and Axiata respectively has, thankfully, been very successful as evidenced by the significant share price and product market gains made.

Equally, we will also be ready to divest of our own non-core or non-competitive assets, provided that our partners are serious and share common aspirations.

GLCs transformation

This would mark the 7th year of the GLC Transformation programme. How many GLCs, in your opinion, have really transformed?

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. It is fair to say that the market and the results have some sense of sustainability embedded in them.

GLCs as a whole have demonstrated resilience through the crisis period and are now growing again, at a rate outperforming the broader market. Nonetheless, the programme journey is still not fully done and that success has not been uniformly achieved.

Aggregate earnings of the G-20 (the 20 largest companies owned by the Government, not necessarily in the Khazanah fold) in 2010 is forecasted to touch the previous peak of RM19.3bil in 2007, and to rise further in 2011.

Market capitalisation of the G-20 has also reached an all-time high of RM343bil as at Dec 31, 2010.

The G-20 has also risen by an annual TSR (total shareholder return or capital appreciation plus dividends) of 16.3% outperforming the rest of the KLCI by 2.2% per annum.

Just to note that in the meantime, the nine companies controlled by Khazanah within the G-20 has posted a TSR of 17.4% per annum, outperforming the rest of KLCI by 3.4% per annum.

Among the GLCs and our companies that were highlighted as being ahead in building a regional presence are CIMB, Axiata, Integrated Healthcare and Parkway, and to an extent PLUS and MAHB. Maybank is another one from outside our stable.

There are three major laggards as evidenced by their market underperformance – Tenaga, MAS and Proton. Nonetheless, we have highlighted that often this underperformance was in spite of, not because of, management’s best efforts.

It’s not a coincidence that these companies are in 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.

In our stable, CIMB and Axiata for instance, have accelerated their regional footprint.

CIMB currently is the largest bank in South-East Asia by number of branches, and its market cap is just shy of the dominant Singaporean banks. Axiata has grown by leaps and bounds from their 5 million local subscriber base less than 5 years ago, to 150 million subscribers in nine countries today.

Parkway is a recent acquisition by Khazanah which already has a significant regional presence. Other future contenders within Khazanah include PLUS (India and Indonesia) and Malaysia Airports (India, Kazakhstan and Turkey).

Nevertheless, the journey ahead remains arduous and challenging for the GLCs to become regionally competitive.

Towards regional competitiveness and in line with the aspirations of the country’s New Economic Model, GLCs are increasingly collaborating or merging with the private sector via innovative new business models or business templates.

Notable recent examples include the UEM Land and Sunrise merger; the HSBB roll-out for TM and its long-term contract with Maxis, ahead of fellow GLC Celcom; MAHB’s LCCT2; PNB and SP Setia in property development; Teluk Datai, Langkawi involving Khazanah and several private developers; WCT’s involvement in Medini Iskandar; and the contingent sale of TIME dotCom to an entrepreneurial group.

Some companies have been more successful at breaking away with commendable performance. Others will therefore need to emulate this and find their own breakthrough pathways. You can expect that this is one of the areas that will keep us busy in the next few years.

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