After seven years of change...


  • Business
  • Saturday, 25 Jun 2011

TWO-THIRDS into the transformation programme of government-linked companies (GLCs), Khazanah Nasional Bhd must be eager to show off the progress of its companies at the inaugural three-day GLC Open Day that ends tomorrow.

The transformation programme started in 2004, some 10 years after Khazanah commenced operations.

It is aimed at turning GLCs from bloated and inefficient entities into stalwarts that thrive in the private sector and are poised to be regional champions.

The man appointed for the mountainous task was Tan Sri Azman Mokhtar, previously the chief of advisory at consulting firm BinaFikir Sdn Bhd, and since his appointment at Khazanah in June 2004, the 10-year GLC transformation programme is synonymous with Azman's reign at Khazanah.

The journey thus far

The GLC transformation programme comprises four phases, with the first phase spanning from 2004 to 2005. It involved the revamp of Khazanah, the setting of key performance indicators for GLCs, and GLC leadership changes.

The more visible changes that took place back in 2004 and 2005 included the appointment of new GLC chiefs in Telekom Malaysia Bhd (Datuk Seri Abdul Wahid Omar), Tenaga Nasional Bhd (Datuk Seri Che Khalib Mohamad Noh) and Malaysia Airlines (Datuk Seri Idris Jala).

The second phase of the programme in 2006 was the launch of the 10 transformation manuals and the setting of policy guidelines, while the third phase stretched from 2007 to 2010, when tangible and sustained results, including benefits to all stakeholders, were expected to be visible.

A key Azman catchphrase' commonly used is value creation with Khazanah's units doing so either through organic growth, divestment, exponential growth via mergers and acquisitions or greater focus in divisions.

Some of the more publicised deals include the UEM Land Bhd-Sunrise Bhd takeover and merger and Khazanah's divestment of its stakes in Pos Malaysia Bhd and TIME Dotcom Bhd (TdC).

In TdC's first full year of its new owner-management, it delivered a profit after five consecutive years of losses.

There is also the ongoing de-listing and re-structuring of PLUS Expressways Bhd, the takeover of Singapore-listed Parkway Holdings Ltd and the emergence of regional champions in CIMB Group Holdings Bhd and Axiata Group Bhd.

Over the seven years to December 2010, Khazanah has completed 36 major divestment transactions with total proceeds of RM24bil, generating some RM11.6bil of gains upon divestment.

In 2011, this overall trend has continued with its 30% divestment of regional healthcare flagship company Integrated Healthcare Holdings Sdn Bhd to Japan's Mitsui & Co for RM3.3bil.

The transaction places an equity value on Integrated Healthcare of RM11bil and enterprise value of RM14.6bil.

The last lap

The final phase of the GLC transformation programme that runs up to 2015, is where GLCs are expected to be performing at par with competitors and several regional champions will emerge.

The transformation programme is also inclusive of GLCs owned by other government-linked investment companies (GLICs) such as Employees Provident Fund, Lembaga Tabung Haji and Permodalan Nasional Bhd.

“This is already happening with companies such as Axiata, CIMB, Malayan Banking Bhd, Sime Darby Bhd, and PLUS.

“Although it has not been smooth sailing for the GLC transformation as some GLCs are still troubled or are muddling along, we believe the overall numbers speak for themselves,” says CIMB Investment Bank Bhd research head Terence Wong in his mid-year strategy report out earlier this month.

In his report, Wong highlights that the market capitalisation of the top 20 GLCs (G20) rose 122% to RM353bil from 2004 to 2010, while the share prices of these GLCs had a compound annual growth rate of 16.4%, outperforming the local benchmark index by 1.9% points.

“Economic profit increased 158% to RM4.63bil while return on equity (ROE) improved from 7.1% to 10.5%.

“Before the GLC transformation programme, the G20 were incurring huge economic losses,” he adds.

While economic profit was RM765mil in financial year ended 2010 (FY10), aggregate earnings amounted to RM17.2bil, much better than FY04's RM9.6bil.

“As for the improved ROE, the Putrajaya committee on GLC high performance attributed it to better capital management.

“Dividends paid by the G20 also increased from RM4.9bil in FY04 to RM9.7bil in FY10,” Wong says.

As for Khazanah, its overall portfolio's realisable asset value (mark-to-market) stood at RM113bil as of last year, up more than two fold since the change efforts back in 2004.

In terms of performance, the fund's net worth adjusted rose by 125% to RM75bil over the same period, resulting in a CAGR of 13% per year.

But the government's investment arm was not left unscathed during the global financial crisis, with the fund having suffered a 20% drop in its realisable asset revenue and 36% decline in total shareholder return in 2008 with some of its units, namely Axiata, Malaysia Airlines and UEM Group, needing their capital topped up.

Of glitches and GLICs

Azman has no disillusions that some of the GLCs under Khazanah's stable have not lived up to expectations.

“We have had some frustrations too, and there have nonetheless been other areas, mostly in the more regulated sectors such as electricity, autos and aviation, where value has stagnated or even declined,” Azman had said in his note at Invest Malaysia 2011 conference in April.

Tenaga Nasional Bhd (TNB) has been saddled with higher fuel costs and its lack of success in getting a tariff pass-through formula implemented for the longest time.

Fortunately, the Government's move last month to introduce a fuel cost pass-through mechanism for the power sector will provide some ease for TNB.

While Malaysia Airlines was successfully turned around initially and posted operating profits through cost-cutting measures, it has recently had to sail through choppy waters due to ill-timed hedging policies made some years ago and its inability to further bring down its unit costs.

As for Proton Holdings Bhd, its lack of competitiveness in home-grown models and operating in a rapidly evolving automotive industry continue to be its biggest challenges.

With one third of the journey left to be completed, it is presumable that Khazanah and its units will continue to fight sector regulations that impede their growth and iron out key operational issues that are causing cost inefficiencies in these companies.

Khazanah plans to continue with its gradual regionalisation programme of key companies while contributing to private sector investments in new areas of growth for the new economy, in areas such as leisure & tourism, healthcare, education services, Islamic finance, information and communication technology (ICT) and creative industries.

“We have already highlighted the building of our healthcare franchise over the last few years, as one of the new economy and growth sectors and how we have built value both organically and through the M&A route.

“An emerging sector where we are devoting significant time and resources is the leisure and tourism sector - which is represented in our co-investment and collaboration in Teluk Datai in Langkawi,” says Azman.

He adds that another role for GLICs like Khazanah under the New Economic Model is to better optimise the pools of national savings and funds residing in GLICs through a streamlining of investment styles and mandates - such as the co-investment and streamlining of ownership between EPF and UEM in the PLUS acquisition and toll restructuring.

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