THE publication of 1Malaysia Development Bhd’s (1MDB) financial results last week for the full year up to March 2014 shed light on a company that is increasingly subject to public scrutiny.
While the numbers were disappointing at first glance, with the company announcing a loss of approximately RM665mil compared with a profit of over RM778mil a year earlier, a deeper examination of the results showed that 1MDB’s performance over the year wasn’t as bleak as the headline figures may have suggested.
The bulk of 1MDB’s declared losses was made up of higher costs and expenses, incurred as a result of the continued expansion of the company’s asset base. While there have been murmurings of discontent regarding 1MDB’s acquisition spree, particularly over the last few years, this is in line with the company’s strategy to invest meaningfully in the near term, with the aim of building a long-term sustainable future.
In total, the value of 1MDB’s asset base increased to RM51.4bil compared with RM44.6bil a year earlier. This was accompanied by a significant increase in total revenue, of over 60% from RM2.6bil to RM4.3bil, a reflection, perhaps, of the quality of the assets acquired, as well as their capacity to generate revenue.
When one considers that 1MDB was only set up in 2009, the scale of what it has achieved over the last five years merits some recognition.
From humble beginnings, the company is on its way to becoming a leading player in Malaysia’s real estate sector, with developments such as the Tun Razak Exchange and Bandar Malaysia, and can rightfully claim to be one of the largest independent power producers in the country. The company also has operations in an additional four countries outside of Malaysia, two of which it holds a market leading position, in Egypt and Bangladesh.
Since 1MDB’s initial foray into the sector with the acquisition of Powertek under three years ago, the energy business has grown to the point that it is now talking about a US$3bil (RM10bil) capital raise on the global credit markets, an internationally anticipated initial public offering that would position 1MDB as a leading regional powerhouse in the energy space.
All of this has, of course, come at a cost.
From the outset, it was never the Government’s intention to fund 1MDB. As such, excluding a small equity injection of US$1mil at the time of its inception and a single secured line of credit guaranteed by the Government, 1MDB has had to fund itself through the debt markets. This should explain why the company’s borrowings have increased alongside its asset base, with 1MDB’s total debts currently standing at RM41.9bil, compared with RM36.2bil a year earlier.
Inevitably, this has led to suggestions that the company has been over-leveraged. However, these borrowings must be placed in the context of the long-term returns 1MDB is likely to generate from the assets it has acquired. When seen alongside the strong cashflows being generated, with the company currently holding cash and cash equivalents of approximately RM16.6bil, the level of borrowings comes across as sustainable.
Furthermore, in context of the broader figures, it is apparent that the speed with which 1MDB is growing the value of its assets exceeds that at which it is taking on debt. According to its recently published results, the value of the company’s net assets increased by approximately 13% from RM8.4bil to RM9.5bil over the previous year. As such, 1MDB’s risk ratio (determined by the company’s asset versus debt ratio) has actually fallen as compared to previous years.
In layman’s terms, this means that if 1MDB were to pay off all its debts tomorrow, it would still be left with assets worth close to RM10bil, which is essentially the value generated by the company for its shareholder, the Finance Ministry, and by extension, the rakyat.
1MDB hasn’t had the smoothest of journeys, and it is clear that there are a number of hurdles yet to be overcome. However, if one scratches the surface, then the fact is that 1MDB has used the US$1mil – about RM3.3mil – of equity it was provided with upon being set up to generate value of up to RM10bil. Not bad for a company that has only been around for five years.
Rashid Dahlan is a financial analyst based in Kuala Lumpur. The views expressed here are entirely the writer’s own.