Big presence in small caps

PDZ Maju at Northport terminal. PMB

GOVERNMENT-LINKED investment companies and their associated funds have long played an active role in the local stock market.

By some estimates, these institutional investors collectively account for 35% to 40% of the market capitalisation of the top 100 stocks on Bursa Malaysia.

But when government-linked funds surface in smallish listed companies, it does raise eyebrows. This is because small-capitalised (small-cap) companies typically carry greater risks and their shares are more volatile than that of bigger-cap, more established companies. And in some instances, small-cap companies do not really have very good track records.

So, when Permodalan Mara Bhd (PMB) suddenly emerged as a substantial shareholder in a number of small-cap companies last year, there were questions. The market was surprised by the action of the state-linked fund, formerly known as Amanah Saham Mara Bhd, which had bought into companies like PDZ Holdings Bhd, BHS Industries Bhd, Sanichi Technology Bhd, Asia Bioenergy Technologies Bhd and Ni Hsin Resources Bhd (see table).

Inevitably, under the current bearish market conditions, the value of its investments in those companies has declined quite significantly.

It should be noted, nevertheless, that PMB’s investments in those small-cap companies only constitute a small portion of its funds, according to a source familiar with the workings of the fund.

Hence, the source tells StarBizWeek, the current volatile equity market conditions will not have a substantial impact on its earnings. After all, the fund has a diversified portfolio of assets that include fixed-income holdings, money-market instruments and private-equity investments that collectively make up the bulk of its exposure.

PMB currently has a total portfolio of assets worth RM2bil, comprising investments it made directly as well as through its unit trust division PMB Investment Bhd.

At present, equity investments only make up about 30% of PMB’s total assets, although the fund’s policy enables it to have up to 40% of its portfolio of assets in equities or shares.

That means about 70% of PMB’s investments are currently held in less risky and stable dividend-yielding assets such as fixed-income securities like bonds, money-market instruments like commercial papers, and private-equity investments.

High-profile entry

According to the source, returns generated from the fund’s diversified portfolio of assets should be more than enough to offset the shortfall in its equity investments.

In fact, PMB expects dividends from these investments to support its projected earnings of RM30mil for the financial year ended Dec 31, 2014.

PMB’s high-profile entry in small-cap companies last year is not an unprecedented case among government-linked funds.

Some others had previously delved into small-cap stocks with varied success.

Take the case of Lembaga Tabung Haji (LTH). The pilgrims fund board had in the past come under constant criticism for some of its investment decisions, involving several small-cap, loss-making companies.

For instance, in 2008, LTH surprised the market by taking a substantial stake of 29.8% in the then-ailing oil and gas fabricator Ramunia Holdings Bhd (now known as TH Heavy Engineering Bhd). The latter subsequently slipped into the Practice Note 17 (PN17) status in 2010, and only exited the dreaded category two years later.

Other investment decisions by LTH that had raised eyebrows in the past included the fund’s exposure in technology company Lityan Holdings Bhd (now Theta Edge Bhd), bread and confectionary maker Silver Bird Group Bhd (now High-5 Conglomerate Bhd) and China-based metallurgical coke producer Sino Hua-An International Bhd.

LTH remains the major shareholder in TH Heavy today with a 30.08% stake in the company as well as in Theta Edge with a 68.7% stake. The fund had, on the other hand, ceased to be a substantial shareholder in both High-5 and Sino Hua-An in 2013.

(High-5 was delisted from Bursa Malaysia in October last year after categorised as a PN17 company for two years.)

Business plan

In PMB’s case, the thinking behind the funds’ venture in small-cap companies is to buy those that it perceives to have good potential at cheap valuations.

But because of the small size of the target companies and PMB’s investments had to be meaningful, the fund ended up with substantial stakes in them, thus putting the fund in the limelight.

“PMB reckoned that it needed to have a meaningful stake in these companies in order to implement its business plan to eventually generate reasonable returns on its investments,” a source says.

With regards to its investment in PDZ, PMB’s intention was to eventually turn the loss-making container shipping company into its oil and gas vehicle through asset injection. However, negotiations to buy into a local oil and gas company, which could be injected into PDZ, fell through last year due to valuation issues.

PMB emerged in PDZ last April after paying some RM41mil, or an average 18 sen per share, for a 26.83% stake in the latter. The following month saw the fund increasing its stake in PDZ to 30.08% at an undisclosed price before paring down some of its holdings in the company at higher prices in subsequent months.

Biomass business

For instance, in August last year, PMB managed to sell five million of its shares in PDZ shares, representing a 0.57% stake in the company, at 22.5 sen per share. Last September, the fund sold 128.02 million of its PDZ shares, representing a 14.73% stake in the latter, to Megalink Industries Sdn Bhd – a company linked to veteran corporate player Tan Sri Halim Saad – at 23 sen per share.

Following the deal, PMB still owns a 14.73% stake in PDZ.

Then, there are PMB’s investments in print services company BHS Industries; precision mould maker Sanichi; loss-making technology incubation company Asia Bioenergy; and stainless steel cookware manufacturer Ni Hsin.

PMB bought into BHS Industries last July. BHS Industries also attracted the entry of another state-linked investor, the Federal Land Development Authority (Felda), which emerged as a substantial shareholder in the company with a 5.23% stake last October.

Both PMB and Felda were believed to be interested in BHS Industries’ plan to diversify into renewable biomass business and also become an integrated property development and government construction player.

As for PMB’s investment in Sanichi, it is believed that the fund was interested in the latter’s plan to diversify into the property development and investment business. However, little is known as to why the fund was interested in Asia Bioenergy and Ni Hsin. There were speculations, though, that Ni Hsin could undergo a reverse takeover by an oil and gas outfit.

For its first quarter ended Sept 30, 2014, PDZ slipped into a net loss of RM1.7mil on revenue of RM37.9mil, compared with a net profit of RM778,000 on revenue of RM43.6mil in the corresponding period last year.

Higher revenue

BHS Industries fared better, registering an 34% increase in net profit to RM3.9mil on revenue of RM13.3mil for its first quarter ended Sept 30, 2014, compared with a net profit of RM2.9mil on revenue of RM17.1mil in the previous corresponding period.

Sanichi’s first quarter ended Sept 30, 2014, saw the company’s net profit declining to RM589,000 from RM1.8mil in the previous corresponding quarter. Its revenue was also lower at RM4.9mil, compared with RM6.8mil previously.

For Asia Bioenergy, its net loss widened to RM1.3mil for the nine months ended Oct 31, 2014, from RM914,000 previously. This was despite the group registering higher revenue at RM36.1mil, compared with only RM1.4mil previously.

Ni Hsin made a net loss of RM551,000 for its nine months ended Sept 30, 2014, compared with a net profit of RM1.5mil in the previous corresponding period. The group’s revenue was also lower at RM30.1mil, compared with RM40.7mil previously.

Undoubtedly, PMB’s decision to buy into some of these companies has been viewed as quite a risky move by the market. Only time will tell whether the fund will continue to be a substantial shareholder in those companies over the longer term and whether these investments will eventually pay off.

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