LTH takes a long-term view

PILGRIM fund Lembaga Tabung Haji’s (LTH) portfolio of investments on the local bourse are a mixed bag of defensive and capital-intensive stocks, Bloomberg data shows.

Besides its core holdings of BIMB HOLDINGS BHD, which wholly owns Bank Islam Malaysia Bhd and TH Plantations Bhd (THP), the pilgrim fund is known as a long-term investor.

“In the market, LTH is seen as a hold investor, assuring companies that their backing is substantial and for the longer term,” notes a fund manager familiar with the workings of the fund.

“The overall decline in global equities are putting pressure on LTH’s stock holdings. However, LTH seems intent to ride out the storm as it had not made major changes to its portfolio,” he says, adding that LTH often looks to grow with its companies.

LTH has also made forays into “strategic” industries such as the fabrication of offshore oil and gas facilities via TH Heavy Engineering Bhd but the latter, once touted as an oil and gas (O&G) turnaround story, has seen its fortunes plummet following the slump in oil prices.

Given its extensive holdings in several upstream service providers and offshore support vessel operators, the fund is clearly exposed to the downturn in O&G.

Besides TH Heavy, the pilgrim fund has a 10.13% stake in ALAM MARITIM RESOURCES BHD and 9.88% of Petra Energy Holdings Bhd, based on Bloomberd data.

Shares in Alam Maritim has come down by more than 40% in a year to 35.5 sen with LTH’s shareholding valued at a mere RM7.63mil now. Alam Maritim’s net profit for the nine months to Sept 30 stood at RM37.8mil, 32% lower than the net profit of RM55.3mil in the same period a year earlier.

Petra Energy shares are, meanwhile, down by close to a quarter. However, its net profit for the nine months ended Sept 30 came in higher at RM36.88mil as opposed to RM27.88mil in the same period before.

The other O&G stocks that LTH has investments of more than 8% are Muhibbah Engineering, UZMA BHD, Icon Offshore Bhd and Tanjung Offshore Bhd. It also has holdings of less than 5% in SCOMI ENERGY SERVICES BHD, Wah Seong Corp Bhd and lesser-known Pantech Group Holdings Bhd.

In July 2014, the pilgrim fund along with two other government-linked investment companies emerged as cornerstone investors in special-purpose acquisition company REACH ENERGY BHD. LTH’s stake in Reach Energy stands at 4.99%.

The prized asset in the pilgrim fund’s stable of companies is without doubt Bank Islam, which is the country’s first standalone Islamic bank set up in 1983.

BIMB, at last look, has a market cap of RM5.67bil, giving LTH’s 53.56% stake a value of close to RM3bil. BIMB also holds a 60.31% stake in insurer Syarikat Takaful Malaysia Bhd (STMB) and 100% of BIMB Securities (Holdings) Sdn Bhd.

The three companies are what BIMB considers its core business units.

RAM Ratings in a recent report notes that the bank’s financing quality and capitalisation indicators have remained sturdy and expects “support from the fund to be extended in times of need.”

For the nine months ended Sept 30, BIMB made a net profit of RM385.41mil, slightly higher than the RM378.42mil posted previously. Its asset size stood at RM46.3bil as at end September.

Presently, BIMB stock is trading at around RM3.56 per share, above its price-to-book value of RM1.63 – indicating that the stock has weathered the soft market better than other banking peers, whose valuations have come down to close to their book values.

Analysts say that while Bank Islam has retained a strong franchise in the domestic Islamic banking sphere, its smaller franchise relative to larger domestic banking groups poses some challenges to the growth of its retail deposits.

It is well known that LTH’s aspiration is to move Bank Islam into the big league and grow its market share. In the past few years, it has sought several mergers and acquisitions but nothing has materialised.

In 2011, Bank Islam failed to strike a merger deal with DRB-HICOM BHD-owned Bank Muamalat Malaysia Bhd, which is currently in talks with non-bank lender MALAYSIA BUILDING SOCIETY BHD (MBSB) for a possible merger.

Should the MBSB-Bank Muamalat merger go through, it would pave the way for the creation of the country’s largest standalone Islamic bank with a combined asset of about RM60bil.

In the meantime, there is talk that BIMB could be looking to make its corporate structure more efficient through an internal reorganisation.

This could see the transfer of its listing status to Bank Islam, a plan which has been bandied about as far back as three years ago.

Analysts say making Bank Islam the listed entity would give investors direct exposure to the banking entity that contributes about 80% to BIMB’s earnings.

STMB accounts for almost the rest of BIMB’s earnings.

In terms of absolute shareholding, LTH’s biggest investment is in THP at 72.82%, making the stock relatively illiquid. The company is engaged in oil palm and rubber plantations, with its land bank standing close to 105,000 ha. It operates 36 oil palm estates throughout Malaysia as well as four rubber plantations in Sabah. About two years ago, it expanded into Kalimantan Timur, Indonesia, marking its first foray overseas.

AMResearch in a report late last year notes that THP’s net gearing stood at 94.2% as at end-September 2015, up from 91.3% as at end-June 2015. “The increase in net gearing was due to a fall in gross cash from RM152.5mil to RM113.8mil,” says the firm.

As compared to BIMB, THP’s valuations are seen on the high side at 21 times current levels, say analysts. Its price stood at RM1.25 at yesterday’s close for a market cap of RM1.1bil.

“In the longer term, we believe these valuations should improve as its palm oil trees reach a more favourable age, which would result in better fresh fruit bunch yields. Currently, we estimate TH Plantations’ FFB yields for financial year 2015 to be around 17 tonnes per ha, which is still a distance from Malaysia’s 19 tonnes per ha average,” RHB Research says in a report.

LTH has also delved into small-cap stocks with varied success. For instance, in 2008, it surprised the market by taking a substantial stake of 29.8% in the then-ailing oil and gas fabricator Ramunia Holdings Bhd, which is now known as TH Heavy. The latter subsequently slipped into Practice Note 17 status in 2010 and only exited the dreaded category two years later.

TH Heavy was in the midst of turning around in mid-2014 but those plans were derailed due to lack of jobs, coupled with the slump in crude oil price.

As a consequence, TH Heavy’s market cap has shrunk to a mere RM162.55mil from its peak of RM1.1bil in February 2014, when its share price hit RM1.03.

On a brighter note, the company is making a second attempt to turn around following the entry of Petronas’ veteran Nusral Danir at the helm.

One of its transformation initiatives involve TH Heavy fabricating the Layang floating production storage and offloading (FPSO) topside at its Pulau Indah yard instead of constructing it in Dubai, thus making substantial savings.

The company, which has been in the red for the past six consecutive quarters, believes that its long-term FPSO-related borrowings would ultimately be self-funded once the FPSO Layang project provides a steady income stream and profit starting from the third quarter of 2016.

The cash-rich pilgrim fund is supporting the move by injecting RM275mil into the company through a Islamic irredeemable convertible preference shares (ICPS-i) rights issue exercise, which will be used partly for the group’s FPSO vessel.

TH Heavy had won its first FPSO contract with Japan’s JX Nippon Oil & Gas Exploration in a deal worth US$900mil in May 2014.

Other investments by LTH in small-cap stocks 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.

The pilgrim fund still holds a 68.7% stake in a Theta Edge but has ceased to be a substantial shareholder in both High-5 and Sino Hua-An in 2013.

High-5 has since been delisted from Bursa Malaysia.

LTH also has notable holdings in Pelikan International Corp Bhd, Brahim’s Holdings Bhd and SOUTHERN ACIDS (M) BHD.

Early this year, LTH raised its interest in high-precision metal component maker Notion VTEC Bhd, bringing its direct stake to 7.21%.

For the fourth quarter ended Sept 30, Notion Vtec, which has a paid-up capital of RM101.94mil, posted a net loss of RM10.98mil, which it attributed to the appreciation of US dollar against the ringgit and impairment loss on plant and equipment.

LTH had also re-emerged as a substantial shareholder in WEIDA (M) BHD after buying 6.2 million shares, based on the company’s filing with the stock exchange on Jan 6. Following this, LTH now owns 12.2 million shares or 9.61 % in Weida.

On the other end, there also defensive and dividend-yielding stocks in LTH’s portfolio of companies. These include stocks like PETRONAS CHEMICALS GROUP BHD, Gas Malaysia Bhd and KPJ Healthcare Bhd, to name a few.

Last year, the fund also emerged as a cornerstone investor in the country’s biggest initial public offering, Malakoff Corp Bhd.

As a 8.97% shareholder of PUNCAK NIAGA HOLDINGS BHD, the pilgrim fund would have reaped the windfall from the bumper dividend following the sale of former’s water-related assets in Selangor. Recall that Puncak Niaga’s board had previously committed to paying out a special dividend of RM1 per share, which would amount to a maximum distribution of RM534mil from the RM1.6bil cash it would receive from the disposal.

By rule of thumb, LTH invests 50% of its funds in equities but it is reportedly revaluating this percentage, given the volatile market. According to its website, it also has exposure in foreign equities in Asia and emerging markets that are outsourced to external fund managers.


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