A giant awakens

PNB coporate logo.AZHAR MAHFOF/The Star (4/2/2016)JOSEPH CHIN

Wahid-Rahman partnership to unleash the hidden value in PNB

PERMODALAN Nasional Bhd (PNB) appears to be stirring from its slumber.

In a clear move to show that Malaysia’s largest fund-management company is on a transformative path, PNB invited members of the media for a briefing to explain how it will navigate its way and maintain growth over the next six years in the midst of challenging times. It unveiled a step-by-step strategic plan from 2017 to 2022, detailing how it plans to push for returns and dividends.

By all means, this is unprecedented in PNB’s history. This sort of forthrightness is rare for the country’s largest unit trust fund, which also ranks among the Top 5 in the region.

From the looks of it, the revamp isn’t just on PNB’s public relations facade, but also its investment strategy.

For sure, PNB will continue to be prudent, and in relation to that, investing in Silicon Valley unicorns is still a long way off.

Nonetheless, with PNB now being helmed by chairman Tan Sri Abdul Wahid Omar and president and group CEO Datuk Abdul Rahman Ahmad, the status quo looks set to change.

The combination of the two personalities, with their vast experience turning around and reviving various government-linked companies (GLCs) in corporate Malaysia, namely, Telekom Malaysia Bhd (TM), Malayan Banking Bhd (Maybank), UEM Renong and Media Prima Bhd, all points to PNB’s reputation as a staid but stable bumiputra unit trust fund is about to change.

When it comes to spring cleaning, rejuvenating or turning around companies, Wahid the “Fixer’s” decorated resume comes out tops. Recall the time when he was tasked with the role of transforming the financially troubled Renong/UEM Group into a viable business entity at the height of the 1997 Asian financial crisis. Not only did he succeed in that endeavour, but he also won back the confidence of local and foreign investors in the new restructured group.

Since then, he has also headed TM and Maybank, and in each case, left the companies in better shape. In the case of Maybank, he took over the mantle when it was concluding the deal to buy PT Bank Internasional Indonesia Tbk and valuations had gone haywire because of the 2008 financial crisis.

Abdul Rahman entered the GLC scene in the early 2000s, when he was part of a handpicked group of young individuals groomed for bigger, largely turnaround roles within the sphere.

He was instrumental in the setting up of Ekuiti Nasional Bhd (Ekuinas) and has been the CEO since its inception in 2009.

Prior to joining Ekuinas, he was the group managing director (MD) and CEO of Media Prima, and prior to that, group MD of Malaysian Resources Corp Bhd.

So, what are their plans for PNB?

They have their hands full. Several of PNB’s strategic holding companies such as Sime Darby Bhd and MNRB Holdings Bhd are ripe for a corporate exercise due to their hidden intrinsic value. Others such as its property assets under Island & Peninsular Group Sdn Bhd (I&P), which was privatised, and Chemical Company of Malaysia Bhd have more potential for monetisation.

“The listed companies and entities, including I&P, are the low hanging fruits. There are many more assets within the stable that can be monetised,” said a fund manager.

As PNB gets larger, it becomes less nimble

PNB is a market leader in the fund-management and unit trust industry in Malaysia, currently holding a 60% market share based on its unit trust assets of RM220bil over 12.8 million accounts. This also makes it among the Top 5 funds in the region.

PNB is a significant player on Bursa Malaysia, holding some 10% or RM169.1bil of Bursa’s market capitalisation of RM1.69 trillion. It has come a long way since its inception in 1981 when the figure was a mere RM3.5bil, With some RM259.49bil worth of assets under management (AUM), this would imply that PNB has grown by a compounded annual growth rate of some 13% since 1981.

A whopping 98% of its holdings are in Malaysia, while the remainder 2% is overseas.

Abdul Rahman says that PNB is certainly looking to increase its overseas asset allocation, although the time is now not right due to the weak ringgit.

Some 69% of its asset allocation is in equities, 3% in private equity, 4% in fixed income and 3% in property. It has some 20% lying around in cash, which Abdul Rahman admits is not optimal and that PNB would be looking to deploy the monies to work soon.

These statistics certainly sound impressive. The problem now is that with its much bigger size, it is also less nimble, and giving out good returns becomes more challenging.

Due to PNB’s heavy weightage in Malaysian stocks, its return on assets (ROA) has been falling. Its performance has been hampered by Bursa ’s negative returns over the last three years. Making the problem worse is the flat global economic growth and the low interest rate environment.

For instance, it recorded an ROA of 7.3% in 2010, but this has since fallen to 6.1% as of 2016.

Over the last five years, PNB’s fixed unit trust funds have also been able to outperform the market by 1% to 2%. Similarly, on a five-year total return basis, PNB’s Amanah Saham Bhd yielded 7.57% compared with the Employees Provident Fund’s yield of 6.33%.

PNB has been able to deliver consistent returns to its unitholders, with over RM136bil having been paid out since its inception 38 years ago.

“The demand to sustain returns performance is increasingly challenging. Assuming that our funds grow by 5% and we have a weighted income distribution of 6%, this would imply that we would need to pay out RM19.1bil just in dividends by 2022,” says Wahid.

Thus, on this note, Abdul Rahman says that PNB has developed a strategic plan to address current and future challenges to ensure that it can sustain its performance for the next six years and beyond.

Enter PNB’s Strategic Plan 2017 to 2022.

With a vision to be a distinctive world-class investment house, Abdul Rahman says that PNB’s mission is to enhance the economic wealth of the bumiputra community and all Malaysians for the prosperity of the nation.

PNB has set a target to increase its total AUM to about RM350bil by 2022 from RM259.49bil currently.

This year, PNB is expecting a gross income of RM18.64bil and a net income of RM15.18bil.

Strategic Plan 2017 to 2022

On PNB’s broad mandate to deliver enhanced sustainable returns for its portfolio, it will achieve these through five different pillars – optimising asset allocation, boosting domestic public equity performance, increasing its exposure to private equity and fixed income, rationalising and enhancing its property investments, and diversifying into global assets.

“To boost domestic public equity performance, we will look to transform strategic and core company performance through value-creation initiatives. There will be a shift in our approach, where there will be greater activism where needed to drive company performance,” says Abdul Rahman.

“We will source for new strategic and core portfolio companies. With a cash level of 20% now, that is not optimal and we are looking to put that cash to work. We are looking for opportunities to invest now,” he says. Wahid adds that there are a lot of things that can be done and achieved with PNB’s existing strategic investments.

PNB has strategic stakes in companies such as Sime, UMW Holdings Bhd, SP Setia Bhd and Maybank, among others.

“We will work closely with the management and board of our strategic investment companies to see how we can further maximise returns and create more value for these companies,” says Wahid.

“We may take some companies private, add value to them and list them again at a better valuation,” says Abdul Rahman.

More importantly, despite all the pessimism on the Malaysian market and the state of the ringgit, Wahid is of the opinion that it is simply a matter of time before the ringgit recovers.

Also, with three years of negative returns, he feels that there has never been a better time to look at the Malaysian bourse.

“I am bullish on the domestic equity market. Only once or twice in history has our market fallen three years consecutively. Organically, we have gone past the phase of historically-low earnings. In terms of foreign ownership of Malaysian equities, it is also at an all-time low. We actually anticipate the FBM KLCI to do better next year,” says Wahid.

Apart from that, Wahid adds that oil prices and crude palm oil prices have started to recover.

“As our companies improve on their performance, so will their share prices. Over time, I see people taking advantage of this historical-low,” says Wahid.

He adds that the ringgit falling is a function of flows. “It will strengthen once the flows stop. Bank Negara doesn’t need to do anything apart from maintaining an orderly market. I wish we had 20% of our assets overseas now, and this would be the best time to bring all those assets back!” says Wahid.

He adds that the ringgit is now weak because investors are repatriating their monies back to the United States.

“Some 50% of our Malaysian Government Securities are held by foreigners. As the foreign holding reduces, the pressure on the ringgit will also abate and it will strengthen again,” says Wahid.

Wahid adds that investments in private equity or non-listed companies will be given more significance, as these investments are needed to bump up returns. Wahid adds that it would generally look at a private equity investment which could yield annual returns of some 12%.

Meanwhile, on properties, Abdul Rahman says that it is looking to streamline and consolidate its extensive portfolio.

Some of PNB’s properties include Menara PNB in Jalan Tun Razak, PNB Perdana Hotel & Suites on the Park, Menara Tun Ismail Mohamed Ali, PNB Damansara, Kenanga International Building, Menara MIDF, Menara MBSB and Menara HeiTech Village.

Abroad, it owns Santos Place, a six-star Green Star, Premium A-Grade 37-storey office building located on 32 Turbot Street in Brisbane, Australia.

It also owns three properties in the United Kingdom, namely, Milton & Shire Houses, One Exchange Square and 90 High Holborn.

“We will create value on our properties, and then look to strategically divest them later on,” says Abdul Rahman.

PNB has a lot of assets ripe for value-creation. Its property unit is one of the biggest in the region.

Now, it has a pair of leaders who are just right to unleash this hidden value.

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