Not changing is a tragedy


  • Business
  • Saturday, 14 Jan 2017

Public Bank branch in Seri Petaling, Selangor.

IN the Malaysian banking universe, it is a well-known fact that one financial institution stands out from the rest in terms of its valuation. PUBLIC BANK BHD trades at a price-to-book ratio of 2.3 times. In fact, the bank has traded at an average of 3.1 times over the last 10 years. Other banks in Malaysia pale in comparison. The other five large banks in Malaysia trade at a price-to-book ratio range of between 0.8 times and 1.27 times. So, why the stark difference?

In a nutshell, Public Bank is conservative in its business approach. It has always stuck to the basics of banking. Just consider these pointers taken from a recent research report on Public Bank. For one, the report noted that Public Bank does not face direct forex risk, as its treasury operations do not take positions. It has one of the best capital provision buffers. It is also noted for having the most sound asset quality and having among the lowest cost-to-income ratios among its peers.

All this shows that this bank has just focused on getting basic banking right, without getting too excited about other more funky banking products and services. In comparison, other banks are prepared to take on more risk in their quest to grow profits and fend off the competition.

A more aggressive bank would have a strong investment bank team. This is to allow for banks to provide a suite of solutions to their corporates – from a bridging loan or long-term loan to their short-term financing needs to undertake daily business. Corporate banking is a vital part of the business.

However, the risk is also the prospect of being saddled with higher bad loans when the economy goes south.

The difficult write-offs faced by some of those banks in loans taken by corporations locally and in countries like Indonesia is testament to this.

However, the banking landscape is changing. Financial technology or fintech is the buzzword and it allows for banking to be conducted in a cost-efficient way.

In Public Bank’s case, it will be interesting to see if the bank’s conservative business approach would be disrupted by the wave of technology hitting the area of banking and finance. Being conservative and merely doing banking the old way is not enough.

Remember the Nokia story. It fell because the company did not adapt to changes taking place in the mobile phone industry.

Education play 

Paramount Corp Bhd’s acquisition of a controlling stake in an established education group is testimony of the increasing demand for private and international schools in Malaysia, their popularity partly attributed to the declining quality of public schools and the standard of English.

In recent years, several listed companies have entered or widened their exposure to the private and international school segment. After all, it is a business that provides recurring income.

In the case of Paramount, the property and education-based company said that its earnings contribution from the education division would be more significant after its acquisition of a 66% stake in REAL Education Group Sdn Bhd for RM183mil.

It sees its recurring income for the education segment increasing by 10% to 40%, making the group even less volatile, considering the soft property market.

According to RHB Research, the acquisition of the controlling stake is at “reasonable valuations” and values REAL at 18.9 times its financial year 2016 (FY16) earnings as opposed to some education/education-related stocks such as SEG International Bhd and Sasbadi Holdings Bhd, which are currently trading at 39 times and 26 times price to earnings, respectively.

Post-acquisition, the company would be a full-spectrum education service provider, as REAL will bring the kindergarten/preschool and Cambridge English for Life segments to Paramount. Paramount currently has exposure in the education sector through the KDU brand.

REAL’s earnings have grown by about 20% per year over the past few years and in FY16, made RM14.7mil in profit after taxation and minority interests.

RHB Research says it expects REAL’s net profit to grow 8%-10% per year over the next two years, which is slightly more conservative than management’s guidance of “double-digit growth”. Whatever the case, the company is readying to cushion itself from fluctuations in the property market.

A case of one port too many?

Another port is being planned in Klang. This time, the location is Carey Island and it may involve investors from China.

Among the local companies tipped to be part of the venture - if it materialises – is Sime Darby Bhd by virtue of being the landowner of Carey Island.

There are already two container ports in Klang – Westports and Northport. Among the two, Westports is the runaway leader, growing at more than 10% per annum with the ability to handle 11 million containers per annum. Northport, although having started its operations much earlier, has not been able to match the growth of Westports.

Eventually, Permodalan Nasional Bhd, the major shareholder of Northport, sold it to MMC Corp Bhd, which also operates the Port of Tanjung Pelepas and Johor Port. The Penang Port is also linked to MMC Corp by virtue of having common shareholders.

What is obvious is that there is a consolidation among the ports taking place.

The collapse of Hanjin shipping company in September last year was a stark reminder to port operators and shipping liners that the consolidation in the industry was still ongoing.

In 2000, there were more than 200 shipping lines. Today, there are about 10 large players. The 10 players are still looking at mergers among themselves to be financially stronger. For instance, Japan’s K-Line, MOL and NYK are merging to form a super shipping line.

The objective of more mergers is to have the financial muscle to build super large container vessels that are able to ferry a larger volume of boxes than what the present vessels are able to handle.

When more of the large vessels come into the seas, the tendency is that only the big ports would benefit because economies-of-scale come into play. The ships would not go to the smaller ports because the containers are likely to be small in numbers.

In Malaysia, only Westports and Port of Tanjung Pelepas can count themselves as being able to attract the large shipping lines. The other ports are largely feeder ports to support the larger ports.

Hence, adding another port could merely be an exercise in adding capacity to a sector that is already having a surplus.

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Business , Paramount Group , Education

   

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