MNCs losing their lustre

LISTED multinational companies (MNCs) on the Malaysian market have long been the darling of investors for two major reasons – low-risk nature and decent dividend yields.

Not only that, many long-standing shareholders of some of these MNC stocks have also enjoyed stellar capital appreciation over the years.

To put it into context, an investor who bought Nestle (M) Bhd ’s shares at its initial public offering (IPO) at RM5.20 per share in December 1989, would have seen his or her funds grown by a whopping 19 times today.

MNCs like Nestle are often seen as “boring” stock, which can be tucked into a drawer and forgotten about. While they offer little trading opportunity to rake in quick bucks, these companies provide steady and resilient earnings.

However, some of these MNCs are seeing a decline in earnings in the current operating environment.

Share price-wise, while many MNC counters have strengthened, some continue to soften.

Pong: While these listed MNCs’ margins are squeezed due to many reasons, the dividends may not be affected drastically.

Given the downward pressure on earnings and share prices, it is reasonable for shareholders of these companies to be concerned about their prospects.

The bigger question is, will dividend distributions continue to be as attractive?

Data compiled by StarBizWeek shows that nearly half of the listed MNCs delivered lower dividends over the last three years. It is likely for the trend to continue, if the respective MNCs do not see a significant rebound in their financial performance.

However, Inter-Pacific Securities head of research Pong Teng Siew believes that dividend distribution from these stocks will continue to be good, given the need to repatriate profits to their parent companies.

“While these listed MNCs’ margins are squeezed due to many reasons such as higher raw materials cost and weaker sales, the dividends may not be affected drastically.

“At the end of the day, these companies will have to maintain their contributions to their parent companies, even if it meant they need to borrow such as in the cases of Bhd and Amway (M) Holdings Bhd . This dividend is in their strategy and won’t change much,” tells Pong.

According to Aberdeen Asset Management Sdn Bhd chief executive officer Gerald Ambrose, while earnings of some MNCs have declined, these companies are still surviving due to their proactive initiatives.

For instance, the tobacco companies – such as British American Tobacco (M) Bhd (BAT) and their unlisted peers Phillip Morris and Japan Tobacco International – have been hit hard by the 40% hike in excise duties in Nov 2015 and the consequent surge in contraband cigarette penetration.

On the other hand, Nestle and other consumer staple manufacturers have been affected by a slowdown in consumer demand, while the brewers have pursued cost-saving measures to maintain margins in a more competitive market.

Ambrose: Many MNCs in Malaysia are able to cut costs more easily than their local competitors due to their ability to procure raw materials at lower costs.

“It’s perhaps true that some of these players are no longer growth stocks in the sense that their revenues and profits are not soaring like tech stocks.

“However, all retain a competitive advantage in their sectors, and their corporate governance and transparency is as strong as they always have been.”

He notes that tobacco companies’ dividends have been strong and visible because their need for capital expenditure has been relatively low, despite slowing revenues. This has produced excess free cashflow which has been returned to shareholders.

“But for some, dividends have been impacted such as Lafarge Malaysia Bhd , which has recently halted dividends. However, many MNCs in Malaysia are able to cut costs more easily than their local competitors due to their ability to procure raw materials at lower costs.

“This makes them more geared to a recovery in conditions for the industry, which could be around the corner,” says Ambrose.


How have the stocks performed?

Year-to-date, the majority of MNCs have posted a decline in profitability versus a year ago.

Consider the case of BAT.

As per Bloomberg figures, the counter’s three-year dividend growth has fallen by nearly 7%, amid its weakening profitability.

The company has a dividend payout policy of 90% of its earnings.

However, despite lower dividends, its 12-month yield is looking attractive at 6.58%. This is on the back of its share price which has largely been on a downtrend over the past few years.

To put it in perspective, this is higher than fixed-deposit rates of Malaysian banks, ranging between 3% and 4%.

The stock has fallen by 14.47% year-to-date and by more than a quarter over a three-year period.

At RM37.78 at the time of writing, the stock is trading at a five-year low.

Out of 15 research houses covering the stock, only five have a “buy” rating; nine have issued a “hold” while there were five “sell”.

Yong: For certain MNCs that are facing near-term headwinds due to oversupply, they are better positioned than industry peers to ride on future recovery.

BAT has been facing competition from cheaper illicit cigarettes and this is reflected in declining profits in the past few years.

For the nine months ended Sept 30, 2017, its net profit fell by 7% year-on-year (y-o-y) while in the third quarter it was down by about a third y-o-y.

As a result, one of its substantial shareholders, the Employees Provident Fund (EPF), has been consistently paring down its stake in the company.

In two separate filings with Bursa Malaysia this week, the cigarette manufacturer said the fund sold off a total of 168,200 shares, or about 0.03% of the company’s shares, last month.

Currently, EPF owns about 5.014% of the company, according to Bursa filings.

Similarly, Nestle, which is part of the largest food and beverage company in the world, saw its gross profits dip by 5% from a lower gross margin of 36.9% for the nine-month period because of high production costs.

Even so, analysts expect the stock to weather through the challenges better as compared to its smaller non-MNC peers.

The company has consistently paid out more than 90% of profit to shareholders as dividends.

Fortress Capital chief executive officer Thomas Yong says the downtrend of many MNCs’ share prices could be a sign of the bourse correcting itself, after years of boom.

However, he says these players should be able to ride out the tough times, given their “superior innovative capability and strong brand equity that drives customer loyalty and good management.”

“Even for certain MNCs like Lafarge that are facing near-term headwinds due to oversupply, they are better positioned than industry peers to ride on future recovery due to aggressive cost control and operational efficiency.”

Lafarge Malaysia, the country’s largest cement producer, is expected to sink into the red for its full year of financial year 2017 (FY17) following three quarters of consecutive net losses. (See chart)




“Our top pick among the MNCs is Heineken Malaysia Bhd , as its product mix continues to improve favourably as it concentrates on growing the high-margin premium brands,” he says.

Given the mixed performances of these MNC stocks, should investors leave them and go for small-cap counters instead?

Yong disagrees. He says large caps are relatively cheaper, as FBM KLCI is trading close to its 7-year average level of 15 times. In comparison, the FBM Small Cap Index is traded at about 20% above its 7-year average level of 9.5 times.

“Year-to-date FBM Small Cap Index has outperformed FBM KLCI by a fair bit and almost doubled the latter’s return at 14%. However, this trend has narrowed since November 2017 as the small-mid caps have corrected by a wider margin.

“Given accelerating earnings growth for the large caps in 2018, coupled with the strengthening ringgit which may attract foreign fund inflow, the large caps are expected to outshine their smaller peers in the near term,” he says.


What has changed

MNCs have a long history in Malaysia and due to certain special requirement for foreign businesses to operate in Malaysia, many have floated their Malaysian subsidiaries on the exchange.

Many of these stocks were listed in the 1970s and 80s but the scenario has changed since.

According to Ambrose, disruption has clearly affected these companies, and they have had to make adjustments to parts of their business models to survive.

Recall that some eight years ago, Malaysian Oxygen Bhd (MOX) was delisted from Bursa after it was taken private by its German-based multinational parent, AGA Aktiebolag.

At the same time, a number of local companies have also come onto the scene that understand Malaysian demand and its shifts in taste and affordability better, which enabled them to explore niches.

Padini Holdings Bhd – which is behind some well-known brands in the country such as Padini, Vincci and Brands Outlet – and several franchise stores in the region is a case in point, says Ambrose.

Yeah: With the Asean Economic Community in place, it has provided a lot of opportunities where MNCs can now leverage on comparative advantage.

If an investor had invested in Padini shares since 2015, he or she would have made a gain of over 300%, excluding the dividend declared by the group.

Bloomberg data showed that the company’s 5-year dividend growth stood at 13.9%, but 12-month yield now stood at 2.25% after its share price rise.

Throughout the years, Bursa has also seen the listing of homegrown large companies that are government-linked or once entrepreneur-owned.

In a way or another, the rise of local conglomerates with a significant global presence – such as the Genting Group and Axiata Group Bhd – have given more choices for investors.

While many MNCs such as Carlsberg Brewery Malaysia Bhd have been long established in the country, some have now started to partially shift their operations into other countries.

For example, BAT has wound up its manufacturing operations in Malaysia and now transformed into a pure trading company. This move was taken in order to retain margins, following significant decline in sales volume.

However, while some has left, others have come in such as Coca-Cola, which has moved its bottling operations to Malaysia from Tuas in Singapore.

Sunway University Business School professor of economics Yeah Kim Leng says the decision of some MNCs to shift their operations is a sign of the Malaysian market maturing and is part of a re-branding by these companies.

“With the Asean Economic Community in place, it has provided a lot of opportunities where MNCs can now leverage on comparative advantage.

“This means, while labour-intensive operations can be shifted into low-wage countries, other segments which need semi-skilled or skilled labour can be moved into Malaysia. This is the result of economic integration,” he says.

More MNC listings on Bursa?

More recently in July, Lotte Chemical Titan Holding Bhd, which is controlled by South Korean conglomerate Lotte, made a debut on Bursa.

The IPO was initially guided at between RM7.60 and RM8 per share, but was later revised lower due to subdued response from investors.

At RM4.73 yesterday, the stock is down by nearly 27% from its IPO price of RM6.50.

At this level, analysts say Lotte Chemical is among the cheapest Asian petrochemical stocks and offers respectable dividend yields, since its dividend payout policy guarantees a distribution of 50% of its profits.

All eight research houses that cover Lotte Chemical have issued “buy” calls.

More recently, there has been speculation that the insurance industry might be primed for a series of listings, as the June 2018 deadline for foreign insurers to meet a 30% local shareholding ruling draws closer.

It was reported that Bank Negara has instructed foreign insurers in June this year to raise their local shareholding levels to at least 30% as part of an initiative to lift domestic participation in the industry.

AIA, Great Eastern and Prudential are the key foreign players in the local insurance industry.

These players, if listed on the equity market at reasonable valuations, would attract keen interest from investors, especially local funds.

Pong says that one of the best ways of engaging this dividend policy of repatriating profits back home is by getting the local operations to be listed.

“When they are listed at a good premium, it is a way of taking back a portion of the worth of the company,” he says.

However, it is moot whether these insurance players would be taking the IPO route or opt for a sale stake to local funds.