Higher debt, palatable gearing

Predictable cashflow: Companies, including TNB, take on debt to optimise the capital structure. — Bernama

DEBT is an essential part of any business. All companies should have some amount of debt to help finance its growth and investments for the longer term. It is an efficient way of managing the balance sheet.

But taking on too much debt can restrict a company’s operational flexibility, and increase its risk of financial problems in a challenging economic environment.

So, there is only a fine balance between what is regarded as “healthy” and “dangerous” debt level and it varies across businesses and industries.

A research on 309 companies (excluding financial institutions) listed on Bursa Malaysia shows 188 firms in a net debt position as at end-September 2018.

In total, net debt increased 10.2% to RM286.3bil from a year ago.

Companies under Khazanah Nasional had accumulated the highest amount of net debt at RM54.7bil as of end-September 2018.

That represents an increase of RM5.5bil, or 11%, from a year ago.

The increase in the absolute debt of the companies under the sovereign wealth fund is largely driven by higher borrowings by Tenaga Nasional Bhd (TNB), Telekom Malaysia Bhd, UEM Sunrise Bhd and IHH Healthcare Bhd. However gearing for all the companies remain at healthy levels.

As of end-September, TNB’s debt stood at RM26.7bil, given the capital intensive nature and demands for funding power stations. In the last one year alone, the national utility firm had taken an additional debt of RM5.1bil.

It is the same for Tan Sri Francis Yeoh-controlled YTL Corp Bhd. The construction and infrastructure outfit had total net debt of RM27.2bil as of end-September, up 5% from RM25.8bil a year ago.

Much of the debt came from its ownership of controlling stakes in other companies within the group, particularly YTL Power International Bhd, which like TNB is into a business that is capital intensive.

Similarly for companies controlled by Tan Sri Syed Mokhtar Al-Bukhary, through his private vehicles Seaport Terminal (Johore) Sdn Bhd and Etika Strategi Sdn Bhd, it is power company Malakoff Corp Bhd that had the biggest debt exposure, albeit at a lower level compared with a year ago.

The debt at YTL Power and Malakoff is a given considering that both companies are independent power producers (IPPs) and the nature of their business is capital-intensive. As such, they tend to maximise their borrowing capacity, and depend on their cash flow from their concession assets to support operations and growth.

“Power producers tend to stretch and maximise their balance sheet as cashflow is predictable. That is why companies such as TNB. YTL Power and Malakoff take on debt to optimise the capital structure,” says an analyst

For companies in Permodalan Nasional Bhd’s (PNB) stable, net debt had increased RM4.4bil, or 26%, to RM21.6bil.

Within PNB-controlled companies, both SP Setia Bhd and Sime Darby Property Bhd are set to see balance sheet improve after selling the phase two commercial assets of the Battersea Power Station in London to the Employees Provident Fund (EPF) and PNB for £1.58bil (RM8.4bil).

Positively for Ananda Krishnan, the balance sheet position of the companies he controls via Usaha Tegas Sdn Bhd has improved, with Bumi Armada Bhd, Maxis Bhd and Astro Malaysia Holdings Bhd seeing net debt collectively reduced by RM1.2bil, or 6%, to RM19.3bil.

The bulk of group’s debt is in Bumi Armada, which needs big money to fund its floating production storage and offloading operations, and Maxis, which needs investment to maintain and grow its cellular network business.

Notably, Top Glove Bhd recorded one of the highest percentage increase in absolute debt, flipping from a net cash position of RM80mil as at end September last year to a net debt position of RM1.8bil due to the financing of its recent acquisition of surgical glove maker Aspion Sdn Bhd.

Of concern, is the vulnerability of highly-indebted companies in the construction sector, as the economy slows down, which implies fewer jobs, and mega projects either get cancelled or postponed under the Pakatan Harapan-led government.

Among the construction companies with a gearing of more than 100% as of end-September are Zelan Bhd, WCT Holdings Bhd, WCE Holdings Bhd and Eversendai Corp Bhd.

Meanwhile, Malaysian Resources Corp Bhd’s gearing is to reduce significantly in the current quarter after it received RM1.3bil from the government in settlement for the Eastern Dispersal Link and RM1.1bil from the EPF for the sale of its 80% stake in Bukit Jalil Sentral Property Sdn Bhd.

The company said current debt levels stand at RM1.48bil with a net gearing ratio of 0.24 times.