PRIVATE sector debt in Malaysia is on the rise as business expansion continues to be fuelled by debt accumulation over the years.
By end-2018, total credit to the Malaysian private non-financial sector had touched RM1.94 trillion. This is a sharp increase from just RM906bil in 2009, according to the Bank for International Settlements’ data.
As a percentage of the country’s gross domestic product (GDP), total credit to the Malaysian private non-financial sector stood at 134% in 2018. In comparison, at the height of the 1997 Asian financial crisis, it was at 167.2% – an all-time high.
The surging private sector debt is cause for concern, along with the high level of federal government and household debt in Malaysia.
While Bank Negara has stated in its Financial Stability and Payment Systems Report 2018 that the liquidity position of Malaysian businesses remained “healthy and above prudent thresholds”, the continued slowdown in economic growth and the declining corporate profitability raise concerns on companies’ ability to service their debts, moving forward.
High debt levels will also limit the potential of businesses to expand their operations, which could further hurt the business sentiment in the country.
To assess the indebtedness among Bursa Malaysia-listed companies, StarBizWeek looks at the top-340 companies with a cumulative market value of RM1.64 trillion or 95% of the stock exchange’s total market capitalisation.
A total of 22 listed financial institutions among the 340 companies are excluded, as their debts and cash are not owned by the companies.
Research has found that 195 firms or 61% of the 318 companies were in a net debt position with a total net debt of RM293.77bil as of the quarter ended March 31.
In comparison to the quarter ended December 2018, total net debt has increased by RM3.5bil or 1.2% quarter-on-quarter (q-o-q).
Meanwhile, the remaining 123 companies were in a net cash position of RM39.63bil as of March 31. The total net cash value increased by 2.6% q-o-q.
A more detailed analysis reveals that nine Khazanah Nasional Bhd-owned companies (the Khazanah group) have the highest net debt value.
The net debt value has increased by RM3.19bil or 5.7% from the quarter ended Dec 31, 2018.
The Khazanah group alone constitutes about 20% of the stress test sample’s total net debt value of RM293.77bil.
It is worth noting that Khazanah is in the midst of paring down its “non-strategic assets”. So far, the sovereign wealth fund has reduced or disposed its stakes in assets in the telecommunications, healthcare, banking and property sectors.
The net debt value of the other most leveraged companies are:
> The YTL group (four listed companies): RM27.76bil,
> The Permodalan Nasional Bhd group (eight listed companies): RM24.34bil,
> The Ananda Krishnan group (three listed companies) RM20.04bil, and
> The Tan Sri Syed Mokhtar Al-Bukhary group (six listed companies): RM19.84bil.
In terms of percentage change, metal can manufacturer CAN-ONE BHD saw the biggest jump in net debt. The company’s net debt value surged 300% q-o-q to RM1.73bil as of March 31.
Can-One’s gearing level has shot up due to the buyout and privatisation of Kian Joo Can Factory recently.
However, the can manufacturer’s gearing level is expected to come down, as the company plans to repay RM750mil of its debt following the sale of its creamer segment, F&B Nutrition Sdn Bhd.
With the disposal, MIDF Research expects Can-One’s gearing level to fall to between 0.55 times and 0.79 times from 1.94 times prior to the sale.
Meanwhile, DKSH HOLDINGS (M) BHD turned into a net debt company with a total net debt value of RM582mil as of March 31.
The company, which is involved in the fast-moving consumer goods segment, was in a net cash position of RM41mil a quarter earlier.
The sharp increase in debt holdings is due to DKSH’s purchase of chilled and frozen products company Auric Pacific (M) Sdn Bhd for S$157.67mil (RM480.9mil), in line with its expansion plans.
Out of the top-10 net debt companies on Bursa Malaysia, four entities have witnessed a drop in net debt value q-o-q, namely, the Syed Mokhtar group, the IOI group, SAPURA ENERGY BHD and the LTAT group.
As of March 31, Sapura Energy nearly halved its net debt to RM8.89bil from RM16.52bil as of Dec 31, 2018, on the back of its degearing move. This includes the disposal of a 50% stake in its exploration and production unit and a RM4bil rights issue.
In terms of the cash-rich companies, the Genting group remained the largest net cash entity with RM4.8bil as of March 31, although it saw a decline in its net cash position by RM252mil compared to a quarter ago.
Meanwhile, the AIRASIA group is the second highest with a net cash of RM3.95bil, adding RM800mil q-o-q to its coffers due to the continued sale and leaseback of its aircraft.
This is followed by the Petronas group (RM3.68bil), Lotte Chemical Titan Holding Bhd (RM3.54bil) and ORIENTAL HOLDINGS BHD (RM3.32bil).
Speaking to StarBizWeek, MIDF head of research Mohd Redza Abdul Rahman says corporate debt is on the rise as it is the cheapest funding source for business.
In contrast, fundraising via the issuance of new shares is more expensive, as it will result in share ownership dilution for existing shareholders who decline to commit more funds to buy the new shares.
Following the recent 25-basis-point cut in the overnight policy rate, Mohd Redza expects more companies to take up debt as borrowing costs have declined.
“High corporate debt doesn’t mean it is bad. Sectors with high capital expenditure such as those involved in infrastructure jobs will tend to have heavy debt, but as long as they have enough revenue to pay for their interest expense and meet the required debt coverage ratio, there shouldn’t be much concern over their ability to service the debts.
“What is of concern is companies whose income projection has failed to meet expectations after spending a lot on infrastructure. For example, logistics companies which had spent a lot to add warehousing capacities but whose utilisation rates are now below projections, or companies whose new office building space comes in line at a time when there is an oversupply of office space.
“Small and mid-cap stocks are more prone to being adversely affected by changes in the economic and demand landscape, particularly those involved in sectors facing challenges such as plantations, manufacturing and property,” he says.
Mohd Redza suggests that businesses take advantage of the recent interest rate cut by refinancing their fixed rate debts.
“By doing this, they can save up on their interest expense,” he says.
The surge in private sector debt is not unique to Malaysia alone.
Since 1950, global private sector debt has tripled and is the key factor behind the accumulation of global debt.
Global debt – public and private – hit an all-time high of about US$184 trillion in nominal terms, the equivalent of 225% of GDP, in 2017.
According to Universiti Malaya business professor Mohd Nazari Ismail, the high corporate debt levels in the country are worrying, as Malaysian companies will become vulnerable to any potential global economic shocks or slowdown.
He tells StarBizWeek that companies with higher external debts denominated in foreign currencies are in a worse situation, as the continued weakening of the ringgit will increase the value of their debt drastically.
“This is what is happening now in Turkey. The corporate sector borrowed massively in US dollars from foreign banks worth more than US$200bil. The fall in the lira pushed the companies into a really bad situation and many had to lay off workers, thereby causing a serious unemployment problem in Turkey,” he says. When asked whether corporate Malaysia has enough buffers to service its debts in the event of a potential economic shock, Nazari says “the buffers are quite limited”.
“Many companies are going to face financial difficulties if the Chinese, American or European economies experience an economic slowdown,” he adds.
RAM Ratings says that corporate Malaysia’s credit health remains sturdy, based on its recent analysis as of Oct 31, 2018.
“We examined a total of 733 non-financial corporates listed on Bursa Malaysia and their performance over the last 12 quarters ending in the third quarter of 2018. Largely focusing on the credit resilience of corporates, we assessed four key aspects – corporate profitability (Ebitda/Revenue), leverage (Debt/Equity), debt servicing capacity (Ebitda/Debt) and liquidity (Current assets less inventory/Current liabilities).
“On the whole, Malaysian listed corporates have maintained reasonably strong financial metrics despite the more challenging operating environment. Posited against regional peers, Malaysian listed firms compare favourably, with debt protection metrics which surpass that of most peers.
“Our analysis suggests that the balance sheets of Malaysian corporates remain resilient and are not at near-term risk of distress in the event of adverse economic stress,” it says. RAM Ratings also says that higher corporate debt may not necessarily affect corporate ratings.
“We also consider other factors such as whether the company’s earnings and reserves have also deteriorated significantly in conjunction with the higher debt, the financial flexibility of the company, or if debt is used for productive purposes, among others,” states the rating agency.
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