Short Position

End of an era

Being a regulator of the capital markets is not easy. They have more enemies than friends. They are often the target of many in the capital markets – from owners of listed companies to investment bankers and in Malaysia’s case, even politicians.

The managing director of the Securities Commission’s corporate finance and investment, Eugene Wong Weng Soon, faced more than his share of challenges. In his 10 years with the SC, he oversaw some of the biggest initial public offerings (IPOs) and in some ways helped prevent a catastrophic listing from taking place.

During his tenure that started in 2009, Wong saw the large listing of Maxis Bhd and the thorny floatation exercise of FGV Holdings Bhd,

However, Wong also sensed something amiss with Edra Energy Bhd. He and his team tenaciously sought more details from the energy unit of 1Malaysia Development Bhd (1MDB) when they lodged their prospectus to seek a listing in late 2014.

Finally, in February 2015, 1MDB’s then chief executive, Azrul Kanda Kandasamy who is also known as Arul Kanda Kandasamy, withdrew the application to list Edra Energy after realising that they could not fulfil the demands of the disclosure standards required.

The listing was supposed to raise the money 1MDB needed to pay off short-term loans due to foreign banks. As Edra Energy’s listing failed, it sparked off a chain reaction.

A year later, the financial scandal of 1MDB blew up and finally in May 2018, it became one of the main issues that saw former Prime Minister Datuk Seri Najib Tun Razak fall from grace.

If the listing of Edra Energy had taken place, the usual suspects such as the Employees Provident Fund (EPF) and Kumpulan Wang Amanah Pencen (Kwap) would probably have been forced to take up the shares of the company, at the expense of the rakyat. Considering that 1MDB is swamped with debts, the consequences would have been severe.

According to a statement from the SC, Wong had informed the SC in May this year that he wanted to leave the organisation when his contract ends in December this year. After having served 10 years, the 50-year Wong believes that it was the right time to seek new challenges.

During his time in the SC, Wong overhauled the takeovers framework, initiated a new approach for independent advisers to evaluate corporate proposals and introduced the lodge and launch framework for small companies to issue debt papers expeditiously.

His successor has not been named yet. Hopefully, it would be someone that would continue to manage on capital market issues without fear or favour.

How much longer can liquidity work?

With growth rates around the world easing and politicians needing a good economy for election purposes, the idea has been to cut to grow.

Lower interest rates do stimulate an economy but after a decade of super-low interest rates, with a number of countries joining the negative interest rate bandwagon, one wonder just how much of a fillip does ultra-low interest rates have in spurring growth.

This time, the trade war between the US and China has had an effect but there has been some spillover in terms of redirection of investments where a number of countries in South-East Asia has benefitted form, including Malaysia.

That will take some time to filter through the economy and with GDP growing 4.4% in the third quarter, it was time to act.

Just before the announcement of the GDP figures, the statutory reserve requirement (SRR) was cut by 50 basis points to release RM7.4bil into the economy. Liquidity is the lifeblood of any economy and more money going around will always be a positive under periods of sluggishness.

But the move also keeps a policy arrow in Bank Negara’s quiver for next year should there be a need to inject more stimulus into the economy by cutting the overnight policy rate (OPR) by 25 basis points.

Economists expect that to be done next year and given the paltry increase the private sector is expecting in wage growth for next year, that will come in useful in putting more cash into the people’s pocket.

It is private consumption that has been the engine of growth for the economy and here, it’s what the middle- and high-income people can spend that lifts that up.

There is also so much they can do and it will be time for policy intervention to get the economy moving again. That has been sorely lacking in terms of an infusion of vibrancy in the economy that past expansion in construction and housing has now fizzled out.

The government should quickly think of what it can do to get growth up again, lest waiting for the SRR and OPR cut effects to find itself immune to lagging growth much the way the world has learnt over the past decade.

Ekovest’s RPTs

Ekovest Bhd is getting into another related party transaction (RPT), making it a second one in a spate of nine months.

On Thursday, the company said it is proposing to buy 20 parcels of freehold development land in Johor Bahru for a total of RM1.5bil from Iskandar Waterfront Holdings Sdn Bhd (IWH).

The interested or related party in the deal is Tan Sri Lim Kang Hoo. Lim owns 32.4% of Ekovest and 63% of the unlisted IWH.

The land acquisitions will be funded by largely by preference shares but also with some cash. The total cash payout comes to around RM200mil and will come from internal funds. Ekovest had cash and bank balances of RM830mil as at June 30, 2019, the company pointed out.

Earlier in March this year, Ekovest forked out some RM76mil to buy a 23.4% stake in loss-making PLS Plantations Bhd. PLS Plantations is also owned by Lim who has a 30.4% stake. So that too was a RPT.

What’s more, Ekovest had committed another RM213.5mil to subscribe to its portion of rights shares to be issued by PLS.

The acquisitions have their rationale. In the recent proposal land deals, the idea is for Ekovest, which has a combination of construction, property development and highway concession businesses, to increase its landbank and increase its presence in Iskandar Malaysia. Ekovest says that incoming catalytic infrastructure projects in Johor are expected to further spur investments in Iskandar Malaysia and these include the proposed Kuala Lumpur-Singapore High Speed Rail, Johor-Bahru-Singapore Rapid Transit System and Bus Rapid Transit System. In PLS’ case, the idea is for Ekovest to diversify its income base. PLS in turn, is going big into the durian business, both upstream and downstream, although it remains loss making for now.

No doubt, these investments by Ekovest into companies owned by Lim could pan out. But the question is, of all the investment opportunities out there in the world, are these two the best fit for Ekovest? That’s the question its minority shareholders will need to ponder and have a chance to voice their views when the proposed land deal comes up for shareholder votes.
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