Monday, February 27, 2006

Khazanah's Report Card



Wow, what an ambitious article. Who is even qualified to make a call on Khazanah (K) with the amount of brain power on hand? Anyway, I jest, it is important to consider the "performance" of Khazanah regularly now since it has been helmed by Azman Mokhtar because of the timeline of objectives it has taken on. These objectives will have a big impact of the performance of KLSE/KLCI and how the Bursa will be viewed by the global investment community.

Key themes of Khazanah Nasional's mandate as a strategic investment house include: a) Creating sustainable value; b) Raising national competitiveness; c) cultivating a culture of high performance. These are to be achieved via four strategic pillars; namely,
- Legacy investments: streamline, restructure, nurture
- GLC transformation: Increase shareholder and strategic value
- New investments: New sectors, cross border
- Human Capital Management: Active leadership management


1) Legacy investments - Well, Azman and his team was not responsible for what is on Khazanah's portfolio. He can only do with what he has been given. If one were to examine the full portfolio, one can already make some "smart investing decisions". Let's just consider the healthcare sector - Khazanah has a 10.87% stake in Apollo Hospitals, a 36.6% stake in Faber and a 28.9% stake in Pharmaniaga. Naturally to consolidate all operations under one management would allow for better synergies and cost savings. So, which vehicle would you use to absorb the rest (as a rule of thumb, you should use a less attractive vehicle to issue shares when buying assets), but in this case we have to bear in mind that control is of utmost importance. This is what is likely to happen: take Faber private because Faber is trading way under fair value, can probably succeed by buying at RM0.70 or RM0.80, still way undervalued. Once K has 100% of Faber, inject both AH and Faber into Pharmaniaga for shares. This will propel K's holdings in Pharmaniaga enormously. Why not the reverse, you might ask, well its a bit like a very attractive girl going out with a guy - injecting 100% of Pharmaniaga into Faber is like a guy asking the attractive girl out (iffy and the real impact may/may not be exciting); but injecting 100% Faber into Pharmaniaga is like an attractive girl asking you out (cannot lose and there are bound to be boasting rights!). As an investing strategy - collect Faber as much as you can; once they announce the privatisation deal, start unloading Faber but buy Pharma - this is however a very, very long term thing to play out, 1-2 years at least but it should happen. I cannot believe Azman will let these 3 stakes to be left alone like that. When you know what value, synergies and efficient usage of capital are - you will tear your hair out if you can put those things into place.

On the transportation sector, we can see that K only has a 0.53% stake in MISC. If I was Azman, I'd be pretty disappointed with that. Don't know how yet, but if I was driving the K ship, I will be looking to buy more MISC, at least triple the holdings. MISC is important and strategic, in fact, Petronas should be the one selling down some of it. As for MAS, that is a big headache as K has 69.34% - like I have mentioned before, the best way out for MAS is to take a stake in Air Asia and work together to sort out matters (please read blog on Air Asia).

As for auto sector, the 42.74% stake in Proton is definitely political soccer ball. If one is an objective analyst, you don't want Proton to go it alone, it doesn't have the critical mass of market demand. I believe Azman will invite a JV partner to come in, even lose control if that's what it takes. Proton could be a good recovery play once they have a JV partner. Proton as it stands would be a good regional production, sourcing and distribution channel for one of the top 10 car makers.

As for technology sector, its 19.96% stake in D'nonce is neither here nor there - get rid of it already. Other things to get rid of becaus ethey are too small include: 9.9% stake in Parkson Retail (profitable though); 0.16% stake in RHB Capital; 17.2% stake in Ho Hup; and the excruciating 24.85% stake in Parkmay. A place such as K should have a certain number of top managers for it to function effectively. One person can maybe manage/oversee 2-4 companies or 1/2 sectors well. If you have ten top people, you should want them to look at stakes of at least RM200 million and above. Having one person to manage four companies of very small stakes (say RM40 million worth) will be a waste of resources no matter how much value he/she can add to the RM40 million. So, get rid of the small value stakes even if they are profitable.

2) GLC Transformation - The GLC transformation is unique as K got involved with not just companies under K but all government linked companies. The changes in top management insituted and the implementation of specific KPIs for each company/sector is well and good. Still need to see how this all pans out. It is important to see what Azman will do when certain heads fail to attain their KPIs - that will give a better indication of the effectiveness and follow through program.

3) Human Capital Management - This ties in with the how K works with the leaders of the companies under its helm and other GLCs. So far so good, some brave appointments made and some even braver decisions to let certain people go. Internally, K has a slight problem - there are roughly 16 director/executive director positions within K. If we were to take out the functionary duties such as HR/financial controller/IT/legal, the 16 positions would be down to 14. The thing is, Azman used to be the Director / Head of Research for UBS in Malaysia. Guess how many of the 13 positions are filled by very senior alumni of UBS... 3, so including Azman it will be 4. Well, we work with who we know best, but we must also be careful not to be regarded as an unofficial subsidiary of UBS. We should not give the impression that K could care less about what the world thinks or possibility that people might talk - even though we have done everything transparently. This is something Azman will have to look at, perception is also important sometimes, you can do without the vicious whispers.

4) New Investments - New sectors and cross borders. This is about time, and though some may say K is following the footsteps of Temasek, so what. As a small country with a population that is way deficient under the "critical mass measuring tape", we need to secure significant stakes to ensure whave a finger in some of the future's important big pies. This will diversify our country's holdings, hence our wealth, hence our economic viability and dependency. Just imagine if all we have to depend on are oil & gas and the natural resources of timber, rubber and oil palm. What if all these market prices halve in ten years time - it could happen, there could be advances made in science and technology to come up with viable and cheaper substitutes? Our country's economic destiny cannot be tie in with just our resources, we need to spot "growth sectors of the future" that we may not be very strong in or have the natural factors to compete (no population for demand), and then invest accordingly.

To do that, K will be selling some stakes. I have touched upon that before but not all stakes are attractive to buyers. If you have to sell something tomorrow, K will probably be able to offload some of its: 55.22% UEM World; 10.56% DRB-Hicom; 30.04% TimedotCom; 21.48% Astro; 44% Time Engineering; 40.17% Telekom; 37.35% Tenaga; etc... Certain stakes are okay to be lowered, certain stakes K would not even consider selling, these are good, important stakes such as 17.32% Pos Malaysia; 3.65% Maybank; 6.23% EON... to name a few. The few that will probably be sold down (not all just part of it) and would be of interest to foreign investors:
a) Tenaga Nasional
b) Telekom Malaysia
c) UEM World
d) DRB-Hicom
e) Astro
It is also likely that K will tap the global bonds market for funds to buy stakes in foreign companies. K should not have a problem raising US$1-2 billion as it has a net worth of around US$12 billion, you need that as a starter.

Some investors might fear that if K sells down some of its stakes, that would lead to a drop in their share prices as well. Well, that is not the case in reality. In fact, as the "controlling party" sells down shares in a decent company, the share price actually performs better with better liquidity as that attracts more institutional buyers. The main objection foreign funds have for not buying Malaysian stocks is lack of liquidity, not that they don't like the company, but that they need to get in with a certain size to make it count, and need the volume to get in and out when he/she chooses. In fact, I am willing to bet that the KLCI wil tread on higher ground once more details are revealed on K's selling down its stakes and the overall global investing community will receive the news positively.

I believe the bulk of the new investments overseas will be targeted at the IT side of things, because that's where we are weak in. I also believe that Azman and his team will need to work much closer with the people from BI Walden (highly successful venture capitalists in the US and Asia, and they have some highly astute professionals at the top of their company) for link up work. K has a 34.09% stake in BI Walden Ventures Ketiga.

So, the report card for Khazanah - before Azman was appointed: C-. The period under Azman Mokhtar: B+.

1 comment:

Rohan_888 said...

Should a country actually hold shares in companies? You mention Temasek as an example, but I think there are dozens of countries who do not own any shares in any (local or foreign) companies or only limited (for instance only the natural resources industries like oil and gas exploration). I think that the Singaporean example is both positive and negative. Most initiatives seem to come from the government holdings, not from private investors/inventors etc., not sure if that is so healthy for the future.