Monday, December 14, 2009

Increasing Free Float For Tenaga Nasional - Not Quite Sufficient

Khazanah sold 703 million ringgit ($207 million) of shares in Malaysian power utility Tenaga Nasional, part of a government push to trim stakes in state-linked companies to boost liquidity.

Malaysia’s state investment arm sold 86.75 million shares, or a 2 percent stake, at 8.10 ringgit each, Maybank Investment Bank Bhd., which managed the placement, said in a statement. That’s a 3.6 percent discount to the Dec. 10 closing price.

Khazanah, which owns stakes in some of the biggest Malaysian companies, has cut holdings in firms including PLUS Expressway and Malaysia Airports Holdings Bhd. as Prime Minister Najib Razak prodded state-linked investment agencies to partially divest to increase the number of shares available in the open market, and lure more investors.

A source with direct knowledge of the share placement said the shares were sold to local institutional funds and the Employees Provident Fund (EPF), the largest pension fund in the country, has taken up 50 million shares in the placement.

Question #1: If you want to increase free float, why place out to local funds only. Its not local funds that are complaining about the free float but rather the foreign funds.

Question #2: EPF gets 50m shares of the placement. That may count as free float but I doubt very much EPF is a short term holder of Tenaga shares. If the presumed improved liquidity is to be evident, wouldn't it be more relevant to break it up into smaller parcels and to more foreign funds?

Question #3: If EPF holds for 5-10 years, how is that improving the effective real free float?

Malaysia is studying a request by national power utility Tenaga to raise the price of electricity, a local newspaper reported on Thursday. New electricity tariffs may take effect from January if it is approved by the cabinet, Energy Minister Peter Chin was quoted by the Star newspaper as saying. Chin said his ministry will study the issue first before submitting to the cabinet for approval.

"The electricity tariff is reviewed every six months due to fuel price adjustments but whether there will be a new tariff or not will depend on the cabinet," he said.

The cabinet reviewed proposals for 4.9 percent electricity price hike in July this year and turned down the plan, fearing that it would an unpopular move.

Question #4: Khazanah and the government seem to be not entirely aware why foreign funds are shying away from Tenaga. Free float is but one MINOR issue. It is very difficult to justify buying Tenaga because there is no transparent tariff formula. To international fund managers, when considering a power utility, tariff hikes and the ability to pass on jumps in cost needs to be clear. It affects the net margins predictability. Just look at the past experience cited above by the government. Each time Tenaga will have to literally "beg" the government for the tariff hike, even when the price of oil/coal has surged significantly. Plus there is absolutely no guarantee. How do you expect international funds to properly assessed the prospects of holding Tenaga? There must be a transparent tariff formula, taking into account all related cost in producing, generating and distributing electricity. There must be a fixed interval for tariff reviews , e.g. twice a year or annually.

Question #5: I can fully appreciate that there are burdens on the consumers, and there are the political considerations as well. If you wish to take into account these two factors, then for goodness sake, do not list it, take it as fully government owned. When you decide to list Tenaga, a utility company, earnings are supposed to be relatively highly predictable, not a guessing game. That my friend, is the main obstacle why international funds are frowning on owning Tenaga. Increasing the free float does not address the problem here. Increasing the free float for most of the rest of GLCs is by large a very good development, but it falls flat here.

p/s photo: Yuriko Shiratori

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