Monday, October 03, 2011

PNB's Strategy Simplified

Sometimes, we give too much credit to people in the news, be they politicians, business leaders, etc. We tend to view something thats in suits and in print as surely something "better", "more knowledgeable",  "qualified" ... We tend to think they are smarter than the rest of us. We tend to think that they would have strategised very deeply before acting or saying things. 

Here I am not belittling PNB's strategy but let me try to simplify them. I think the recent wave of racialising and politicising the few recent mergers and acquisitions has been barking up the wrong tree. As a listed entity, owners will sell if the price is right. If they do sell, then its the end of story there. You can only politicise these things IF and WHEN the owners are forced to sell or "pressured to relinquish via indirect means". I do not see such untoward pressure with respect to Sunrise, E&O or even SP Setia ... but if we ask Robert Kuok, he may say something else.

Anyway, I digress, back to PNB's strategy. Mind you, PNB has been putting in returns of around 8%, a few notches above EPF, but of course EPF's cake is much harder to manage and the bulk is not in equities. Thus you cannot and should never compare PNB with EPF or EPF with LTAT. PNB is sitting on assets of over RM120 billion (based on 2010 numbers). Its investments have yielded at least 8.5% returns to unitholders for the past five years.In comparison, the Employees Provident Fund provided returns to unit holders of less than 6%, Lembaga Tabung Haji 4.5% to 7% and Lembaga Angkatan Tentera between 15% and 16% over the same period. (Hint: A smaller fund can benefit from say a large placement of Malaysian Sugar or Bumi Armada IPO, which will not make a dent for EPF or PNB).

If you want to simplify PNB's strategy, just look at the yield of their investments. Generally, they do not interfere with management's direction. Just look at the yield and you know where their problematic holdings are.

PNB should be very pissed off with Sime Darby. As PNB has a sizable stake relative to its portfolio, the returns will be affected as Sime Darby tries to revitalise itself, which may take another 2 years. Hence they needed to boost their yields via other investments. 

To make a significant play, their current stake must not be too high, SP Setia falls into that category. The yields looked good relative to the projects secured. Mind you, PNB has also privatise Island & Peninsular and Pelangi, as they provide decent yields but not sufficient liquidity to need to be listed still. Lack of liquidity means poor market valuations and a difficulty in raising funds for expansion, so, better to take them private. 

In line with that, obviously someone came up with the idea that you can best have a stable yield by locking up decent property companies with established portfolios. To that end, it would not be far fetched for Sime Darby to have consulted with PNB on that strategy: before taking up E&O.

The move to privatise SP Setia was great timing as markets were badly affected by the current EU sovereign mess. SP Setia's rapid drop below RM4.00 to nearly RM3.40 was an excellent window to launch the RM3.90 bid, it looked relatively good (in my view, yes, it undervalues SP Setia still by at least 15%, and yes minority shareholders should NOT accept). 

So, that should have been PNB's strategy, but somehow we all like to speculate and over think everything. 


hishamh said...

An excellent analysis - and very close to the truth

Mohammed said...

With the stock market looking like a guillotine, there can be some comfort from high yields. I would look for good businesses with good management first and yield second, though. I mean, track record and prospects trumps yield.

The Malaysian Wait said...

Only a suit in a small pond would have the gall to think shareholders would accept such a lowball offer. We were just at RM3.90 a month ago (not to mention the offer price almost 20% off the 52-week high). Looks like PNB's trading room is full of 'try luck / cuba nasib' execs. A better tactic would've been to accumulate at RM3 if they just wanted more shares. Damn sad, biggest fund manager konon.

ronnie said...

Many small & mid caps on Bursa should be taken over by local funds such as PNB. This is what Berkshire Hathaway does and the sharp downturn in equity prices offers many good opportunities.