Wednesday, May 30, 2018

Buying MRCB

The day to day announcement of cancellation of projects have spooked the market so much so that I feel there has been certain stocks being oversold quite a lot.

One of the example is MRCB which had just had a fund raising late last year. From that exercise, I think what the investing community has been thinking of MRCB is that it is about the HSR project alone.

To be fair, the fund raising is not purely for HSR but as per my article earlier, it is part of its reorganization exercise where it cures its balance sheet and at the same time refocus. MRCB has gone from owning many parcels of land that has lower GDV to larger projects where each GDV is much larger.

Key among them are the MX1 project which is the city center project on Kwasa Damansara, Bukit Jalil etc. Many of these projects are private projects which have been secured.

Through several exercises, MRCB had raised close to RM3 billion over the last 6 months and those would have improved its balance sheet, while having larger order books.

As a result, I have sold Tropicana which does not get impacted during the bloodbath and bought MRCB.

Tuesday, May 29, 2018

Why floating Petronas is not a bad idea

As a Malaysian, while I do not like to see our nation's asset to be sold, the idea of floating Petronas perhaps should be different. Floating it does not mean we are selling the entire stake but perhaps 25% like what is being proposed by some personalities recently.

Why is it good for the country?

  1. Although Petronas is a national asset, I for one do not have a clue of its value and in the name of transparency, despite being someone who follows Malaysian economy closely as well as track our country's controlled companies, this is one asset which I have very little knowledge. Those things are such as, where are the asset listing, reserves, liabilities. I know that it can be found here and there but not in one consolidated report. Floating Petronas will allow every Malaysian public that access.
  2. Malaysia will be at the forefront of being transparent. One of the biggest hope in this new government is the act of being transparent. Petronas is the largest asset (company) of the country by far. We will be showing the way to attract investors in this manner. It will also enhance Malaysian capital market as I am sure Petronas will be viewed as one of the must own asset among larger funds. Hence, probably from this, weightage on Malaysia would be higher.
  3. Dependency on oil would be lessened. We know that over the next 20 years, the world's dependency on oil is being relooked at. As an example, several countries such as Britain, France, China are doing away with full carburetor cars and with that many other countries would follow as these are car producing countries. By floating Petronas, we would have been less dependent on Petronas  and as such can use the funds to build other sectors. We need to bring back the push for some technology sectors which the government has not focus on like the semiconductor, ICT, Industry 4.0 etc.
  4. Petronas's Board and CEO would have a different focus. Today, they report to the PM, and that is not what we want. We want them to report to the public. We want international analysts to review them. We want others to be critical of them. Again, one of the things I am not able to comprehensively have a view is the close structure of our most valuable asset.
Much has been said about our national debt but we will need to continue to grow as a country, and not pull back our development work. We will still need modern infrastructure such as MRT, roads, ports, intellect people, telecommunication assets.

And this is probably the best time to do that as we are moving towards a new era of development and governance.

Monday, May 28, 2018

The Edge: Dr Mahathir on toll concessionaires

The most recent Edge Weekly is quite a meaningful edition as it had the opportunity to interview Tun Dr Mahathir i.e. the first to do so in a private setting after GE14 where Pakatan Harapan had won the election.

I managed to get a copy during the weekend, and Dr Mahathir was enquired about his views on toll abolishment in stages as in the Pakatan Harapan's manifesto.  Here are some of it (but please go and buy a copy as there are much more to read especially on ECRL, HSR etc).

TheEdge: The national debt is already so high. The government has zero-rates GST, reintroduced petrol subsidy and is reviewing toll charges. These will cost the government money. How is it going to handle the situation?

Tun Dr Mahathir: Much of the work being done now is to downsize the financing of the government. By doing away with all these expensive projects, we are already reducing (debt) servicing costs.


I must admit that when we were campaigning, we proposed things so that the people would want us to be the government. But, of course, we have to manage these promises. For example, the toll review is not going to be immediate, it will be in a gradual manner.

Is the government going to acquire all the toll concessionaires?

Some we have already acquired. But we have to work with the private sector. I have read some of the proposals; they sound quite reasonable. You see, the main point is we don't want to punish the people (toll operators). At the same time, we have to ensure the government has some money to build roads.

Based on the above, it is unknown what he meant by "Some of the toll we have already acquired." Could he have meant that PLUS was for example is already 51% owned by Khazanah, the only government owned that I know which is owned by the government. Many other toll businesses are either owned through PNB (a government managed fund), EPF or some of them the shares are passively owned by Malaysian funds.

Toll business which traditionally have been the safer bet assets, have been hammered especially when several individuals have appeared to justify that they will follow the Pakatan Harapan's manifesto of abolishing toll in stages. From there, the toll concession shares have suffered drastic drop and some of them have been owned by my investment fund. These are WCE, Ekovest, LITRAK, MRCB.

What was initially feared is that the government will be using a clause which is available in the toll contract i.e. in the "expropriation clause" where the government can acquire them for national, public interest or public security.

Of course, the argument from many (including me) is that in doing so, it will collapse the capital and bonds market where toll concessionaire's bonds are among the highest in total.

What I think may happen?

As mentioned by EPF's CEO, the toll business acquisition has to be looked at holistically. In my mind, holistically means it has to be looked at in its entirety and it may involve Khazanah, PNB and EPF in acquiring these assets. The bonds may also be repackaged and new shares may also be offered in the capital market.

One may ask: But, it does not eliminate toll charges. Yes, but in reducing the toll charges, it is already a win. When the government together with the funds are able to negotiate a package with the toll owners, they can relook at an optimum charge towards the users as well as a decent return for the investors i.e. the funds.

It has to be understood, rightly so, some of these toll businesses have made quite a lot throughout the concession period. Among them are LITRAK and PLUS and these have been the topic of contention among the politicians like Tony Pua.

Hence, by acquiring the concessions outright at a fair price and repackage the toll rates, they may seem to be the best option.

Sunday, May 13, 2018

My thoughts on WCE after the GE14

I am sure many people would be concerned and confused on what to do with WCE which is a toll concession business after the Pakatan Harapan (PH) has won the election. Among the manifesto, PH has proposed for a staged elimination of toll concessions in Malaysia. They are also proposing for renegotiation of the highway concession contracts.

I have seen several press articles as well as a video put up by Tony Pua.

Well, while some of the toll concession businesses has made tonnes of profits (such as LDP, Maju, PLUS), the way it is presented (by Tony) is somewhat misleading. One cannot just say that because of the concessionaire has invested a "y" amount of money and they have profited several times more from the y investment, then the concession should be bought back at cost +.

In finance, where especially projects are concerned, one of most important theory is "Time Value of Money". I do not want to explain so much on that concept, but here is a good explanation. From that explanation, usually for a project to kickstart especially concession business such as the toll, the concession owner will invest upfront for a number of years (in the case of WCE - more than 5 years), and upon the completion, they will start collecting from the tolling proceeds.

Note that finance is different from accounting. Finance has element of time while accounting does not take into account time. In this case, finance is more relevant.

As in any business, the biggest question is who will be coming up with that big sum of money (including cash and borrowings) and ultimately allowing the government to buyback the projects at cost or even cost plus? Nobody.

It is illogical. Nobody wants to take up that risk that way. It defeats entrepreneuralism.

This is because there are completion risk, borrowing risk and return risk that the business concession has to stomach. As an example again for WCE, there are not many construction companies that can complete these kind of projects. Why it has been delayed is that companies like Talam were not capable of doing it and ultimately not getting the financing and support needed. Hence, me being convinced to invest into this project is because it is a IJM led project. Even then, as one can see, there are additional risks now.

One of the biggest message that has been given by the current PH government is the application of the "rule of law". Mahathir also put huge importance onto the economy (which is why the council of elders comprising of 5 very experience people i.e. Daim, Zeti, Robert Kuok, Hassan Merican and Jomo) are all financial and economic experts. Many other countries, their advisors are mix of security, financial, legal etc. But the first team formed in Malaysia are all finance and economy.

To eliminate tolls, the older projects are those such as PLUS, LDP, and PNB owned Prolintas.

All our large funds such as EPF, PNB (ASM and ASB), KWAP, Khazanah etc. owns large proportions of these projects. Prolintas which owns 6 highways i,e, AKLEH, SUKE, LKSA, SILK, DASH, GCE is wholly owned by PNB.

EPF owns 49% of the biggest highway chain in Malaysia i.e. PLUS while the remaining 51% is owned by Khazanah. PLUS has a RM23.35 billion sukuk bond  which is largely unpaid, probably not even paid principal yet. If the government wants to eliminate toll, it has to find ways to repay this i.e. more than RM23.25 billion bonds. By taking out PLUS, it will impact EPF contributors as well. And Khazanah also, which is under MOF.

As it is, there are a lot of financial issues that the government has to tackle and the main part of them are eliminating GST, continuing with BRIM, bringing back some of the subsidies. Obviously, to look at doing away with tolls, it is a very hard task and not as easy as explained by Tony Pua.

The merits of WCE itself

WCE is an important project. It not only connects the west coast where if one is to take the old Federal roads which is inconvenient, but it also connects ports such as Klang, Penang and Lumut. The road is much flatter and more friendlier to heavy vehicles. These are all the important economic development which has been promoted by many of the PH leaders, chief among them Mahathir, Daim and perhaps even Anwar.

Moreover, which part of Malaysia gave the biggest endorsement to the new government? West coast of Malaysia. I.e. connecting Taiping, Lumut, Tanjong Malim, most parts of Selangor - all which have brought the wins to PH.

In fact, I may not be surprise, the new government is better for WCE as some alignment as it is now is still not finalised, especially Tanjong Karang. 

IJM is one of the most respected construction company and without them, the costs of the highway could have been even higher as they are not only capable of building the highway but they are also able to manage the costs.

One should take note that the large part of its management today is from Road Builder Bhd - which was merged into IJM back in 2005. Road Builder as in its name is particularly strong in building roads and West Coast Expressway is not one easy feat. Portions of WCE is on soft soil, which is not easy.

What may happen with the new mandate with the Manifesto

To entirely take away tolls, that is not easy. But to payoff especially the older tolls, that will show that current PH government meant what they promised. The older tolled highways are LDP, Lebuhraya Sungai Besi, first Penang Bridge etc. But even to do that it can be costly as it is not about buying back but also the costs of maintenance.

I would suggest the current PH government to declassify the contracts so that it is becoming more transparent. Speaking of the fairness of the contract, I believe the WCE contract is one of the most fair tolled highways. This is because it has fixed the IRR (actual IRR is not revealed but I hear that it is a higher single digit percentage - not double digit) and if the highway achieves that IRR, government will get a share of the profits over and above the IRR threshold.

I also believe some part of the contracts may be renegotiated. But as mentioned above, a decent IRR (I think) has already been incorporated for the WCE highway.

What about WCE's valuation?

Assuming that the current government is not illogical (by killing the project, and not paying compensation, where even then the court is the remedy for WCE) and follow the rule of law - the price of WCE where it is currently at 93 sen continues to warrant my interest. With the recent proposed fund raising, at 93 sen it will increase the market capitalisation of WCE to RM1.5 billion. This is still a good valuation for investors.

Mahathir has already said the abolishment of tolls will be done according to the contracts. And the contract mechanism for WCE I believe will have elements of protection for the shareholders.  After the contract has been finalised, there were 2 major new shareholders that has gone into the business - MWE and Mamee. They would not have bought into the company if their rights are not protected in the contract.

In summary, the bigger risk after the new government is formed is whether they will follow the "rule of law" as promised and being rational in terms of financial management. Now, let's see!

I have been one of the guys whom have been rooting for a change. That was why I was not concerned with the manifesto of PH especially on tolled highways, but after their big surprise win, it made me think of the consequence of the promise.

Monday, May 7, 2018

To Tony Fernandes, sometimes it is better to just keep quiet!

I am a shareholder, hence I believe I have the right to say something.

I have read your book and I respect your entrepreneurial mind and spirit which is also why I own shares on companies that you lead.

However, I am hoping that being a businessman, do like what many business people are, be impartial. In your biography, you mentioned that it was Dr Mahathir that is the one whom have approved for your airline business. He was very supportive of your endeavor. Obviously, today by you coming out to support Barisan Nasional is because of some of their policies in supporting your business. Thailand helps you isn't it although at one point of time Airasia was partnering Thaksin.

In my mind, whichever the party, they will support Airasia as it has to some extent become the pride of the country.

Hence, you do not need to take side openly.

You have done right by reducing the air fare for people to go and vote. (and in the process, Airasia will make more through these travels)

As a CEO, one must also know that Airasia despite being a low costs airline, it is still the middle classes to more affluents whom will be more often than not travel via your airline. As you have said, it is the customers that counts than the government. I understand that by supporting the government of the day, you will be provided with infrastructural support - from landing rights to airports.

However, one does not need to do that. Over the last few weeks or even more, we have seen anger among some of the rakyat. These people can decide to pay a RM100 more to go to Malindo, MAS, SIA just to make a point to you. Why not? There are people whom donates more than the RM100 to political parties of their choice.

So why cause them to hate you. The ones that are taking Airasia, more often than not, they are from the urban areas. You know where the votes go to in KL, PJ, Penang. I do not have the data that you have but I am very sure, they fly more than the people from Arau, for example.

So, sometimes one does not need to be that vocal. It helps.