A Remarkable Piece Of History In Corporate Malaysia
What a difference 10 years make to a person, its even more glaring for certain stocks. Perwaja is to be listed by end of August. yes, its roughly the same company as before.
Late 1993 - Dr. M asked Eric Chia to take charge of the ailing steel giant Perwaja. Said Chia: “I was shocked when Doc asked me to do it. I didn’t know anything about steel. But if the PM asks you to do something, how can you say no?”
1996 - Perwaja now seems to be insolvent. Finance Minister Anwar Ibrahim confirmed in parliament that the steelmaker had racked up debts of RM975 million under Chia’s stewardship. Unofficial numbers, based on figures reportedly derived from an earlier company audit, put the debt at closer to RM2.3 billion, while the opposition has claimed it may reach RM3.9 billion. Anwar told parliament, evidence of an apparently fraudulent transaction. During Chia’s tenure, RM76 million of Perwaja money was paid to a non-existent Hong Kong-based company named Frilsham Enterprises.
In June last year, the 74-year-old tycoon was acquitted in the Kuala Lumpur Sessions Court of committing criminal breach of trust 13 years ago. Judge Akhtar Tahir acquitted him of misappropriating RM76.4mil from Perwaja Rolling Mill and Development Sdn Bhd in his capacity as its managing director on Feb 19, 1994. The judge also acquitted Chia of an alternative charge of dishonestly disposing of Perwaja’s funds by entering into an agreement with NKK Corporation, Japan, and authorising the RM76.4mil to be paid into the account of Frilsham Enterprise Inc with the American Express Bank Ltd, Hong Kong.
Production was 21,000 tons per month when he took over; four years later it was 80,000. The local press reported in 1993 that Perwaja’s Trengganu operations were so healthy that “it will produce one million tons this year and it will have written off all its debts.” The company even expanded, with the opening of a second plant at Gurun in the Prime Minister’s home state of Kedah. But these good signs hid the fact that the company continued to suffer from operating problems, dubious contracts issued without any tendering, and lots of debt taken on to ride out earlier difficulties and finance expansion. Much of the leverage came from Japanese banks and trading companies, and was denominated in powerful yen.
Perwaja's alleged management irregularities
- Payment of US$27.1 million to a mysterious company in Hong Kong.
- Misuse of US$196 million loan.
- Purchase of parts not used by the company and of questionable quality.
- Contract to pay a local company almost RM200,000 a month for gardening, cleaning and vehicle maintenance.
- Awarding construction contracts worth RM529 million to Man Shoon Group of companies, controlled by a long time associate of Eric Chia without asking for competitive bids or referring the deals to Perwaja's tender committee.
- Contract to pay Tomen, a Japanese firm, commission at the rate of US$3 per metric ton of ore purchased when the typical commission internationally was about US$0.75 per ton.
- Engaging a Singaporean commodity trading firm to market Perwaja's direct-reduced products at a shipment price of US$112 per ton at a time when the quoted market price was US$150 per ton.
Yes, No, Maybe
Over the next couple of years, there were plenty of proposals by Maju to the government. British-based consultants, WS Atkins has suggested Perwaja be split into two parts - that is the Kemaman and Gurun plants - and that each plant be operated by different operators. Both plants are not short of suitors because of their good facilities. At one time, Malayawata Steel and Southern Steel were said to have indicated an interest in the Gurun plant.The Gurun plant is sought after because it is the only one in the region with facilities to manufacture structural steel used to erect buildings. It also has facilities to produce wire for the manufacturing sector. The Kemaman plant has also attracted buyers, even from Singapore, because of its strategic location. The plant is said to be ideal to produce billets for exports.
So, in actuality, it was not easy for Maju to finally get Perwaja. Apparently connections will only get you so far. Maju has a huge advantage over other bidders in that it has placed a RM120m deposit with Ministry of Finance and that it had been managing Perwaja since mid-1996. Unbelievably, there was even a proposal by some internal government whiz kid that they should package Perwaja together with Antara Steel in Johor and National Steel Corp (the steel company in the Philippines controlled by the Malaysian government) . A Swiss party had expressed interest in taking over all three steel mills. The proposal was basically to save Malaysian government from the sticky and thorny problem that is the NSC. The government wanted to solve a few problems in their steel portfolio in one fell swoop.
At its height, Perwaja was losing RM40 million a month. When Maju took over, its losses were trimmed to RM10 million a month. Now the losses are said to be less than RM3 million a month. Perwaja's predicament is shared by the steel industry as a whole. The economic crisis pulled the rug under the feet of the major players. Even established producers like the Lion Group is grappling with unresolved debts of RM10 billion. Perwaja, even back in December 1995, had accumulated losses and liabilities of RM2.9 billion and debts of several billion more. The government's involvement then, in the form of loans, capital and bank guarantees, was RM5 billion. Perwaja, which is grossly over-staffed, has 2,300 workers but only needs less than 1,000 (in the late 90s). It is only operating one shift due to the reduced demand. Maju is said to be proposing to reduce the workforce by 55 per cent but the government did not go for it.
Maju has submitted a plan to the MoF to reduce Perwaja's operational losses. The plan includes exporting the billets from Kemaman to neighouring countries and sourcing billets from steel manufacturers in the northern region for the Gurun plant to reduce transportation costs. Maju's plan also entails an upgrading of Perwaja's facilities to produce high quality billets and wire rods. Perwaja's most successful product is structural steel. The Gurun plant is one of the few in the region with the facility to produce structural steel. However, it faces stiff competition from imported structural steel coming in from Thailand.A sore point was that the government has paid RM5.68 billion in loans owed by Perwaja since 1998. The ACA has only managed to trace RM76.4 million.
Maju Worked Hard To Rejuvenate Perwaja
From 2001 to 2004, Maju Group basically dug in their heels to rejuvenate both plants under Perwaja. Thanks to a strong recovery in steel prices, Abu Sahid and his team basically knew it was time to cash out and reduce risk after slogging for over 9 years to get Perwaja this far. In November 2005 Kinsteel Bhd has forged a strategic alliance with Maju Holdings. both parties will manage Perwaja, according to a joint statement from the companies.
The deal involves Kinsteel acquiring 51% equity interest in Perwaja and 51% equity interest in Maju's Gurun assets, consisting of a bar and wire rod milling mill, beam and section mill, wire conditioning, nail processing and wire mesh factories with total annual capacity of 1.1Mt. Maju would retain 49% equity interests in Perwaja and the Gurun assets and acquire a substantial stake in Kinsteel.
The rest was a fairy tale as Kinsteel caught a brilliant wave alongside the meteoric rise in commodity and building materials' prices over the last 2 years. Now Kinsteel wants to list Perwaja Steel - yes, buy, merge, fix, then list ... in these kind of situation its best to be cautious, particularly when Kinsteel has been a brilliant performer over the last 2 years.
Perwaja's IPO@2.90Perwaja will be focusing on high-grade steel in the upstream segment while Kinsteel will move towards midstream product diversification. There will be significant planned capacity expansion in Perwaja's Direct-Reduced Iron production (from 1.5m t/y to 1.8m t/y) and Billet Production Capacity from 1.2m t/y to 2.5m t/y. Total capex will be around RM800m. Once complete, Perwaja will contribute around 50% of Kinsteel's group earning in 2009.
Kinsteel
Kin Kee Holdings 34% Maju Holdings 20.8%
Perwaja
Kinsteel 37.3%
ECSB 31.4%
If you hold Kinsteel shares, you can subscribe to Perwaja at RM2.23 or a 23% discount, at the ratio of 1 Perwaja share for every 4 Kinsteel. At RM2.90, Perwaja is priced at just 4x 2009 earnings. Domestic long steel companies trade at 4.2x 09 earnings while Kinsteel's at 5x 09 earnings. Compared to regional peers which trade at around 9x. The main reason for the huge discount is the lack of size and the probable restriction on exporting steel products by the government.
Perwaja is very likely to hit at least RM4.00 when it comes on, with RM4.20 being the top side. Hence if you have been successful in getting the IPO, good on you. If you are thinking of buying Perwaja in the secondary market, well only if you can get it below RM3.80 (fat hopes).
The best way to play this is actually to buy up big on Kinsteel (current price RM1.22) with a limit of RM1.26. As it is Kinsteel's stake in Perwaja will be diluted from 51% to 37% but Kinsteel still holds a 156m ICULs in Perwaja which will bring its stake in Perwaja back to 51% upon full conversion. Kinsteel can take its sweet time to convert as it has a 10 year tenure. The ICULs is a critical feature in all this because the gradual conversion will dilute Perwaja's earnings in the future. Hence its a safer bet to stay with Kinsteel given the similarity in valuations.
In fact, Kinsteel should trade at a premium to Perwaja given that it controls Perwaja plus it has pure Kinsteel operations, while Perwaja only has Perwaja's operations.
Corporate success is never easy - Maju has shown that a lot of hard work, some connections, some foresighted management, some long term planning, a great understanding of steel's business cycle, a lot of persuasion and proposals to the government, and a nice dose of luck ... can make you a great business entity.
p/s photo: Elanne Kong
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