The Malaysian Govt-Linked-Companies Experience - Malaysia Airports

The Bravura & Mis-steps

Some of our GLCs do well but many do poorly. Do we not have capable managers? Our spreadsheet analysis not credible enough? Execution problem? (Please read my blog on "execution risk"). I would like to run through the brief history of Malaysia Airports (MA), a GLC, and see where they'd gone wrong and what they did right. Khazanah Nasional Bhd owns 73% in the company. It is understood that getting MA in order is one of the Government investment arm's priorities.

KLIA started construction in 1995 and was completed in 1998 by the government, not by the people in management of MA. We needed the new airport. Cost came to RM10.7 billion and was borne by the government. The license to manage and operate KLIA was issued to MA in May 1998 for a period of 50 years. MA was listed in 1999. In its IPO prospectus, MA published the financial results from 1994-1998 (not including KLIA) as MA was already managing 19 airports in the country. The PAT: for 98 was RM341 million; for 97 was RM236 million; for 96 was RM357 million; for 95 was RM104 million; and for 94 was RM176 million. Pretty decent stuff.

Was it a question of timing or bad luck? The Asian financial implosion was pretty clear in 97/98, surely assumptions on air travel and business activity would be curtailed. Why was the F1 sepang circuit suddenly put under MA? Why did MA get involve in the management and operation of 1,740 hectare of oil palm on KLIA land?

The basic revenue streams for MA are simple: aeronautical - airport charges; and non-aeronautical - concession income, fees from parking facilities, sales revenue from retail outlets, rents/charges paid by other airlines and tenants. Its like running a property building, isn't it? If it stays that way, it is hard to go wrong.

Things went awry because assumptions on air traffic flow were way off. Other businesses were parked into MA (see above), making life hell for management of MA but cannot say "no" to Khazanah/MOF, right?! Did I mention the National Exhibition & Convention Center (NECC) also? This was apparently sold for RM145 million to recover cost incurred by MA.

The proposed sale of 30% MA to Schipol in 2003 would have been good but was called off. F1 circuit in Sepang was supposed to be sold off to Ministry of Finance for Rm389 million. Plus compensation for Senai airport would see RM70 million going to MA from the government. But wait, this is in 2003, all that is supposed to help MA pay for the outstanding concession fee of RM454 million to the government. Nothing happened - tai-chi negotiations...

These are so "unstrategic" and non-synergistic.

The restructuring of payments to government and sale of F1 circuit have been dragging on for so long. The numbers MA has to pay is RM856 million to the government as concession fee. The bloody F1 thingee is still in the air for RM390 million. Plus MA still has to pay lease rental charges for KLIA amounting to RM60 million per year (increasing at 4% annually), as well as 8% of KLIA's revenue. Under the terms of the concession agreement, MAHB is required to pay the Government RM1.3 billion for the KLIA concession in five instalments. But the lower-than-anticipated passenger movements at the international airport in its first few years of operations, coupled with the incentives given to the various airlines to lure them to KLIA, had dampened the airport operator's ability to strictly follow the payment schedule. That being the case, the balance payment of RM467.3 million will still be a strain on the company's cashflow.

That's why airport tax will rise by tomorrow, and lower airport tax will be levied on the Subang low-cost-carrier terminal, and I suppose some/part of the lease payments would be waived to compensate for MAS pulling out of some domestic routes (which MA is managing those airports). F1 circuit will probably absorbed by MOF in lieu of concession payments to the government. Maybe finally MA can come clean. Should be clearer skies for MA... finally.

Lessons From The Malaysia Airports' Experience:

1) management at MA seems to be powerless to counter "higher up" voices in terms of assets and the businesses they have to take up - we need to appoint capable people and then empower them to act, not pull the strings attched

2) just because it involves the government doesn't mean deals/payments/lease/agreements do not need to be resolved asap - in fact the government should set a leading example by honouring these agreements to boost the "good feelings" of doing business with government bodies. Things cannot go into tai-chi mode for a long time as parties involved get flustered and frustrated. Nobody likes to deal with that kind of business mentality. You don't want members of the business community to always think "Oh, well, its part of the cost of dealing with government bodies". That has to change

3) stop being a good mother - the government has to stop being a mother to all projects. GLCs have to be given the leeway to operate within their jurisdiction. When occassions arise, don't ask the richer son to give to the poorer son

4) improve business plans, projections, spreadsheet analysis and assumptions. Too many times, proposals have been kicked started on too-rosy projections with not enough hole-poking into assumptions. Don't just accept a biz plan and spreadsheet analysis just because the project was already okayed by "higher voice" - it will come and haunt us later. That's why Khazanah has to do so many "crisis management meetings" with GLCs, they step off the wrong foot in the first place. Do better at the initial stages, so that you have less to do later. Plus, when fundamentals change, we need GLCs to move fast enough to change business plan, or renegotiate contracts where possible - GLCs tend to move too slow

5) not just things coming from the top - we cannot have things being decreed from the top, set the GLCs free, don't ask them to absorb this, buy that, sell this and that. Let the GLCs set a proper business strategy for the business that they should focus on. Let each GLC be focused in what they do, not a mish-mash of stuff. Let them be accountable

6) when dealing with GLCs, make it more certain that parties involved know what's the likely outcome. There is so much uncertainty with MA for the past 3 years - will certain payments be waived, will taxes be increased, what will become of certain domestic airports, will they be able to sell the F1 circuit, etc... when it is difficult for independent investors to make a clean assessment of the prospects, dues, payments, terms of contract a company is involved in (because when it comes to GLCs, many things are FLUID).. then how do you expect to garner consistent institutional investor interest... no amount of international roadshows and showcasing will help to counter that

Execution Risk

NOT The Probable Amount Of Blood On Your Hands In Carrying Out An Execution

Speak to any foreign fund manager on buying or selling Malaysian stocks, you will inevitably come across the term "execution risk". As mentioned above, it is not the penalty for getting caught with drugs in Malaysia, Singapore or Bali. This terminology is particularly useful and important a consideration with Malaysian companies. Before anyone jumps the gun here, this is not a "case-against-bumiputras" OK!

It is important in Malaysia because a large number of important and lucrative contracts are awarded, or they managed to obtain these "projects/assets" via strong networking skills, to "fresh companies" or companies with little known expertise in the respective industries. Hence therein lies the risk, the risk of not being able to carry out the terms of the contract properly or the risk of not being able to run the "project" in a professional manner. Execution risk also includes the ability (or lack of) to capture opportunities on hand, maximising potential returns, and scaling up operations when the conditions suit. Execution risk also involves the ability (or lack of) to engineer the company to the next level when the opportunity arise. There are some executives who can manage a company with RM50 million turnover but will be in over his head when turnover rises to RM300 million or more. Some are so aware of "execution risk" that the moment they get awarded the contract/project, they quickly farm it out to other companies who know how to do the job better.

To fund managers, the inherent execution risk may cause them to be averse to certain groups of companies or corporate personalities. Hence, their track records are worth monitoring constantly. Unproven companies with seemingly good contracts or projects will have their valuation greatly reduced. However, once they have shown good progress and have a couple of notches on their corporate black belt, foreign funds are more comfortable with them.

An example of execution risk reduction success is the YTL Group/Power. If one were to look at the forays of YTL Group/Power 15 years ago, not many institutional fund managers would give the company a second look. However, the ability to move into new areas (with little expertise) and accomplish well will gain enormous goodwill for the company concerned. Now, whenever YTL Power proposes a new bond offering or new project in a new country, nobody will even bat an eyelid of caution as investors are already comfortable that the company has done their homework and should be able to execute the project successfully. Bond offerings get snapped up without too much querying and at preferential rates to the company.

I would like to highlight the "execution risk" inherent with a few important group of companies - whether the perception is rising or falling. This will be a useful exercise to do constantly with important companies as the "investing risk premium" says a lot about their prospects and ability to attract strong institutional support.

Scomi - Most recent "project", using Habib Corporation to buy tugboats and barges from Singapore's Chuan Hup Holdings for RM1.3 billion. Execution risk here is minimal as Chuan Hup is a solidly managed company. Chuan Hup would still be in the picture as they want to do the deal to get access to Scomi's range of businesses in the region. Scomi Engineering (old name Bell & Order) is another counter being used for other businesses. The thinking behind all that is to use a number of listed vehicles to allow for management to stay focused on their respective companies. Scomi Group itself is getting very big after having completed the acquisition of a 70.9% stake in Oiltools International Ltd. Hence the depth of management team is crucial to Scomi Group.

Scomi Group Bhd has appointed four senior vice presidents to ensure a smooth transition and integration of its new integrated businesses in October 2004. Ridzuan Ali, a former group chief operating officer of Peremba Construction Sdn Bhd, will oversee the group’s oil and gas business operations in Malaysia. Abang Abdul Aziz, former acting head of Shell's production liaison team, will be responsible for business development and expansion plans in Asia excluding China, Malaysia and Indonesia. Alan Steedman will oversee the worldwide drilling waste management business of Scomi, while Carl Mitchell is the senior VP for north and south America. Steedman and Mitchell have 24 years and 28 years of experience respectively in the oil and gas industry. More senior appointments will be added with the absorption of Oiltools. Good "divide & conquer" strategy.

The report card for Scomi reads well. So far, so good. Management has been professional and deal making ability impeccable. Actual execution, while still too early to tell, the early signs are good. Execution Risk Report Card 2004: C , 2005: B, 2006: A-.

Ranhill - Ranhill did well as a construction unit and reaped the benefits in the days when the government was doling out huge infrastructure projects. That dried up a couple of years ago. Last 2 years saw Ranhill doing damage control on their US$239 million oil processing facility in Sudan (engineering, procurement and construction). However, thankfully Ranhill Utilities has been doing much better with its water concession project in Johor. The other notable new star is Ranhill Power with its 120MW plant in Sabah. The dangerous part to all this is that Ranhill is still going further ahead to do a RM3.5 billion deal from Libyan government to build a new township there. African ventures for Malaysian companies have not fared well so far. Ranhill also has its fingers in oil & gas with its involvement in the Citarum field (Indonesia) - based on the reserves, Macquarie Research says that it could be worth between RM0.66 to RM14.41 per share to Ranhill (Ranhill's most recently traded price RM1.48).

The report card for Ranhill will say stay away from African ventures. If ever there was a case for Ranhill to spin off the utilities/power/oil & gas into a seperate vehicle, this is it! By doing that, the spinoff vehicle would get very good valuation than by being under Ranhill itself. The parent company can still get access to the cash flow - easiest case for merchant bankers. Ranhill overseas ventures (African continent) 2005: D , 2006: D-. Ranhill's power, utilities and oil & gas ventures 2005: B , 2006: B+.

MMC/Syed Mokhtar Al-Bukhary - Syed Mokhtar has acquired a strategic stake in DRB-Hicom. His 51.74% stake in Johor Port injected into MMC, same for Port of Tanjung Pelepas. MMC proposed to take its 74.99-per cent owned MMC Engineering Group Bhd private in January 2003. Syed injected the 2,400 MW Tanjung Bin power plant into Malakoff for RM840 million cash. His 70% stake in Bank Mualamat is probably to be injected into Bank Islam. Next, his Senai assets, including the Senai airport. Now he is negotiating to buy an additional 3,000 acres of land in Senai from Lee Rubber before injecting the whole Senai play into one of these 4 vehicles - DRB-Hicom, MMC, Tronoh or Tradewinds. (I tend to favour Tronoh).

Most institutional fund managers avoid Syed Mokhtar's counters. Its a lot of wheeling and dealing. On closer examination, the deals are not all hot air, rumour has it that he has strong Middle East financial backers (i.e. he does not own all the assets reported). His deal making ability has been fantastic. Initially many regarded him as a market maverick, but there is more behind the deals - its shrewd and he keeps the numbers ticking along. He dares to take on large, difficult and risky projects (esp the ports around Johor) and comes out better-than-alive-and-kicking each time. Operation wise, very much a hands-off personality. Report card for Syed Mokhtar - 2004: C+, 2005: B, 2006: B+.

Ananda Krishnan - What can you say about the man, much more than just a successful oil trader. The main thing he did very well, hire well. As you get more success along the way, get a small but reliable finance team to pore through the numbers religiously at every juncture to ensure that expansion plans and progression plans are intact. Hire well again, reward the top guys well. Hob-nob and make good use of contacts and network like crazy but only with the really important people. Just look at the achievements via Tanjong, Astro, Powertek and Maxis. His companies always manage to eke out the most returns from their investments - ROE is so important, makes me feel that that is their only KPI (key performance indicator). The only iffy one so far is that satelite thing still waiting to take off, but it should sometime soon. Report Card: A+ throughout. Star pupil.

Goverment Linked Corporations - That's where "execution risk" usually resides when foreign fund talk about GLCs. At least Azman Mokhtar knows it and have given them KPIs to work with. Its pointless to keep giving "big things" to GLCs if they have trouble carrying them to fruition in the most effective manner. The report card is still out while waiting for the new regime to work its magic. I am hopeful, but results have to show soon. If the results are mediocre, how the key leaders are treated will be crucial. Reward those who produce, replace those who don't, GLCs are not retirement homes or some elaborate pension scheme for the priviledged.

Petra Perdana/Sapura Crest - Both were caught up in the oil & gas whirlwind last year. Share prices have climbed through the roof but both have shown little in terms of getting the a slice of the growing oil & gas contracts on offered. Management seems to be lacking in depth and is failing to engineer and leverage from a position of strength to grow exponentially over the last 2 years. Report card for both - 2004: C, 2005: D-, 2006: D.

Singapore's Best Motivator - Malaysia's GLCs

The horrendous mis-steps by a few GLCs exemplify what is sorely lacking in our top management. We must be doing something wrong, either the incentives are not lucrative enough, or the punishment meted out is nothing to shout about, or our top people are not really that good professionally - or all of the above. This is a fair statement, I believe. Rather than cringe at the message, please do something constructive with the experience, if the ones that matter are reading this.

SIA makes good profits in their current FY, compare that to MAS. Telekom is ambling along, about 10 years behind SingTel in overseas ventures. Singapore produces ZERO number of cars, their COEs makes more money than Proton. Singapore has almost all but closed out their steel operations, one can import them, cheaper than the price set by the government in Malaysia to support the local steelmakers.

If we were to generalise, Malaysians are great dreamers, strategists... but poor executors. The MSC, brilliant, the execution could be a lot better. Why the gap? Mainly because failing is not a very big thing in Malaysian corporate world. There has always been bailouts. Your professional management career is not terminated, you still get cushy job placements elsewhere. You do not really need solid proven experience to rise to the top. Is it any wonder then that we fail so often.

In the meeting rooms of top Singapore companies, they probably don't need Stephen Covey material to motivate them. Their mantra would be "Look, if you don't want to be like the Malaysian GLCs, you better buck up". That probably will scare the be-jeezzzuss out of the kiasu Sinagporeans.

The corporate environment is not a place to make money just because you know somebody. You have to prove yourself. As long as we keep nominating top positions to priviledged people and not to capable ones, we are doomed to repeat the same mistakes. Again, .... and again.... and again...