Petronas To Put Bursa Back On The Radar

Petronas is Malaysia's premier state-owned company, but as a publicly owned company it could be worth more than $200 billion and would dominate the country's stockmarket.

According to Deutsche Bank, Petronas could potentially make up 40% of Malaysia's weighting in the MSCI Asia ex-Japan index if it was to list in its entirety (MSCI is a free float-adjusted market capitalisation index that is designed to measure the equity market performance of countries in the region).

Based on a price-to-earnings ratio of 15 times, Petronas could be worth up to $207 billion, according to Investment and Pensions Europe. This would make Malaysia's largest state-owned company close to the same size as the country's total equity market capitalisation today, almost doubling the total market size to $464 billion from $257 billion.

Publicly listing more of Petronas's operations, say analysts and market participants, is critical to stimulating greater growth in the markets. According to Deutsche, if the government were to release a proposed 25% of its equity share, it could potentially bring Malaysia's weighting back on par with Singapore, which currently accounts for 6.6% of the MSCI Asia ex-Japan index. It would also put the country ahead of its biggest regional competitors, such as Indonesia, Thailand and the Philippines. Malaysia currently holds a weighting of 3.8%, but the addition of more Petronas shares to the market could raise this to 6.4%.

To put this into another context, if the government chose to only release a further 20% of its equity interest in the company's downstream operations, such as its LNG [liquid natural gas] and refinery businesses, it could result in an increase to $191 billion from $79 billion of Malaysia's MSCI weighting.

Petronas's total listed assets on Bursa Malaysia currently have a total market capitalisation of $5.62 billion. Within the holdings group, the companies that have been listed are MISC, Petronas Dagangan, Petronas Gas and KLCC Property Holdings.

In April this year, MISC, which is a key subsidiary and specialist in global marine transportation and logistics services, hired J.P. Morgan, Maybank and Credit Suisse for the listing of its marine engineering unit Malaysia Marine and Heavy Engineering (MMHE). Its IPO is now scheduled to take place in September. This follows a $1.5 billion rights issue for MISC in February, arranged by RHB Capital. A market capitalisation of about M$7 billion ($2.2 billion) is expected for MMHE, assuming a net profit of M$350 million and the company being listed at a price-to-earnings ratio of 21 times, according to analysts.

The announcement to list MMHE came as a surprise to some analysts. OSK Research, for example, had expected Petronas to list parts of its petrochemicals business instead, specifically Petronas Carigali and Malaysia LNG. OSK Research had calculated that the market capitalisation of Petronas's petrochemicals companies would be about M$50 billion ($15.1 billion). This is based on a 2009 net profit of M$5 billion for these two companies and the assumption that the shares would be listed at a price-to-earnings ratio of 10 times. Within the petrochemicals sector, a M$50 billion market cap dwarfs the local peers.

While the listing of MMHE is good news, from the analysts' perspective there is much more value for Petronas and the market if it was to list its more profitable downstream operations, such as the petrochemicals, LNG and refinery businesses. A partial listing of this nature would push Malaysia's Asia ex-Japan MSCI market capitalisation to $123 billion and the country's weighting to 5.95%.

Investors and analysts are pushing for such a listing because a move to further publicly list parts of its operations could result in other Malaysia-based companies following suit.

Staying competitive

According to Dealogic figures, the Malaysian primary equity market reached its zenith in 2002 when it raised $1.65 billion. By 2008, this volume had dropped drastically to $174 million. If you look at other signposts, such as foreign direct investment (FDI), the nation is falling behind its peers. AmResearch estimates that 35.4% of FDI flows into Southeast Asia went to Malaysia in 1980, while less than 1% went to Vietnam. By 2008, both countries attracted about $8 billion in FDI each.

However, with the roll-out of the so-called New Economic Model and a commitment by Malaysian Prime Minister Najib Tun Razak to lift the country from a middle-income to a high-income economy by 2020, the markets appear to be on the mend.

Many of the government incentives are aimed at attracting FDI. Previously, if a company was to list on the Bursa Malaysia, only a maximum of 40% could be held by foreign investors. Now, in certain sectors, foreigners can own as much as 70%. Plus, non-Malaysian investors can own 100% of a commercial property asset, if it is bought from a non-Bumiputra controlled entity.

Simply, reforms like this not only expand the investor pool but also potentially attract a more seasoned investor-base into the country.

This article was first published in the June 2010 issue of FinanceAsia magazine.

Great Malaysian CEOs Part 2

Well, I got a lot of feedback on the CEO issue following my mentioning of Nazir Razak. There have been naysayers who reminded me that the family name and connections played a significant part. I have to say that there are plenty of people who got to the top with just connections and by having the right family name - but the crux is what do you with it.

I have extended the list, its not just GLCs CEOs, but after surveying the CEOs of listed companies in the country, these 4 would be part of the top 5. Hassan Merican would have easily made the list as well but let's just look at the current crop.

Datuk Shamsul Azhar Abbas

was formerly the President / Chief Executive Officer of MISC Berhad and just recently appointed to the top post of Petronas. I can tell you that a lot of observers breathed a sigh of deep relief when his appointment was confirmed as the stewardship of Petronas assets was at stake.

Shamsul holds a degree in Political Science from Science University of Malaysia, a Masters of Science Degree (MSc.) in Energy Management from University of Pennsylvania, USA and a Technical Diploma in Petroleum Economics from Institute Francaise du Petrole (IFP), France. He joined PETRONAS in 1975 and has held various senior management positions in PETRONAS including Vice President, Petrochemical Business, Vice President, Oil Business, Vice President, Exploration and Production Business and Vice President, Logistics & Maritime Business. On 1 July 2004, he was appointed as the Managing Director/Chief Executive Officer of MISC.

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Jamaludin Bin Ibrahim

Jamaludin Ibrahim joined Axiata Group Berhad (formerly known as TM International Berhad) on March 2008 as the President and Group Chief Executive Officer. He is also a board member of Axiata Group. Prior to that, Jamaludin was with Maxis Communications Berhad, which he joined in 1997 and was appointed Chief Operating Officer in the same year, and Chief Executive Officer in 1998. In 2006, he was redesignated the Group Chief Executive Officer to reflect Maxis’ international footprint. He retired from Maxis in July 2007 but remained as a Board member till February 2008.

During Jamaludin’s decade of leadership with Maxis, the company’s revenue grew more than twenty-fold to about USD2.3 billion, net profit grew to about USD600 million and market capitalisation swelled to more than USD11 billion in 2007 (before the privatisation).

Before joining Maxis, he spent 16 years in the IT Industry. He was Managing Director and CEO of Digital Equipment Malaysia (a Malaysian branch of Digital Equipment, then the second largest IT Company worldwide) from 1993 to 1997. Jamaludin also spent 12 years in IBM (1981-93), the first five years as Systems Engineer and then in various positions in Sales, Marketing Support and Management. Prior to IBM, he was a lecturer in Quantitative Methods at California State University, United States in 1980. Jamaludin graduated from California State University in 1978 with a B.Sc. in Business Administration and minor in Mathematics. He obtained his MBA from Portland State University, Oregon in 1980.

Jamaludin is the Chairman of Celcom Axiata Berhad (formerly known as Celcom (Malaysia) Berhad), the second largest mobile company in Malaysia, and sits on the board of PT XL Axiata Tbk (XL) Indonesia, MobileOne Ltd (M1) Singapore, as well as one local university. In 2008, Jamaludin was appointed board member of the GSMA (the global World GSM Association). He was also appointed board member of Multimedia Development Corporation Malaysia (MDeC) in 2009.

Jamaludin earned the accolade of Malaysia’s ‘CEO of the Year’ 2000 by American Express & Business Times and was inducted into the Hall of Fame for ‘Services to the Mobile Telecommunications Industry’ by Asian Mobile News in 2004. He was also named Asian Mobile Operator CEO of the Year by Asian Mobile News Awards 2007.

Amir Hamzah Bin Azizan was appointed President/Chief Executive Officer (CEO) and Director of MISC Berhad on 1 January 2009. He graduated with a Bachelor of Science Degree in Management (majoring in Finance and Economics) from Syracuse University, New York. He had also attended the Stanford Executive Programme at Stanford University, USA and the Corporate Finance Evening Programme at the London Business School, United Kingdom.

Amir Hamzah joined MISC in 2000 and was the Group's General Manager, Corporate Planning Services. Subsequently in 2004 he was the Regional Business Director (Europe, Americas, Africa and FSU) of MISC based in London, UK before being appointed President / CEO, AET Tanker Holdings Sdn Bhd on 1 April 2005.

Prior to joining MISC, he served the Shell Group of Companies for ten years in various capacities including Head of Financial Services and Manager, Planning & Support at Sarawak Shell Berhad, Marketing Credit Accountant at Shell Singapore Ptd Ltd, Internal Auditor at Shell Eastern Petroleum Pte Ltd and Senior Treasury Advisor at Shell International Ltd, London. Amir Hamzah is Chairman of the Boards of major subsidiaries of MISC Berhad, among which includes Malaysia Marine and Heavy Engineering Sdn Bhd, MISC Integrated Logistics Sdn Bhd, Malaysian Maritime Academy Sdn Bhd and MISC Agencies Sdn Bhd.

Amir Hamzah is also Deputy Chairman, AET Tanker Holdings Sdn Bhd. He is also Director of Bintulu Port Holdings Berhad and NCB Holdings Berhad. Amir Hamzah is Board member of UK P&I Club, PETRONAS Maritime Services Sdn Bhd, as well as Executive Committee member of INTERTANKO. He is also council member of the American Bureau of Shipping, and General Committee Member of Bureau Veritas. He is also a member of Management Committee of PETRONAS.mir Hamzah bin Azizan was appointed as the President / Chief Executive Officer of MISC Berhad on 1 January 2009.





Raised in a fishing village, Chia Song Kun graduated from University Malaya with a B Sc (Hon) degree majoring in Mathematics and worked as a lecturer with Mara Institute of Technology before venturing into private education business and co-founded Inti College (now Inti Universal Holdings Berhad). Having been there and done that, Chia decided to return to his roots - the fishery business, and together with his family members, started QL Group.

Chia nurtured and transformed the business into a diversified agro-based Group with interests in processing of marine products, livestock farming and palm-based activities. Adopting a "win-win" approach, QL Group has now become the largest distributor of animal feed and surimi-based products manufacturer in Malaysia, the largest producer of surimi in Asia, as well as a leading poultry egg producer in Malaysia. Its products could also be found in Japan, Korea, Singapore, Brunei, Australia, China, Sri Lanka and Vietnam. Under his visionary leadership, QL was listed on Bursa Malaysia in 2000 and since then, the Group recorded a healthy turnover and net profit 5-year CAGR of 18% pa and 22% pa respectively. Today, QL Group has sales of more than RM1.4 billion, employing more than 3,000 employees.

Under the leadership of Mr Chia Song Kun, QL has developed a business model that has the following sustainability:
• Stable, broad-based and ample opportunity for growth.
• All 3 core activities are based on Malaysian agriculture resources.
• Food-based business is resilient and has full of value adding and export potential.
• Well aligned with government’s initiatives to grow the fisheries & agriculture industry.
• Able to enjoy tax incentives that are available under the agricultural & fisheries sectors.

Kopi-O Satu ... Let's Tembak Angin

Sometimes when you have your local coffee at the kopi tiams (or as we now know them as Old Town, Pappa Rich ... hmmm ... there should be a new chain call Very Old Town or even Ancient Town soon, or how about Mommie Dearest, Who's Your Real Daddy Kopi-tiam..). But I digress. Sometimes even you try to engage in coffee shop talk, the topics aren't interesting enough. Here are my views on a couple of business issues which should be sufficient fodder for those lazy afternoons:

- Petronas Bashing:
What were their motives? Its already proven to be one of the best run international companies with Malaysian management. Keeping in mind that the many frivolous projects they threw money at, were not really management's decision to make in the first place. Most were basically stuffed down their throats.

The one quibble some had about Petronas was the philharmonic concert hall - some thinking its frivolous as well. Let me tell you that that was much needed. No major city or capital can do without a world class concert hall. Those who say that it was a snooty thing do not see the bigger picture. Its not just esteem or pride, its how we place the importance of having great/grand concerts with world class acoustics and a brilliant setting. Its not a high brow thing, thats like saying people who send their children to study the piano or violin are wasting their time. Its not a matter of trying to distill the local culture with Western culture, its bringing great artistes to our shores. You try to aspire to global best standards.

Children see, they think its an option. Imagine kids in Medan, there are probably no such concert halls, hence none of the top classical acts get to perform there. The kids are not exposed, they will never aspire to further their boundaries. They are limiting their imagination because they did not see. Kids who saw know its a reality, and they may do something like that if they like it enough or are talented enough. That's why the concert hall is a must.

The other bashing involves asking Petronas to open their accounts. Why is that necessary? Why wasn't Khazanah also asked to the same? Although I agree that Petronas can show more figures, but why were they singled out. Khazanah is a prime example as well. This led me to believe the attacks were more to discredit management and do a "management change of guard". Seriously folks, don't think of tampering with Petronas or try to have ideas on how to "milk or divert" funds to pet projects. Don't do that. Petronas has to remain as "independently and professionally managed" as possible as their annual dividends to the government is what is keeping many things afloat. Don't play with things that cannot afford to go wrong.

- Listing FELDA:
NO! Think of why Felda was set up in the first lace. You cannot be thinking of selling Felda shares to the public now, its reprehensible. Its like the Malay reserve plots of land in Kampung Baru, what do you think about gathering them as one, corporatising them and selling shares to the public and foreign institutions??? It defeats the very essence of the asset and why they were set up in the first place.

Unless you are thinking of disbanding Felda altogether, then SELL 100%, and NEVER set up another Felda thing again. Then you can list. Anything else is just greed over substance.


p/s photos: Linda Onn

The M'sian X-Files - Intricacies Of The New FBM KLCI

There is a lot of new information that one can get on the new index, which will help us to understand the index and the markets better. It will also help to get a better grasp as to the "integrity of the FBM KLCI" when it rises and falls.

a) Its just 30 counters instead of the old KLCI which had 100 counters.

b) The new index addresses issues such as liquidity and free float, and let's face it funds in general are really looking at just the top 30... heck throw in another 20 stocks and that's their universe.

c) There is a good chance that the 30 stocks will start to be traded at a premium to the rest as these are the must haves for all indexed funds, by all the big and small local funds, and by most of the foreign fund managers managing Asian portfolio so as to not be under performing the Asian benchmarks.

d) Having said that, part of the rise in the FBM KLCI over the last 2 weeks may be attributed to some of these sustained 'enforced buying' activity rather than by genuine equity players.

e) The new index is a skewed index. Banks and plantations alone have a total weighting of 55%. If you have banks, plantations and telco = 63%. If you add banks, plantations, power, gaming and telco = 85%. So, technically a fund manager need only look seriously at these FIVE SECTORS alone to do well, forget about the rest.

f) The new index will also affect how research houses form their analyst teams. They must cover the 5 sectors, there are 9 sector that are not covered by the new index. It is very likely that analysts in the following sectors better start covering a more important sector in order to stay relevant. The following are the 9 sectors that are deemed as "irrelevant", "need not exist", "unimportant to the Malaysian economy", "unnecessary to look at in order to gauge the overall health of the economy": technology, transportation, property, timber, insurance, construction, building materials, hotels and industrial products. Go figure!

g) The new index will make it that much "easier" for the index to be controlled - conspiracy theorists will agree with me whole-heartedly that this is to allow PNB-EPF-MOF-EPU to control the index better. So, the next time we see a major market correction, we may be able to withstand it better with the new index as all it takes is to mop up the 30 stocks ... even though those stocks outside of the top 30 may be seeing their share prices tumbling like a rock. Managed perception more important la... than real effects to the economy. Hey, like that, we may never ever see a major correction in the FMB KLCI... ever... especially if we keep launching new big funds to mop these buggers up. But I am only guessing here.

h) Now let's consider the sin stocks, gaming and tobacco, they account for 12% of the new index. This is an important consideration as most of the big local funds will not be touching these stocks. Can you "not be in control of the 12% of the index" and still manage funds that is compared to the FBM KLCI benchmark? If these 12% of the new index starts a bull run on its own, most of the local funds will be under performing the new index. Can you all see a danger here??? Staring at you in the face!!! The danger is ... if there ever occurs a situation where you get the gaming and tobacco stocks to be in a strong bull run outperforming the rest of the new indexed stocks ... could we safely say that the EPU-MOF will not be strong-armed or "influenced" by certain parties to "whack down the sin stocks" with excessive punitive measures ( additional gaming and duties above and beyond what is normally expected in a financial year)???

g) If you take Khazanah, Petronas and PNB as the investing triumvirate ... the 3 already control 12 out of the 30 stocks in FBM KLCI. If you are a nasty anti-government critic, you have enough loose thoughts to take this factor to the next level. I am not saying its a negative or a positive, but its a fact that is worth remembering. Be careful, as the greater the influence one has, the greater the responsibility to be prudent, transparent and professional.

h) Though most fund managers will want to stick to the FBM 100 as the benchmark for their performance, it will not be so easy. The drivel, the propaganda and focus have all been set to make FBM KLCI the index to watch, and because it was kinda close to the level where the old KLCI was, most will tend to take to this new index. Its much harder if you switch from a 1,100 index level to a 9,500 one ... kudos to the planners.

i) Of course detractors will point to the fact that the venerated Dow Jones Industrial Index is only made up of 30 stocks, and is an often quoted barometer, even though most professional funds benchmark their performance to the broader S&P 500. The big difference is that it will be a hundred times easier to try to "manipulate" the FBM KLCI than the Dow Jones Industrial Index. Actually, pick just any two stocks in the Dow Jones, I am VERY SURE the market cap of any two stocks will be bigger than total market cap of ALL stocks listed on Bursa - in fact just any ONE stock in the top 10 of DJIA will be enough to cover the entire market cap of Bursa. Not to belittle FBM KLCI but to put things in perspective.

Can I have my Datukship now??!! (yea, I don't really need one or want one... but I want to get on and off my plane faster la...).


p/s photos: Yukie Nakama

Petronas Raises Huge Bond Issue

Finance Asia: Petronas (Petroliam Nasional Bhd) has upped the stakes for Asian borrowers in the international capital markets with a $4.5 billion two-tranche deal, split between 10-year conventional notes and five-year sukuk certificates.

It was the second largest international issue from an Asian (ex-Japan) borrower since Hutchison Whampoa's $5 billion deal in 2003, and the sukuk tranche matched the biggest ever Islamic bond-like issue by Dubai Ports in 2007.

The 144A transaction attracted huge demand from investors worldwide, with an order book amounting to nearly $20 billion, and more than 500 investors receiving allocations by yesterday afternoon. It was priced late on Wednesday, New York time.

The $3 billion 10-year notes pay a semi-annual coupon of 5.25% and were re-offered at 99.447 to yield 5.322% to a maturity date of August 12, 2019. That translated into a spread of 162.5bp over the yield of the 10-year US Treasury benchmark bond. The issuing vehicle was Petronas Capital Ltd, guaranteed by Petronas.The $1.5 billion sukuk was issued (by Petronas Global Sukuk Ltd and also guaranteed by the parent) at the same 162.5bp spread over the five-year US Treasury note, pays a coupon of 4.25%, and was re-offered to investors at 99.871 to yield 4.278% to a maturity date of August 12, 2014. According to the structure of the sukuk al-Ijara certificates, wholly-owned subsidiaries of Petronas will sell sukuk assets to the Petronas Global Sukuk SPV, which will buy those assets from the proceeds of the sale of the certificates and then lease them to Petronas, which will pay out so-called rental proceeds. It is, by now, a well-established sale-lease back arrangement and the most common form of sukuk structure.

Holders of both tranches will be able to redeem their bonds or certificates at par if the Malaysian government reduces its holding in Petronas below 51% or in the event of a debt cross-default of more than $100 million. Initial price guidance last week had centred around 175bp (plus or minus an eighth of a percentage point) over the respective US Treasury yields for both tranches. According to sources familiar with the transaction, most investors were cash buyers, although there had been some switching out of existing illiquid Petronas bonds.

Yet, those rarely traded issues provided the benchmarks for pricing the new deal. A sometimes active Petronas 2022-dated bond was bid at 160bp over the US Treasury yield and the company's 2015 issue was nominally bid at 165bp shortly before the launch of the new deal. But perhaps more relevant comparisons were found from recent bonds issued by oil and gas companies elsewhere, such as ConocoPhillips (rated A1/A) which was trading at 120bp over US Treasuries.

Importantly, Petronas had scarcity value and was propelled by a tremendous rally in Asian credit markets, which has seen average investment grade spreads tighten from over 800bp in October 2008 to around 330bp. Both tranches are rated A1 by Moody's and two notches lower by Standard and Poor's at A-, and are subject to English law. The joint bookrunners, Citi, CIMB and Morgan Stanley had set out with a minimum $2.5 billion deal size and arranged extensive roadshows with Petronas officials, starting in Kuala Lumpur, Hong Kong, Singapore and London last week, Dubai and Abu Dhabi at the weekend and ending in the US on Wednesday.

Asian investors were the main buyers of the sukuk, taking 47% and Malaysian accounts took an additional 13%. The rest was split 27% to Europe, 7% to the Middle East and just 6% to the US, which seems to continue to struggle with anything that has an Islamic label. US investors were more enthusiastic about the 10-year conventional notes, buying 25% of them, while 39% was placed in Asia, 4% in Malaysia, 31% in Europe and 1% in the Middle East. Asset managers were the biggest buyers of both, taking 40% and 61% of the five-year and 10-year tranches respectively. Commercial and private banks were allocated a combined 46% of the sukuk, and the balance of the conventional paper was evenly distributed among banks, insurance companies and pension funds.

In after-market trading yesterday, both new issue tranches were 5bp to 7bp weaker in line with generally softer credit markets. Petronas is 100% owned by the Malaysian government and has operations that span upstream oil and gas exploration and production, and downstream oil refining, marketing and distribution of petroleum products. The company reports directly to the prime minister and has exclusive control over Malaysia's hydrocarbon basins and is an integral part of the government's energy policy and other spending and investment plans.

According to a July 28 report by S&P, Petronas has high capital expenditure requirements, but its liquidity is strong and largely denominated in ringgit. The company's rating is "highly influenced" by the sovereign's performance "in view of the integral link with the government and the company's critical role in managing the country's oil and gas infrastructure and implementing the national energy policy", it said. Crude oil prices have risen by 61% this year due to expectations about a global economic recovery.



p/s photo: Jessica Michibata