Who gets the cake?

Malaysian Business, Apr 16, 2010 by James S


MALAYSIA'S latest development blueprint will create opportunities for both business and equity investors. We highlight sectors and stocks that may benefit from the implementation of the New Economic Model.

DESPITE THE MARKET'S MUTED response to the unveiling of the New Economic Model (NEM) on March 30, analysts are confident excitement will pick up as the plan gets underway.

Of particular interest to investors is the government's announcement on the need to increase public-private cooperation, the proposed development of some strategic locations in the Klang Valley, and the floatation of selected government-linked subsidiaries.

To recap, in promoting capital market development and public- private sector cooperation, the government will:

* Allow the Employees Provident Fund (EPF) to invest 10% of its assets overseas from 6% now;

* Allow the EPF to increase its direct investments in the real economy in sectors such as healthcare, commodities and property;

* Corporatise the Malaysian Industrial Development Authority (MIDA) and rename it Malaysian Investment Development Authority;

* Reiterate the need for government-linked companies (GLCs) to divest their non-core and non-competitive assets. For instance, it was announced that Khazanah Nasional Bhd would sell its controlling 32% stake in Pos Malaysia through a two-stage strategic divestment process. National oil company Petrolium Nasional Bhd (Petronas) has identified two sizeable subsidiaries to be listed in 2010;

* Tender out for development by the private sector several parcels of government land in Jalan Stonor, Jalan Ampang and Persiaran Lidcol in the Kuala Lumpur city centre;

* Develop jointly with the EPF 3,000 acres of land in Sungai Buloh into a new hub for the Klang Valley; and

* Consider corporatising and privatising Percetakan Nasional Malaysia, CTRM Aero Composites, Ninebio and Innobio.

All these have generated a buzz in the market, with analysts and investors trying to identify the beneficiaries that will get a boost from the NEM. Here are some likely sectors and companies to watch:

RICH PICKINGS FOR CONTRACTORS AND DEVELOPERS

Analysts reckon that the EPF will be getting more aggressive in making direct investments into the healthcare, commodities and property sectors in the future.

The property sector in particular could see continued interest given the Government's plans to tender out the parcels of land in Jalan Stonor, Jalan Ampang, and Jalan Lidcol and to develop 3,000 acres in Sungei Buloh into a new hub for the Klang Valley.

Of the latter, while there are no details about its exact location, it is widely speculated that the land will likely to be the one that belongs to the Rubber Research Institute (RRI, see chart), which is located behind the prime developments of Mutiara Damansara and Kota Damansara.

Malaysian Resources Corporation Bhd (MRCB) is one of the biggest beneficiaries of the scheme, apart from other local developers. This is by virtue of MRCB being the major development and construction arm of the EPF.

According to OSK Research, MRCB has submitted to the Government its development proposals for several pieces of Federal land, including the RRI land. The research house says MRCB has proposed to adopt an `integrated' development concept for the RRI land with a combination of commercial, residential properties, as well as a transport hub given that the final stop of the proposed new light rail transit (LRT) line will be located there.

Based on its agricultural land status with an estimated market value of RM3 per sq ft, total land cost value for the RRI land is estimated at RM392 million.

Following its recent rights issue, MRCB has allocated RM380 million for its future land acquisitions and development. As such, with the development set to be undertaken on a joint-venture basis, OSK Research believes that the potential costs are within MRCB's allocated budget.

Following the announcement of the NEM, the share price of MRCB has surged more than 15%, reflecting investors' confidence in the stock.

Other potential beneficiaries are SP Setia Bhd and Mah Sing Bhd. These companies have also indicated their interest in pockets of land and also the Sungai Buloh development project. Incidentally, these stocks also have the EPF as their shareholder (see table).

Analysts reckon that should these developments materialise, the property sector could be in for another round of re-rating.

HEALTHCARE TO BENEFIT IN THE LONG RUN

As for the EPF's potential direct investment in the healthcare sector, while some analysts believe this will benefit KPJ Health as a result of a re-rating of the sector, others think this development could turn out to be just a short-term treat.

This is because the EPF could enter the sector via a joint venture with other private hospitals. Should this be the case, the joint-venture hospitals could eat into KPJ's market.

Nonetheless, as healthcare ranks high on the list of sectors to be promoted by the Government, its prospects are still bright, says a local research analyst.

POS MALAYSIA: A DIRECT BENEFICIARY

One announcement that caught investors' attention was the divestment by government investment arm Khazanah Nasional of its 32% stake in Pos Malaysia via a two-stage process. The first stage involves a relook at its regulatory structure, usage of government- controlled land and welfare of its staff.

Khazanah had reportedly said it hoped to get the sale done by year-end. Tune Group and DRB-Hicom are speculated to be interested in the stake, although the former has since denied it.

The sale announcement is deemed positive by analysts, as this initiative will introduce new corporate developments and business models if the block of shares is disposed of to strategic investors who will broaden Pos Malaysia's revenue and service base in the long run.

The local postal industry faces a multitude of challenges as mailing volume continues to decline due to the migration of mailing products to digital forms amid increasing competition from other service providers such as advertising media players and hand mailers.

Nonetheless, the requirement was that the qualifying bids must be majority controlled by Malaysian parties.

Still, to sweeten the divestment process, it is widely anticipated that the Government could review the use of its government-controlled land so that Pos Malaysia would be able to unlock its asset value.

So far, it has been announced that postal rates for letters will be raised from July. Other postal tariffs could be reviewed should the company's margin compression persist.

Pos Malaysia's share price has appreciated more than 30% since the announcement of the proposed sale. With Khazanah's acquisition cost said to be below RM2 a share, this will make it profitable for it to divest at the current price level of around RM3.24.

NEW LISTING BOOST FOR THE MARKET

The following is a snapshot of government-linked companies - subsidiaries of Ministry of Finance Inc - that may likely be listed on the local bourse. Given the scarcity of such companies on Bursa Malaysia, these entrants will add to the breadth and depth of the local market.

MINISTRY OF FINANCE INC (MOF) SUBSIDIARIES

Percetakan Nasional Malaysia Bhd (PNMB) was established as the largest printing company in Malaysia. Formerly known as Jabatan Percetakan Negara, PNMB was incorporated in 1993. Wholly owned by MOF, it undertakes all the printing and presswork for the Government, the private sector and the general public.

It provides one-stop printing services, plastic card printing, paper- based ticketing, outdoor signage and electronic document management system, online ordering and door-to-door services. Most of its revenue is from the government sector, with a small contribution from the private sector.

Ninebio Sdn Bhd was incorporated in 2006 as a wholly owned company of MOF. It was formerly known as the National Institute for Natural Products, Vaccines and Biologicals. Ninebio focuses on research and development and the manufacture of vaccines and biologics for protection against life- threatening diseases.

Inno Biologics Sdn Bhd specialises in mammalian cell culture technology and operates the state-of-the-art cGMP facility for the production of bio- pharmaceuticals. The facility is built to comply with the European Medical Agency (EMEA) and United States Food and Drug Administration (FDA) regulatory requirements. It offers complete services from upstream to downstream operations for the development of therapeutic proteins such as cell line development, antibody services, process development, cGMP manufacturing, and contract research as well as training.

It has been picked by the largest drugs contract manufacturer in the world, the Boehringer Ingelheim group, to be its partner in Asia.

Composites Technology Research Malaysia (CTRM) was incorporated in 1990, with the MOF owning 92% and Petronas the remaining 8%. CTRM is entrusted with the strategic role of developing the aerospace and composites industries.

CTRM started operations with the assembly and manufacturing of the two- seater composites light aircraft, Eagle 150B. Today, CTRM is part of the global supply chain supplying composites aero structures for major commercial and military aircraft manufacturers in the world.

CTRM also provides engineering design services, composites assemblies, composites R&D, manufacturing of automotive composites structures and manufacturing of defence-related equipment, including the Tactical Unmanned Aerial Vehicle. Its order book as at end-2009 was RM8.5 billion.

PETRONAS SUBSIDIARIES

Petronas companies already listed on Bursa Malaysia are Petronas Dagangan Bhd, Petronas Gas Bhd, KLCC Property Holdings Bhd, and MISC Bhd. The national oil company also has a 32.8% stake in listed Bintulu Port Holdings Bhd.

The listings of Petronas Dagangan and Petronas Gas were done during the height of the country's privatisation wave in the 1990s and attracted a huge amount of institutional investor interest from locally and abroad.

As at the time of writing, Petronas has identified two business entities for listing. They are its petrochemical business and its heavy engineering arm, Malaysia Marine and Heavy Engineering (MMHE). The latter is a wholly owned subsidiary of MISC, which is 62.4% owned by Petronas.

MMHE registered revenues of over RM4 billion for the financial year ended March 31, 2009. The company is driven by three core businesses: engineering and construction services, marine conversion, and marine repair.

Petronas' petrochemical business registered a revenue of RM13 billion for the year ended March 31, 2009. Its product offering ranges from olefins and polyolefins to fertilisers, industrial and specialty chemicals.

Of the two, some analysts favour MMHE considering that it is contract- driven and dependent on the oil and gas (O&G) business cycle. They expect good growth in fabrication, with O&G exploration picking up. But while a listing may unlock MMHE's value, some analysts think the market may not give it a higher market price-to- earnings as compared to parent stock MISC.

As for Petronas' petrochemicals operations, some analysts say while the turnover base is big, margins in the business are low. This being the case, it may not be altogether a favoured pick.

Some analysts had hoped that Petronas would list its wholly owned Petronas Carigali and 90% owned Malaysia LNG. The former is the national oil company's exploration and production arm while the latter is involved in the management and operation of the liquefied natural gas (LNG) complex in Bintulu and marketing of LNG to overseas buyers.

TIMELY MOVE

Many research houses believe that a listing of the two subsidiaries would be timely given the current sustainable high oil prices.

It would also have a positive impact on the O&G sector, especially if done at premium valuations as this would open up opportunities for the market to re-rate the sector and lift the share prices of other listed O&G supporting companies.

As for the impact on the broad market, even as the new listings would add to market capitalisation, there is a risk that huge amounts of capital might be reshuffled from the existing portfolios of institutional investors to take up any large initial public offerings (IPOs) by these companies.

Should this be the case, all component stocks of the benchmark FBM-KLCI, especially the two smallest - RHB Capital and Nestle Malaysia - could face the risk of de-rating as index tracking funds would need to reshuffle their portfolios.

While the NEM would be good for the long-term development of the Malaysian equity market, there could be a short-term negative impact if the EPF invests more overseas and slows down its local investment and trading activities, which currently account for up to 50% of the trades in the local market on some days.

Others worry about the timing and execution of the NEM as the market has seen bold initiatives announced by the Government being bogged down by poor implementation and bureaucratic red tape.

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