Thursday, October 14, 2010

Can GLCs Raise RM454 billion Under ETP? II

Pemandu needs to do much better to convince Malaysians that GLCs will be able to stump up RM454 billion for ETP projects

I have on Monday questioned the Prime Minister and Pemandu on how the Malaysian GLCs will be able to raise RM454 billion for ETP projects when the listed GLC companies (excluding banks) have only got a market capitalisation of RM266 billion and shareholder funds of RM140 billion, as well as RM38.6 billion in debt. This is based on 17 largest listed GLCs on Bursa Malaysia including the G-20 companies monitored by the Putrajaya Committee on GLC High Performance (PCG) as well as listed Petronas subsidiaries.

Pemandu had issued a statement yesterday had claimed that my conclusion was flawed because I did not include non-listed GLCs. “Not all GLCs are listed and hence, the non-listed GLCs are not factored into the current market capitalisation. Key GLCs that are privately held today will be taken public over the next 10 years.”

I agree that non-listed GLCs were not included in my calculation because their financial information is not publicly available but the reason why the data from the 17 companies were sufficient is because they already are the largest Malaysian GLCs in this country, hence their being monitored directly by PCG.

However, the only largest unlisted GLCs of note are the Petronas group and the Felda plantation group. Petronas for example, has announced that they will invest approximately RM2 billion per annum over the next three years in domestic exploration, while Felda generated net profits of approximately RM1 billion per annum. The combined net profit for the 17 listed companies is only RM14.1 billion.

Hence even with the inclusion of non-listed GLCs, the Malaysian GLCs will be hard-pressed to invest RM50 billion per annum to meet the RM454 billion target over the next 8-9 years.

Under such circumstances, Pemandu will need to do much more to convince Malaysians that the figures projected are indeed viable, and the best way to so will be to provide a detailed outline of investments by individual GLCs on the 131 projects.

It is certainly not enough for Pemandu to just claim that “the market capitalisation of listed government-linked companies (GLCs) to grow in tandem with Bursa Malaysia’s growth rate” which is expected to be at a compound annual growth rate (CAGR) of 15%, where the Government “expect the market capitalisation of Bursa Malaysia to grow from RM1 trillion in 2010 to RM3.9 trillion by 2020”.

Firstly, Bursa Malaysia can grow very quickly with new sizeble listings such as Petronas, which may in itself nearly double Bursa's market capitalisation but it will not at the same time double the value of existing GLCs. Hence it is a fallacy for Pemandu to expect GLCs to grow at the same rate as Bursa's market capitalisation.

Secondly, the targets are once again set at a level well beyond the norm over the past decades with no explanations provided on the basis of such assumptions. Between 1991 to 2000, the market capitalisation doubled from US$56.7 billion to US$113.1 billion. It then increased further to US$286.2 billion or 153% by 2009. These numbers have yet to take into consideration the fact that the increase in overall market capitalisation is partly due to a 200% increase in the number of companies listed from 321 in 1991 to 959 in 2009. However, Pemandu is now expecting Bursa's market capitalisation to incresase by nearly 290% by the year 2020, well beyond our historical performance.

Pemandu needs to be credited for having spent substantial effort in identifying projects to be undertaken by the country's investors over the next 8-9 years. The effort is substantial and many of these projects have been discussed in depth. However, now that the projects have been identified, it is now important to tie them to the ground and ensure that these projects are digestable by our local companies, especially our GLCs. Otherwise, the risk of other unintended outcomes such as a self-induced debt crisis for the country as a result of a reckless increase in private debt securities, expected from RM270 billion in 2010 to RM880 billion in 2020.

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