More M&As in PNB’s stable?

I am very much in favor of the private sector doing business, they simply know best how to do it. However, I have no problem with the way PNB tries to buy more shares of SP Setia, the share price came down, PNB offered to buy shares at a premium to that low price (RM 3.90), management immediately responded that the price was too low (it had often traded above RM 4.00 before, but during better market conditions), PNB does not threaten with delisting, and an independent adviser will be called in to give his opinion.

In the article below other potential candidates on PNB's target list are named.


This article appeared in The Edge Financial Daily, October 3, 2011.

Written by Isabelle Francis.   

After its takeover bid for S P Setia Bhd, speculation is rife that Permodalan Nasional Bhd (PNB) may be eyeing its other holdings, particularly against the backdrop of a softening equity market.
PNB said the move for S P Setia is to turn it into a strategic shareholding, as this would allow it to further strengthen its portfolio.

It is also part of its responsibility to continuously seek long-term value for its unit holders, it said in a statement to defend the proposed deal.

It is worth noting that PNB is sitting on assets of over RM120 billion (based on 2010 numbers). Its investments have yielded at least 8.5% returns to unitholders for the past five years.

In comparison, the Employees Provident Fund provided returns to unit holders of less than 6%, Lembaga Tabung Haji 4.5% to 7% and Lembaga Angkatan Tentera between 15% and 16% over the same period.
Among the bigger companies PNB has invested in are Sime Darby Bhd, which has generated lower returns, especially after it was hit by cost overruns at its energy and utilities division over the past two years.
However, Sime has now turned around and with the palm oil prices staying high at around RM2,900 per tonne, the company may be worth looking at, especially since PNB is just short of making Sime a subsidiary with its current stake in the giant planter of just over 48%.

An observer conjured that in the event PNB increases its stake by another 2%, it can equity account Sime’s earnings. However, unlike S P Setia which is an entrepreneur-run company, Sime is viewed as a government-linked company and any increase in the stake by PNB would not alter the company’s management and culture.

Rumours are rife that PNB may be looking to bag Bonia.

Interestingly, Sime has also unveiled interest to grow its property division, having recently acquired a 30% stake in Eastern & Oriental Bhd (E&O) at a huge premium.

With such aspirations, PNB may put in more efforts to consolidate its property division. Apart from S P Setia, Sime Darby’s property arm and E&O, it also earlier privatisated companies like Island & Peninsular Bhd and Pelangi Bhd.

“With the expertise and branding at hand, PNB can create the strongest property group in the country,” opined an analyst.

PNB owns 48.14% of Sime, which is valued at some RM2.43 billion, based on its latest share price.
The counter has lost some 5% year-to-date (YTD), and fell sharply in recent weeks due to the stock market slump as well as concerns over whether it will be required to undertake a general offer for E&O.
Meanwhile, Bonia Corp Bhd stands out as one of the smaller companies where PNB has a large stake, outpacing that of its controlling shareholder.

Bonia is speculated to be on PNB’s radar given that the fund already holds a 32.99% stake in the apparel company. This is just short of the 33% level that will trigger a general offer. Besides, the counter is trading cheap versus other fashion stocks, particularly those listed in Hong Kong, at 8.3 times trailing price-to-earnings (PE) ratio.

Like S P Setia, Bonia is also an entrepreneurial-driven entity with the Chiang family owning some 26.9% stake, less than PNB’s shareholding.  The company, which specialises in making quality leather goods, has offered PNB a dividend yield of some 3.1%. Its stock price, however, lost over 9% YTD against the backdrop of weak market conditions, which dragged the key benchmark index to 9% YTD.
Over the past four years, Bonia’s revenue grew at an average annual compounded rate of 13% from RM221.37 million in 2006 to RM360.1 million in 2010. 

Net profit growth was even stronger from RM13.83 million to RM33.55 million, reflecting a 24.8% compounded annual growth rate over the same period.

Given the numbers — and the Chiang family’s successful entrepreneurial track record — it makes sense for PNB to continue banking on Bonia’s growth. Another possible target for PNB, observers say, is Asia File Corp Bhd, in which PNB and its funds collectively own 26.4%.

This is especially after PNB made a rare move at Asia File’s AGM last week when it expressed its unhappiness over the company’s directors’ fees and choice of several directors. However, it will be difficult for PNB to take over the company as its controlling shareholder, Prestige Elegance (M) Sdn Bhd, which belongs to chairman Lim Soon Huat, holds a 45.3% stake. Its share price has lost over 22% YTD.
At the AGM, PNB forced a vote by poll following dissatisfaction on the reappointment of three independent non-executive directors and the amount of directors’ fees paid.

This was despite the company’s officials defending the directorship fees, saying that it was much lower than most companies.

The executive directors were paid fees, salaries, bonuses and benefits totalling RM1.04 million while the non-executive directors were paid RM90,000 fees in total.

It is worth noting that Asia File recently bought DS Smith Paper located in the UK for RM22.4 million (£4.6 million), with the hope that the mill would boost income, particularly on the back of declining profits.  For the financial year ended March 31, Asia File, which sells stationery items, reported a 12.7% decline in net profit to RM50.39 million, on the back of a 7.6% dip in revenue to RM247.11 million.

However, with the decreasing income, it is uncertain whether Asia File can continue to be one of the highest dividend contributors to PNB — it has a dividend yield of 7.5%.

One of PNB’s largest and highest dividend yielding investment is Malayan Banking Bhd (Maybank). The fund, via Skim Amanah Saham Bumiputera and PNB directly, owns about 51.4% of the country’s biggest bank. Maybank offers a dividend yield of 7.5% while the counter has lost 5.8% YTD.

PNB also owns 46.42% in UMW Holdings Bhd, which in turn controls Perusahaan Otomobil Kedua Sdn Bhd (Perodua). A merger between Proton Holdings Bhd, owned by Khazanah Nasional Bhd, and Perodua has been heavily speculated of late. PNB also invests in little known companies such as Formosa Prosonic Industries Bhd, which makes high quality speakers.

Formosa, in which PNB owns 22.4%, offers a return of 9% to the fund."

Let’s have real shareholder activism

Below article is from Errol Oh from The Star, October 1, 2011. PNB's behavior regarding Asia File is indeed puzzling.

I have written in the past about what I would like to call "Government Linked Funds" (GLF's) like PNB, EPF, Valuecap, LTAT etc. They have been very disappointing in the last decades, they could have been vocal, they could have voted against controversial deals (especially Related Party Transactions), they chose to stay silent and toe the line. I am sure that if they had issued press releases in the past, announcing how they would vote and why, that newspapers would be more than happy to print their views.

They helped to initially fund MSWG, it looks like these GLF's found that that was enough for them, they let MSWG do the talking and stayed further passive.

I really hope their mentality will change soon; they are managing other people's money and thus have a huge responsibility. We are now Anno 2011, a world where people demand transparency; these GLF's should update their websites, give insights in their holdings, their voting behavior and their explanations for it, etc.


ON Wednesday, Permodalan Nasional Bhd (PNB) was a central player in two unrelated corporate developments. Of course, the top news of the day was the fund manager's general offer for shares in property developer SP Setia Bhd.

That alone warrants StarBizWeek today offering at least a cover feature and a comment piece. And there will surely be more coverage in the coming weeks as the story unfolds.

PNB's other headline-grabbing corporate manoeuvre on Wednesday was equally intriguing and surprising. At the AGM of stationery maker Asia File Corp Bhd, PNB voted against the reappointment of three independent directors and refused to approve the directors' fees of RM242,000 for financial year ended March 2011.

However, PNB didn't have enough votes to outnumber the ayes, and the resolutions went through. Although the state-owned company failed to change the outcome of the AGM, it certainly made a statement. Only thing is, what was it trying to say?

The Asia File management doesn't seem to know. A daily quoted executive chairman Lim Soon Huat as saying: “They (PNB) decided to request for a poll (to vote on the resolutions) without notifying us ahead of time and we were shocked. The reason given by the representatives who attended the shareholders' meeting was that their boss told them to vote like that.”

The same newspaper labelled PNB's move at the Asia File meeting as “a rare display of shareholder activism”, but that's stretching things a bit.

It's not the first time that shareholders act mysteriously and without warning when there's no indication of any dispute at shareholder or boardroom level during general meetings to block the passage of routine resolutions, such as the re-election of directors.

For example, during the AGM of Chemical Company of Malaysia Bhd (CCM) in April 2003, the voting on the 11 resolutions were by way of poll. Three were not carried, including the resolution to re-elect group executive director Oh Kim Sun, who had been slated to take over as CCM's managing director in October that year. The identity of the shareholder who voted against the resolutions wasn't made public.

There were similar instances last year at the AGMs of Envair Holdings Bhd, Industronics Bhd, Seacera Tiles Bhd and Nakamichi Corp Bhd, when plain vanilla resolutions were defeated. Are these cases of shareholder activism at work too? We don't know the answer because the shareholders concerned haven't come forward to say why they were against the resolutions.

It's a good time to revisit the concept of shareholder activism. For one thing, it takes more than showing up at a shareholders' meeting and blind-siding everybody by silently opposing resolutions.

Instead, it ought to involve active engagement with the relevant parties (the board and management, and other shareholders and stakeholders) to bring about changes in a company's policies and actions. Usually, it's about pressuring company executives, and that requires using the media and mobilising public opinion.

The February 1999 Report on Corporate Governance by the High-Level Finance Committee on Corporate Governance refers to shareholder activism by institutional investors in the context of “demanding and pursuing higher corporate governance standards”.

The Securities Commission's (SC) Corporate Governance Blueprint 2011, issued in July, brings an updated perspective on this topic, plus a deeper discussion. In recommending the formulation of a code for institutional investors, the document says such a step can strengthen the accountability of institutional investors to their own members and investors.

“Responsible ownership requires high standards of transparency, probity and care on the part of the institutions, which may be met by adhering to a set of over-arching principles in the form of a code for institutional investors. There is a need for institutional investors to review their existing practices in the light of growing recognition of the significance of their role and heightened expectations to monitor management and moderate managerial discretion,” adds the SC in the blueprint.

“The new code will require institutional investors to explain how corporate governance has been adopted as an investment criteria and the measures they have taken to influence, guide and monitor investee companies. It is also important for institutional investors to include governance analysis in their investment appraisal to help identify better governed companies.”

The plan is for institutional investors in Malaysia to form a working group to draw up the code. The blueprint lists some areas in which there should be best practices to be incorporated in the code. No.1 is “Commitment to engagement”.

“The code for institutional investors must address the issue of transparency with regard to institutional investors and their agents' commitment to meaningful engagements and whether such engagement policies are effectively implemented,” says the SC.

Hopefully, we don't have to wait long for the code. It tickles the imagination to speculate on the motives behind the strange goings-on at AGMs and EGMs, but people don't invest based on amusement value. It's far better that we work towards having true shareholder activism, when ownership rights are exercised openly and responsibly.