Cover Story: Corporate debt outpaces earnings growth

This article first appeared in The Edge Malaysia Weekly, on September 4, 2017 - September 10, 2017.
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THE net debt of companies listed on Bursa Malaysia continues to outpace their earnings growth based on their latest filings with the stock exchange.

Companies (excluding banks) that compose local benchmark the FBM KLCI saw their aggregate net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) rise 149% to 1.37 times as at Aug 28 from 0.55 times five years ago. In the same period, their earnings per share (EPS) remained relatively flat — it stood at 105.73 sen per share as at last Tuesday.

If a corporation takes advantage of leverage to grow its business, earnings growth should outpace rising debt but this has not been the case in the last couple of years, Areca Capital Sdn Bhd CEO Danny Wong tells The Edge.

“What we have seen in the last couple of years is that companies are borrowing due to cash flow problems as opposed to growing their business. A lot of them are facing problems in collecting payments from sales. There has been a rise in receivables, thus  leading to poor cash flow for companies, eventually contributing to an increase in debt. The addition of borrowing costs has impacted the bottom lines of companies as well,” he explains.

This is reflected in RAM Credit Information Sdn Bhd’s (RAMCI) report, which shows that the average debt repayment trend of industries crept up to 70 days in the second quarter of this year compared with 66 days in the first quarter.

In other words, corporations in Malaysia are taking a longer time to repay their debt.

Nonetheless, RAMCI CEO Dawn Lai thinks the trend could be merely cyclical. “Some sectors have seen an improvement in payment speed while others have seen a slowing down. It could be cyclical. We would need to watch the trend for a few more quarters,” she says via email.

Apart from the companies on the FBM KLCI, the total net debt of those listed on Bursa, excluding banks and newly listed entities, also rose — by 81.4% from 2012 to RM295.7 billion — based on their latest filings. In the same period, revenue grew 18.9% to RM981.9 billion while net income edged up 0.98% to RM97.5 billion.

Tenaga Nasional Bhd recorded the highest net debt of RM26.3 billion among all the listed companies in the country, based on its latest filings. This represents an increase of 66.3% from 2012.

By comparison, its latest 12-month revenue and net profit grew 28.9% and 57.5% from 2012 to RM46.2 billion and RM6.95 billion respectively.

It is even more worrying that some of the companies have seen a decline in net profit while net debt rose.

Of the top 20 companies with the highest net debt, more than half have seen their bottom lines shrink from five years ago, based on their latest results. Those with the biggest fall in net income are Bumi Armada Bhd, Felda Global Ventures Holdings Bhd, Axiata Group Bhd, IOI Corp Bhd, Malaysia Airports Holdings Bhd and Sapura Energy Bhd.

Bumi Armada, which is involved in the oil and gas industry, slipped into the red, suffering a loss of RM1.2 billion, based on its latest 12-month performance. This is despite its net debt ballooning by 387.1% from 2012 to RM10.6 billion now. Sapura Energy, another oil and gas player, also saw its net profit fall, by 55.4% from 2012 to RM125.5 million, despite an increase of 21 times in its net debt to RM14.8 billion, according to its latest filing with Bursa.

Moody’s Investors Service agrees that the earnings of Malaysian firms have not grown as much as their borrowings, pointing to the rise in their debt-to-Ebitda ratio to 4.1 times last year from 2.4 times in 2007.

Moody’s senior credit officer and vice-president Eugene Tarzimanov, however, says this trend is similar to the rapid build-up in non-financial corporate debt the world over after the 2007/08 global financial crisis.

“Interestingly, the share of corporate debt owed by weak firms, those with interest coverage ratios or ICRs (Ebitda-to-interest expense ratio) of below 1, increased only marginally to 7% in 2016 from 6% in 2007 as interest rates remain relatively low in Malaysia, particularly after the overnight policy rate (OPR) cut last year,” he adds.

Bank Negara Malaysia cut the OPR by 25 basis points to 3% in July last year due to rising risks from the Brexit vote in Europe. It was the central bank’s first cut in seven years.

Looking at all the listed companies in Malaysia, Tarzimanov considers the health of the Malaysian corporate sector as broadly good but observes some weaknesses in commodity-related industries (oil and gas, transport, marine and mining) and import-dependent industries (such as automotive).

In terms of corporate debt level relative to gross domestic product (GDP), Malaysia is better off than many other Asian economies, according to Tarzimanov.

“Malaysia’s ratio stands at around 70% based on BIS (Bank for International Settlements) data, lower than that of Australia, Singapore, Vietnam and China. Malaysia’s corporate debt-to-GDP ratio, however, is a bit higher than that of Thailand, India, Indonesia and the Philippines (all below 50%),” he says.

Nonetheless, the gearing ratio (debt-to-equity ratio) in Malaysia deteriorated to 70% last year from 60% in 2015, indicating that companies have more debt in their capital structure. Tarzimanov says Malaysia is about average compared with the rest of Asia on this measure.


Increase in debt level normal

A fund manager who requested anonymity considers the increase in the debt level of Malaysian listed companies as normal because most of them are taking advantage of the global low interest rate environment. He attributes the slower pace in earnings growth compared with net debt partly to the collapse in oil prices in the last two to three years.

“If you look at Malaysia, we are a commodity-driven economy. There are quite a lot of oil and gas-related companies on the FBM KLCI as well as Bursa. These companies have seen a decline in their earnings and a rise in borrowings in order to manage cash flow.

“It’s also a process, I believe. Some of the borrowings were made to invest in long-term projects. Look at Ekovest. The company has a lot of projects in the pipeline but earnings will take a longer time to materialise. Still, most of them would generate sustainable long-term earnings,” he says.

Ekovest’s net debt jumped 103 times from 2012 to RM1.88 billion, its latest filings show. Revenue and net profit in the last 12 months grew 407.9% and 214.4% from 2012 to RM1.06 billion and RM228.4 million respectively.

The fund manager notes that on average, the ICRs of companies listed on Bursa remain at very comfortable levels. Bloomberg data shows that the aggregate Ebitda-to-interest expense ratio for Malaysian listed companies stood at 5.8 times as at Aug 29, slipping slightly from 6.1 times in 2012.