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KUALA LUMPUR: With its newly acquired power assets, 1Malaysia Development Bhd (1MDB) recorded its maiden revenue and operating profit in its audited accounts for its financial year ended March 31, 2013 (FY13).

While this is so, an even bigger revaluation surplus on its investment properties in FY13, which is almost three times its operating earnings, continues to mask the sustainability of the sovereign wealth fund, given its much higher debt burden and the interest costs that come with it.

1MDB’s total borrowings ballooned to RM36.25 billion as at March 31, 2013 from RM7.93 billion in  the preceding year, as the group issued more debt to finance the purchase of power assets as well as the development of its property projects in the Klang Valley, its audited accounts for FY13 showed.

The 357% increase in its total borrowings is in tandem with the 372% rise in total assets to RM44.66 billion from RM9.46 billion previously, indicating that the purchase of assets was financed heavily by debt. Net debt stood at RM24.69 billion from RM7.48 billion previously, after deducting cash and liquid assets (investments in financial assets).

In comparison, the group’s shareholders’ funds attributable to shareholders only increased to RM1.81 billion as at March 31, 2013 from RM1.08 billion previously, with the increase due to positive changes in reserves and retained earnings, helped in large part by the revaluation of its landbank in the city centre known as the Tun Razak Exchange (TRX), followed by its maiden profit from the power assets.

As shown in its FY13 income statement, 1MDB reported a maiden revenue of RM2.59 billion with a gross profit of RM1.02 billion. Of the revenue, finance lease income came in at RM507.27 million, while the power segment contributed RM2.08 billion — through Powertek Energy Sdn Bhd (acquired in May 2012) and Mastika Lagenda Sdn Bhd (acquired in October 2012).

Apart from its core activities, the group’s profit was boosted by a huge revaluation surplus of RM2.74 billion (RM569.92 million in FY12) as well as other operating income of RM714.92 million (RM63.26 million in FY12). The revaluation surplus was on the 70-acre ( tract for the TRX project, while other operating income reflected the gain on disposal of other investments as well as a change in fair value of financial instruments.

What took a huge chunk off 1MDB’s bottom line was the impairment loss on goodwill of RM1.19 billion on the contentious purchase of the said power assets, finance cost of RM1.62 billion (increased from RM461.89 million previously) and general and administrative expenses of RM859.15 million (increased from RM126.57 million previously).

It is worth noting that the net carrying amount of the power assets — Powertek and Mastika — was reduced to RM7.1 billion from RM8.7 billion, following the
accumulated impairment of RM1.19 billion and amortisation of RM419.9 million.

“Despite the impairment loss recognised, the group subsequently utilised its original investments to build further value in the form of the successful bid of Project 3B … and potential expansion of power assets, both domestic and overseas, by leveraging the expertise and strong knowledge of these markets,” said 1MDB in its accounts.

After netting off expenses, finance cost, impairments and so on, 1MDB produced a net profit attributable to shareholders of RM676.91 million for FY13, compared with RM44.72 million in FY12.

Thanks to contribution from the power assets, the group generated a net operating cash flow of RM762.93 million in FY13, compared with a negative RM133.75 million previously. Net cash used in investing activities, however, rose to RM13.94 billion from RM3.35 billion due to the acquisitions, while net cash from financing activities ballooned to RM19.11 billion from RM2.71 billion amid the issue of more debt.

Overall, the group registered a net increase in cash and cash equivalents of RM5.94 billion during FY13.

Stripping out the revaluation surplus, which is a non-cash item, it remains to be seen whether 1MDB’s core earnings from its power and property development businesses can sustain its hefty finance cost of RM1.6 billion moving forward.

Meanwhile, the RM1.19 billion impairment on its power assets has lent more fuel to analysts’ view that 1MDB could have overpaid for its power business, which might affect its returns. Nevertheless, sceptics may have to wait another year before they can sharpen their view on 1MDB.

At this juncture, the group’s FY13 accounts may not provide a clear enough picture as the power segment’s revenue did not reflect the full-year contribution of Powertek and Mastika, while the acquisition of Jimah Energy Ventures had yet to be finalised within FY13, although the debt for the acquisition might have been raised.

Meanwhile, 1MDB’s property development ventures — TRX along Jalan Tun Razak and Bandar Wawasan in Sungai Besi — have yet to commence, even though debt has already been issued for the purpose of developing the two projects.

Sustainability issues aside, the argument remains that becoming a property developer and owner of power stations is not in line with 1MDB’s mandate, which is to drive initiatives into new areas that will bring in new investments. Right now, the sovereign wealth fund, which is wholly-owned by the government, is seen as taking on too much debt and competing in sectors that are already crowded with domestic private sector players.


This article first appeared in The Edge Financial Daily, on April 23, 2014.


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