This article first appeared in The Edge Malaysia Weekly on January 22, 2018 - January 28, 2018

ANYONE who has been paying attention would have heard allusions to Khazanah Nasional Bhd underperforming its potential and whispers of its managing director Tan Sri Azman Mokhtar leaving after 15 years of service when his current term ends in May 2019.

Despite a bad cough, Azman looked none the worse for wear and kept an upbeat tone as he delivered his message of success, succession and sustainability when presenting Khazanah’s 2017 annual review last Thursday. He also announced that Khazanah’s core (investee) companies will undergo “Transformation 2.0” to raise their performance, create more value and deliver sustainable returns.

First, success. Apart from the RM115.6 billion record-high net worth adjusted value of Khazanah’s portfolio, which represents a 13.2% year-on-year gain and an average annual growth of 9.6% since May 2004, Azman also affirmed educated guesses of a RM6 billion haul in Singapore and RM800 million of gains from investments in Chinese equities, among other things.

“That [RM6 billion] is something we can harvest in the years ahead,” Azman told reporters last Thursday evening, referring to Khazanah’s 60% share of “at least S$3 billion gains” from the Marina One and DUO integrated development projects in Singapore with a gross development value (GDV) of S$11 billion that were officially opened by the premiers of Malaysia and Singapore on Jan 15.

That money would come in handy for dividend payment to the government (RM1 billion for 2017) and investments for future growth, including acquisitions in the digital and innovation space for gains and transactions to allow core companies to better compete in this age of rapid technological disruption.

Did this mean a fresh spate of mergers and acquisitions and organisational changes, the kind that provided much market excitement in Permodalan Nasional Bhd’s (PNB) companies last year?

“[Transactions are] always on the cards. I can’t comment much [on the nature of deals] but I can confirm that we constantly look for what we call transformative transactions. The second element is ongoing [improvements in] efficiencies, not as sexy but important,” Azman said.

Transformative transactions

Acknowledging that the details of Transformation 2.0 were still being fleshed out, Azman said the CEOs and heads of Khazanah’s investee companies were to meet (on Jan 19) for further discussions.

Was the much-speculated re-merger of Axiata Group Bhd and Telekom Malaysia Bhd on the cards? Was Khazanah nudging the listing of Axiata’s tower unit edotco?

Speaking on the convergence of fixed, mobile and content providers, Azman said Khazanah’s priority was performance rather than any one form.

“Both fixed and mobile suffer from certain elements [of disruption] … TM has its mobile [webe] and Celcom Axiata works with some fixed service wire line providers to deliver services. Celcom and DiGi, for instance, share common infrastructure ... In short, for us, it is all about performance. If it makes sense, Khazanah would be open but we need to evaluate structures, see if market conditions are right and if culturally it is [a good fit].”

It remains to be seen if Khazanah will favour a remerger of Axiata and Telekom or consider merging Axiata’s Malaysian mobile unit, Celcom, with Telekom. One industry expert, citing Macquarie Research, said Axiata holding a reduced stake in an enlarged Celcom-Telekom merged entity would unlock value while having lower holding company discount.

On the listing of edotco, Azman said Khazanah “is in no rush” but added that “there must be some urgency”. “The key thing is to create value. When the time is right, we should harvest. Overall, we prefer our companies to be listed [for that market benchmark],” he said. A privatisation, on the other hand, allows greater flexibility when restructuring is necessary.

Other than Axiata and Telekom, Khazanah counts Tenaga Nasional Bhd, CIMB Group Holdings Bhd, IHH Healthcare Bhd, Malaysia Airports Holdings Bhd and UEM Sunrise Bhd as its core (investee) companies.

Their share prices were mixed last Friday even as the FBM KLCI gained 0.4% to 1,828.83 points. TNB gained 1.41% to close at RM15.82 while CIMB rose 0.44% to RM6.83. On the other hand, Telekom slipped 0.49% to RM6.05, MAHB fell 0.44% to RM8.98 while Axiata, UEM Sunrise and IHH closed unchanged at RM5.55, RM1.17 and RM6 respectively.

That’s perhaps a reflection of market expectations that any major transaction or cost-efficiency benefits would take time to materialise, although Transformation 2.0 is generally welcomed by analysts and the investment community. For example, Sime Darby Bhd’s demerger was only completed last November, some 16 months after Tan Sri Abdul Wahid Omar took over as chairman of PNB.

“Whilst there is a long and challenging road ahead, the latest endeavour by Khazanah in charting its next course through the Transformation 2.0 initiative is a step in the right direction, a firm reflection of the ever-changing business landscape where corporations globally have had to innovate and evolve or face the inevitability of value destruction,” CLSA Malaysia head of research A C Tan tells The Edge.

“It is unlikely that [the] progress will be straightforward as evoking change in traditional bricks-and-mortar aligned mindsets and businesses will prove to be an arduous proposition. Nonetheless, the strategic foresight in embracing technological transformation while inducing the entrepreneurial spirit amongst its investee companies is commendable and should help Khazanah ride out what appears to be an interesting five years ahead.”

Of Khazanah’s companies, CLSA is “most positive” on TNB, which can cut leakage by installing smart meters and potentially spin off its generation division to “crystallise value”.

Giving the excuse of needing a break for lozenges, Azman last Thursday directed some questions to his two new deputies.

“What we’re planning is a five-year programme to take our companies to a very different level from where they are today,” said Ahmad Zulqarnain Onn, 45, who is one of Khazanah’s two newly promoted deputy managing directors and is in charge of Transformation 2.0.

Tengku Azmil Zahruddin Raja Abdul Aziz, 47, who was also promoted to deputy managing director effective January this year, has been put in charge of the TIDE (trending, innovation, disruption and entrepreneurship) programme aimed at transforming cultures to drive growth and performance at the investee companies. He was executive director (investments) with oversight of Khazanah’s investments in the innovation and technology sector, among other things.

For the record, Azman was 43 when entrusted with transforming Khazanah in 2004. At the briefing, he laughed as he said the retirement age at Khazanah was 60 — if that’s any measure, there is leeway for at least half a term more after his current (fifth) three-year tenure ends in May next year. In the meantime, the stage is set for his two deputies to earn their stripes.

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