DATUK Johan Abdullah has taken over the reins of Lembaga Tabung Haji (LTH) at a challenging time. He was appointed acting CEO on May 16 before becoming CEO on July 1.
While he does not complain about the task ahead during an exclusive interview with The Edge, the group managing director acknowledges that much uncertainty looms over the economy in the country.
To put things in perspective, the benchmark FBM KLCI has shed more than 73 points or 4% since mid-August and is trading at the 1,625 point level, the lowest since June. The ringgit has weakened by more than 13% since mid-July, hitting 4.46 against the greenback, the lowest since the all-time low of 4.71 in January 1998.
On the political front, street protests are aplenty, political parties are at loggerheads and the problems at strategic investment fund 1Malaysia Development Bhd (1MDB) are coming out and raising more questions than answers.
“When I took over, we did quite an in-depth analysis. Taking into account the current economic climate and market outlook, we need to tweak certain parts of our investment strategy,” says Johan.
“We do have our asset allocation strategy ... But because of our high payout rate, to survive going forward, it will be a bit challenging,” he adds.
From 2011 to 2015, LTH registered net profits of between RM1.69 billion and RM3.54 billion (see table below). Depositors were given dividends and bonuses (including a Haj bonus and a 50-year anniversary bonus in 2012) of between 6% and 8.25%, translating to between RM1.68 billion and RM3.24 billion in payouts.
Johan’s strategy: The pillars
While Johan’s strategy for the challenging times ahead is still being fine-tuned, it will largely hinge on LTH increasing its investment in equities from 46% to 53%, fixed income from 23% to 27% and real estate from 11% to 15%. In managing and squeezing better returns from its fund of RM65 billion, LTH will also hold less cash, reducing it from 20% to 5%.
“The focus now will remain on more sustainable and recurring income. That’s why we like property and plantations, long-term assets which fit into our investment plan,” he explains.
Other areas LTH may venture into include concession model businesses and infrastructure.
LTH’s plantation assets are parked under 72.82%-owned publicly traded unit TH Plantations Bhd, while its property division is housed under TH Properties Sdn Bhd.
TH Plantations closed last Thursday at RM1.18, giving the company a market capitalisation of about RM1.04 billion. It currently operates 36 oil palm estates totalling 105,000ha throughout Malaysia and it also has rubber plantations in Sabah. It also operates seven palm oil mills with a total milling capacity of 250 tonnes per hour.
It recently acquired 10,000ha of land in Kalimantan Timur, Indonesia, marking its first foray overseas.
For its financial year ended December 2015, TH Plantations registered a net profit of RM62.13 million from RM455.30 million in revenue. It had cash and cash equivalents of RM75.59 million, long-term debt commitments of RM1.13 billion and short-term borrowings amounting to RM106.49 million.
The company achieved an annualised return on equity (ROE) of 5.01% while its fresh fruit bunches (FFB) yield per mature hectare stood at 18.7 tonnes, lower than FY2015’s 21.15 tonnes.
A check on the Companies Commission of Malaysia’s website reveals that TH Properties Sdn Bhd chalked up after-tax profit of RM75.90 million from RM412.45 million in revenue in its financial year ended December 2015.
As at end-December, TH Properties had current assets of more than RM1.09 billion and non-current assets of RM795.48 million. The company’s current liabilities were pegged at RM1.05 billion and long-term debt commitments at RM346.59 million. It had reserves of RM146.99 million and had paid out dividends of RM25 million for the financial year.
“I’m willing to go into infrastructure and construction. [Like] the recently announced ECRL (East Coast Railway Line). We could invest with other pension funds, for example, and there are other good investments around the region. So, we have to be smart enough to balance our asset allocations,” he explains.
Losses in oil and gas, but exposure remains small
Although LTH has managed to register great figures, some of its investments, especially in the oil and gas sector, have been hit badly. Much of this is attributable to the dive in oil prices. From the record high of US$145.29 a barrel in July 2008 to the decent level of US$110.53 in September 2013, oil prices then went into a free fall, hitting a low of US$26 in mid-February this year. Last Thursday, the international benchmark West Texas Intermediate was at US$48 a barrel.
LTH’s losses in the oil and gas sector are mainly linked to the tumbling oil prices. For instance, the pilgrims fund trimmed its equity interest in the ailing Perisai Petroleum Teknologi Bhd to 6.01% or 75.80 million shares after selling 1.75 million shares on Oct 4 and 622,800 shares on Oct 18.
On Oct 18, Perisai shares were trading at between 4 sen and 4.5 sen, LTH would thus have made between RM24,912 and RM28,026 for the 622,800 block. On Oct 4, Perisai shares was trading at between 8.5 sen and 10 sen, which means that at the most, the pilgrimss fund would have received a mere RM175,000 for the shares.
To recap, LTH became a substantial shareholder in Perisai on Dec 23, 2014, after an acquisition of 1.2 million shares nudged its shareholding to 79.88 million shares or 6.70%.
Perisai’s 2013 annual report indicates that LTH was not among its top 30 shareholders as at April 30, 2014, which means that most of the pilgrims fund’s shares had been acquired after that.
The company’s shares were trading at an average RM1.24 from May 1 to Dec 23, 2014. However, judging by the trading volume, it is likely that LTH started accumulating the company’s shares after end-September, which pushes up the average trading price to 83 sen.
At 83 sen apiece, LTH’s 79.88 million shares (prior to the Oct 4 sale) would be worth about RM66.30 million. However, as at last Thursday’s close of 4.5 sen, the shares have a value of RM3.59 million, indicating that the pilgrims fund is sitting on a paper loss of more than RM62.81 million.
Perisai is also classified under Practice Note 17 (PN17), which means that LTH may have difficulty in selling its shares.
LTH is a substantial shareholder in several other oil and gas companies, including Alam Maritim Resources Bhd, Dayang Enterprise Holdings Bhd, Reach Energy Bhd, TH Heavy Engineering Bhd (THHE), Uzma Bhd and Icon Offshore Bhd.
LTH surfaced as a substantial shareholder in Alam Maritim with a 5.03% stake in September 2008, when the counter was trading at an average RM1.17 per share. At last Thursday’s close of 21.5 sen, LTH’s loss is bound to be significant.
And it was not too long ago that LTH was left holding the baby at what was then Ramunia Holdings Bhd, since renamed THHE. Insiders say LTH’s holding cost at THHE is just below RM1, a huge premium to its close of 10.5 sen last Thursday.
“Oil and gas is something I have to review in terms of strategy. But property, plantations and infrastructure will be the strategic (sectors) going forward. Touching on that, of course, we have a bit of exposure, so what do we do? We’ve got to take stock of them. We want to preserve our overall investment value, you know, so we are moving out of oil and gas, perhaps doing something else,” Johan says.
However, according to LTH’s annual report for FY2015, oil and gas only accounted for 5.5% of LTH’s portfolio of RM65 billion (see pie chart).
“If you take into account the equity exposure, oil and gas is very small … We have provided for it (the losses) in our books already. And we have also marked to market. We want to focus on preserving the value,” Johan says.
During such periods of volatility in earnings, the immediate fear is whether LTH can remain a safe haven for depositors.
Johan explains that its members’ investments are secure as every ringgit deposited with LTH is guaranteed by the federal government. While this is the case, there is no guarantee of dividends (or hibah) as per the Tabung Haji Act 1995 and Lembaga Urusan Tabung Haji Act 1969.
The transformation office
With the changes Johan has put in place and those that are coming, LTH is strengthening its management and is on the lookout for individuals who can serve its transformation office and head the various business pillars.
The most important criterion is that the individuals must be well versed in creating value, be it in properties, plantations or the other pillars such as concessions and infrastructure, says Johan.
According to him, the LTH board approved the setting up of the transformation team only last Monday. “We need to hire the best in the market, not just for properties but across all [LTH’s business] sectors.
“The person(s) whom I am going to recruit, in terms of level of experience and networking, will not just be capable locally but internationally ... knows about the London market, the China market and Indonesian market ... the person must have that [capability]. So that is the way forward,” he says.
After working with him for six months, Johan’s aides say that his management style is very different from his predecessors’. The two words they use to describe him are “energetic” and “focused”, but only time will tell if he and his team can improve the results further at LTH.
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