This article first appeared in The Edge Malaysia Weekly on February 8, 2021 - February 14, 2021

IN 2019, Lembaga Tabung Angkatan Tentera (LTAT) set a goal to reduce its heavy dependence on dividend income from the listed Boustead group of companies as part of its plan to rebalance its investment portfolio. Two years on, it seems no closer to realising that goal after it aborted its plan to take Boustead Holdings Bhd private last week.

The proposed privatisation was mooted by LTAT last May in what was seen as an important step for the armed forces pension fund to support the potential restructuring of the loss-making diversified conglomerate’s businesses away from the scrutiny of public shareholders and regulators. The proposal is now entirely off the table and attention has now shifted to Boustead to turn itself around.

In a statement last Friday, LTAT says its exposure to companies listed on Bursa Malaysia was 58% of its RM9.6 billion assets under management (AUM), of which 31% comprise investments in Boustead and its subsidiaries. The fund has a 59.43% direct stake in Boustead, as well as interests in Pharmaniaga Bhd (11.23%), Boustead Heavy Industries Corp Bhd (BHIC) (8.16%) and Boustead Plantations Bhd (12.1%).

In 2019, LTAT’s net profit fell 58.5% year on year to RM91.7 million, which it blamed in part on the zero dividend received from Boustead. It had also pointed to the absence of land sales compared with RM87.2 million recorded in 2018. It has yet to file its 2019 annual report on its website.

The fund was able to announce better dividends of 2.5% only in 2019 compared with 2% in 2018 as a result of a waiver from paying dividends on the government’s contribution to the fund for 2019. Will it be able to obtain another waiver for 2020?

Boustead, a sprawling conglomerate with interests in plantation, heavy industries, property and industrial, trading, finance and investment, and pharmaceutical, has been suffering losses since the financial year ended Dec 31, 2018 (FY2018). In the last nine months ended Sept 30, 2020, it paid no dividends to its shareholders. Considering the current challenging economic environment, its outlook indicates that the trend is set to continue. With the proposed privatisation off the table, it may take longer for Boustead to generate sustainable earnings and be in a position to declare consistent dividends to its shareholders. Thus, the hope of returning to the high dividend payouts of 6% to 8% in its heyday remains elusive for LTAT.

According to Boustead’s newly appointed group managing director Datuk Seri Mohammed Shazalli Ramly, the group is exploring ways to improve its debt and gearing position as part of its newly crafted Reinventing Boustead strategy.

“This is currently being executed under the smart debt initiatives. Supplementing this initiative is the strategic sale of assets under its asset rationalisation plan. This is to ensure that the group will have strategic paring-down of its debt to an optimal level,” Mohammed Shazalli says in an email response to questions from The Edge.

As at end-September 2020, Boustead’s borrowings totalled RM7.7 billion and it had RM531.2 million in cash, leading to a net debt of RM7.17 billion. Net gearing was 1.3 times.

Mohammed Shazalli says the Reinventing Boustead strategy involves value creation within the group’s existing core businesses, changing business models for new revenue sources, rationalising a few non-strategic assets, as well as venturing into the digital services and technology sector. It has identified 300 top talents from across the group to drive the strategy.

“We do realise that our strategy to unlock values in our non-strategic assets may take slightly longer, as the market remains uncertain on when the Covid-19 pandemic will end. However, with the continuous support from our shareholders and lenders, we are not pressed to sell these assets immediately. Any sale of assets would happen only at the valuation that will benefit our shareholders in the long run,” he says, adding that he will be coming up with a 100-day plan to rejuvenate the Boustead group.

Boustead’s venture into the digital services and technology sector will be done mostly through collaboration with identified partners, says Mohammed Shazalli. “Considering our strengths in various industries such as being the largest pharmaceutical logistics chain in Malaysia, [having] a retail petrol business with nationwide presence, combined with the maturing digital elements in the market, we imagine that there are a lot of opportunities that can be tapped.”

On its heavy industry side, he says the group plans to reach an agreement with the government on long-term solutions to resolve issues at BHIC, particularly in the latter’s shipbuilding arm Boustead Naval Shipyard Sdn Bhd, which is undertaking the RM9 billion littoral combat ship (LCS) project.

“We will also strengthen our governance and uphold the highest standards of integrity, accountability and professionalism in the conduct of our businesses,” he adds.

 Mohammed Shazalli says that, while Boustead has also been affected by the pandemic, the “diversification within its portfolio helps cushion the overall impact on the group”. “Case in point: Our pharmaceutical division is doing well, with Pharmaniaga being a key player in the government’s efforts to vaccinate the population against the pandemic,” he says. Pharmaniaga is partnering with China’s Sinovac Life Sciences Ltd to supply 14 million doses of Covid-19 vaccine to the Malaysian population.

“This is further supported with Boustead Plantations’ recovery, which is backed by promising crude palm oil prices,” he adds.

The National Patriot Association (Patriot), a grouping of retired armed forces officers that had strongly opposed the proposed privatisation of Boustead, welcomes LTAT’s decision not to pursue the plan.

Patriot believes the four listed companies under Boustead — Affin Bank Bhd, BHIC, Pharmaniaga and Boustead Plantations — still have tremendous growth potential, says its director of public communications Captain Dr Wong Ang Peng.

“Palm oil price is fairly good at the moment, which is good news for Boustead Plantation shares. However, management has to put the right people on the job,” he says.

Wong also says BHIC and the LCS project are no lost cause. With support from experienced shipbuilders, BHIC would be able to resolve the delay in the delivery of the LCS units.

“Six new-generation patrol vessels have been built and delivered previously when BHIC took over from Penang Shipbuilding and Construction-Naval Dockyard Sdn Bhd. The problem with BHIC and the LCS project is appointing the wrong persons to the job,” he says.

“To solve the problem of the LCS project, the defence and finance ministries must first recognise that they were part of the problem in delaying approval of the three variation orders (VOs) and also in approving the extension of time. The CEOs of LTAT and BHIC must make their case effectively to the two ministries.

“Once the defence and finance ministries have agreed to the VOs, BHIC can do a lot. It can go to the banks and ask for bridging loans or tap the equity market to raise funds.”

Wong urges the newly appointed chiefs of LTAT and Boustead, as well as those of the listed companies under their umbrella, to be more visible to allay the concerns of the shareholders and investors.

Minority Shareholders Watch Group (MSWG) CEO Devanesan Evanson suggests that Boustead, as a holding company with much persuasive say, should look at the board composition of its listed subsidiaries.

“It is trite corporate governance that boards play a pivotal role in performance and governance. The right boards will solve a lot of the group’s woes,” he tells The Edge.

Meanwhile, Devanesan believes the changing of the guard at both LTAT and Boustead have contributed to viewing things differently, which resulted in the abandonment of the privatisation option and adoption of an internal restructuring option.

“MSWG is neutral on the choice of the option, as there is more than one way to restructure a company,” he says.

“The duration of nine months to come to this decision is understandable, as no one could have foreseen how long the current pandemic and the lockdowns would persist. Furthermore, the decision was not a straightforward one, as Boustead had within its stable of companies three other listed companies and is a substantial shareholder in a bank; all decisions would have widespread ramifications.”

Still, some market observers believe Boustead, as a listed entity, may have less flexibility to execute its growth strategy, owing to regulatory requirements. And given the adverse market conditions, it could take longer for the group to monetise its assets and strengthen its balance sheet.

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