This article first appeared in The Edge Malaysia Weekly on September 21, 2020 - September 27, 2020

FOR the past few years, conglomerate Boustead Holdings Bhd has appeared to be locked in a downward spiral. In May, its largest shareholder was so concerned about the group’s finances that it discussed the possibility of a privatisation.

To some market observers, mounting legacy issues presaged Boustead’s recent troubles.

“Among the key legacy issues are the investments made in the past that do not have the right focus in making them profitable, mismatch of funding between long-term investment and short-term debts, and a convoluted organisational structure where there are cross-holdings in Boustead subsidiaries between Boustead and our main shareholder, Lembaga Tabung Angkatan Tentera (LTAT),” Boustead chairman Datuk Seri Mohamed Khaled Nordin tells The Edge in his first media interview since assuming his current role in May.

“Additionally, some of the businesses that we are in would be best owned by individual entrepreneurs as they are relatively small and not required to be part of a conglomerate such as Boustead,” the former Johor menteri besar says, without elaborating.

LTAT holds a controlling 59.44% stake in Boustead, which acts as the armed forces pension fund’s investment arm. Today, the diversified group comprises more than 90 subsidiaries, associate companies and joint ventures.

Describing Boustead as “a company in transition”, Mohamed Khaled points out that the group saw two consecutive years of losses in the financial years ended Dec 31, 2018 and 2019 (FY2018 and FY2019), and just when it thought things would be looking up, the global economy was hit by the Covid-19 pandemic.

“The pandemic and the subsequent Movement Control Order have brought about complex challenges to our businesses. As we are a conglomerate operating in multiple sectors, each of our businesses is impacted in different ways.

“Conscious of this, we are currently focused on ensuring that we are able to weather through this tough time, as well as putting the group onto a more sustainable path in the long term,” he says.

Boustead’s net loss broadened 139% year on year to RM1.28 billion in FY2019. In 1HFY2020, it posted a net loss of RM146.7 million compared with a net profit of RM1.9 million a year earlier, dragged down by its trading, finance and investment division.

In an Aug 28 report, Kenanga Research says it expects Boustead to register continued losses of RM46.6 million and RM50.7 million in FY2020 and FY2021 respectively.

In July, Boustead unveiled a transformation plan called EDG 20, aimed at transforming the group into a high-performing, sustainable and resilient organisation in three years.

“This is important as the performance of Boustead Group is a critical driver of the dividend paid out by LTAT to our ultimate stakeholders — the members of the armed forces,” says Mohamed Khaled. Boustead did not declare any dividends for FY2019.

EDG 20 represents 20 key transformation initiatives, which among others include a debt re-profiling exercise, revision of capital structure and management across the group, business turnaround at selected companies and an enhancement of board effectiveness. Describing it as “the right thing to do”, Mohamed Khaled notes that the first phase of the transformation plan includes the consolidation of companies within Boustead that have overlapping roles in order to improve returns from these investments.

While details on this are scarce, market observers say Boustead is likely to consider demerging its property and hotel management businesses into two separate entities.

“The hotel business segment, which is currently part of its property division, is one example of Boustead’s businesses that require some level of reorganisation. The ownership of some of these hotel properties is not within the hotel business segment,” says one market observer.

“As such, a demerger could bring about clarity in terms of structure, reporting line and accountability. This move could also bring efficiencies for tax and strategic planning purposes,” adds the market observer.

The first phase also involves a comprehensive review of the group’s operations and investments, says Mohamed Khaled. “Among the opportunities that we are considering is to identify resources for our key investments. Boustead Group aims to have the technological know-how and expertise on board to ensure the improvement of our investment value over time.”

According to Mohamed Khaled, the transformation plan was formulated over a period of six months, with its key priorities being to review the group’s business model and address legacy issues.

“I think it is anyone’s guess how long the Covid-19 pandemic will persist, but regardless of the situation, we need to adapt to the new normal. We are working towards ensuring business continuity for our subsidiaries that have been significantly affected by the pandemic, such as our Royale Chulan hotels, our shopping malls and commercial spaces, and our cruise centre in Port Klang.

“Although difficult, we had to take steps to minimise cost, which inevitably includes temporary salary cuts for employees of the impacted businesses,” he adds.

The Edge reported on Sept 7 that Westports Holdings Bhd and Northport (Malaysia) Bhd are considering a joint bid for Boustead Cruise Centre. None of the parties confirmed or denied the story.

At end-June, Boustead’s borrowings totalled RM7.86 billion and it had RM541 million in cash, leading to a net debt of RM7.32 billion.

“We are continuously monitoring our cash position, as well as the debt that we need to service. In terms of maintaining a healthy cash balance, our focus has been on three areas: improving our cash flow from operations, matching our debt repayment commitment to our cash flow profile and monetising non-strategic, low-yielding assets.

“With all this in place, it is safe to say that we are confident that we will be able to honour all our existing financial commitments,” says Mohamed Khaled.

In July, The Edge reported that Boustead was embarking on an exercise to restructure its existing debt of about RM5.4 billion.

“Internally, we prefer to describe it as a debt re-profiling exercise because that is what it essentially is. This is a voluntary and proactive exercise undertaken by Boustead, with the ultimate aim of matching our debt repayment to our investment profile,” says Mohamed Khaled.

“As of now, we are not asking for any haircut or debt forgiveness (from our lenders). We just need a bit of time to improve our business position and unwind some of the low-yielding assets,” he adds.

Boustead’s 2019 annual report shows that its principal bankers are Affin Bank Bhd and Affin Hwang Investment Bank Bhd — both of which fall under the group’s stable of companies — as well as Alliance Bank Malaysia Bhd, AmBank (M) Bhd, CIMB Bank Bhd, Malayan Banking Bhd, OCBC Bank (M) Bhd, RHB Bank Bhd and United Overseas Bank Bhd.

“We have been in active discussions with all our bankers in the last few months, and we are encouraged by the progress made in the talks. Our aim is to reach an agreement with our lenders as soon as possible, so that we can focus our attention on other parts of the transformation. Depending on the final structure agreed with our lenders, we may or may not require shareholders’ approval. This will only be decided in due course,” says Mohamed Khaled.

To date, the group has also institutionalised an investment monitoring framework so that its board and management have an overview of each of the investments made by the group, and their respective performance.

“I am pleased to share that, as of now, we are clear on the key steps that we need to take for each of these investments. In parallel, we have also progressed on our debt re-profiling and asset rationalisation plan. As previously reported, we have started the disposal of a number of properties, including the Royale Chulan Bukit Bintang hotel and one plot of land in Jalan Cochrane, Kuala Lumpur.

“However, it is important to note that with the current market situation, any future sale will only be done after a thorough review of the asset’s potential to ensure the true value of our assets is preserved and protected,” he says.

“While we are faced with an uphill task in turning the group around, we are committed to staying the course as we believe there are inherent opportunities group-wide,” he concludes.

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