PELABURAN MARA BHD (PMB) has been in the spotlight lately after buying into small-cap companies PDZ Holdings Bhd and Sanichi Technology Bhd, which many market players consider to have limited earnings potential. 

Another reason for the scrutiny has been the meteoric rise in the shares of PDZ and Sanichi, which shot up more than 150% and 100% respectively, either after PMB came in or during the run-up to the buy-in. 

To put things in perspective, PDZ is a shipping company that just turned the corner while Sanichi is an aspiring property developer that is diversifying from its core business of making precision moulds. 

Nevertheless, PMB CEO Nazim Rahman maintains that the investment body’s acquisition of shares in PDZ and Sanichi was done diligently and with due care. “It is not a blind investment and certainly not speculative,” he stresses.

PMB is a strategic investment and asset management company that is wholly owned by Majlis Amanah Rakyat (MARA), a statutory agency. 

Nazim adds, “I am perplexed at the attention on these specific investments. We [PMB] have a diverse portfolio. The current rally in these counters [PDZ and Sanichi] could not be driven by any one institution, let alone us. Deeper analysis might reveal that we are not the only fund that provided the liquidity.”  

Any investment undertaken by PMB, it seems, is dictated by its risk management framework. The company also has strict criteria for acquiring substantial stakes in small-cap companies, such as the need for their balance sheet to be healthy, as represented by gearing levels.

The target companies should have future earnings trajectory and their shares have to be traded at low valuations relative to the overall market. They must also have a strong management team.

PDZ’s controlling shareholder was Tan Sri Robert Tan Hua Choon, who, at one time, was a close associate of former finance minister Tun Daim Zainuddin.

Sanichi’s largest shareholder, German national Herbert Tucakovic, has sold down to 5.7% now, hiving off his shares to PMB.

However, it should be noted that both the individuals do not manage the respective companies.

A change of plans  

PMB seemingly changed PDZ’s plans almost immediately after buying into the company. When it surfaced in PDZ in late April with a 26% stake, the plan was for the shipping company to be the state-controlled fund’s oil and gas vehicle. Part of this plan is Efogen Sdn Bhd, a company PDZ was in the midst of buying. 

However, things changed and PMB is now likely to sell half its stake in PDZ — leaving it with 14.7% — to privately held Megalink Industries Sdn Bhd, a company supposedly connected to businessman Tan Sri Halim Saad, who is also said to be close to Daim.

“We didn’t expect PDZ to be a target. But as you know, it [the plan] has now changed. A new party [Mega­link Industries] made us an offer we couldn’t resist,” explains Nazim.

PMB had bought out Tan’s 19.8% stake at 18 sen apiece and mopped up shares on the open market. Megalink’s offer price is not known, but PDZ was trading at above 30 sen when the deal was struck.

As for Sanichi, Nazim defends the acquisition by saying that PMB had entered the company at a price that was below its net tangible assets and that its management was sound and its balance sheet healthy. 

“The company may not be significant in the overall context of the stock market but it is an alpha stock that will always be available in any equity portfolio,” he explains.

(In simple terms, alpha stocks are those that tend to outperform the benchmark.)

From mid-March 2013 to PMB’s entry, Sanichi’s shares had only once hit the 10-sen band.

While it posted losses in FY2011 and FY2012, Sanichi has returned to the black, albeit registering a net profit of only RM2.2 million on revenue of RM22.4 million in its financial year 2014 ended June 30. 

It closed at 14 sen last Friday. 

PMB acquired 18 million shares (about 5.2%) in Sanichi at 11.2 sen apiece and an additional 53 million shares from Tucakovic, giving it a 15.3% stake in the company. 

Last week, it emerged that PMB could be eyeing a stake in oil and gas outfit TH Heavy Engineering Bhd. However, Nazim declines to comment on the matter.

According to Nazim, buying into PDZ and Sanichi does not paint an accurate picture of PMB’s investment strategy. 

“These two companies constitute only a small portion of our portfolio. So, any meaningful review of our investments will have to take into account our broad portfolio and not be based on specific counters.”

PMB, he explains, has investments in multiple asset classes, including fixed income, equity, private equity and real estate. Its equity investments are diverse, from small caps to blue chips, with each stock category taking up not more than one-third of the pie chart.

PMB has four units — PMB Investment Bhd, PMB Assets Sdn Bhd, PMB Tijari Bhd and PMB Consulting Sdn Bhd — that dabble in asset management. They collectively have 12 products with a total of RM1.7 billion in assets.

“At the company level, we generated a return on equity of 13.5% last year. One of our top performing funds, PMB Shariah Aggressive Fund, gave us 21.7%. 

“I think any fund manager worth his salt will look for alpha stocks. 

Otherwise, he would have to be satisfied with the modest, albeit stable, returns typically associated with large-cap counters,” Nazim says. 

This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.

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