This article first appeared in The Edge Malaysia Weekly on June 1, 2020 - June 7, 2020

LEMBAGA Tabung Angkatan Tentera’s (LTAT) proposed 80 sen per share offer, if it goes ahead with plans to privatise loss-making Boustead Holdings Bhd, would allow shareholders a chance to cash out at a reasonable level, say analysts.

LTAT — already Boustead’s largest shareholder with a 59.44% stake — revealed last Thursday that it is considering a proposal to privatise the diversified conglomerate. It intends to acquire the shares in the group that it does not already own at 80 sen apiece, which would see the armed forces pension fund forking out around RM660 million.

The offer price represents a 27% premium to the stock’s closing price of 63 sen on Thursday (May 28), the day prior to the suspension of the stock to make way for the announcement. At 80 sen per share, this values Boustead at RM1.62 billion.

An analyst with a local research firm says Boustead’s stock has been trending downwards, from RM3 in October 2017 to as low as 35 sen in March this year, before rebounding to 63 sen last Thursday. Assuming an investor bought 1,000 Boustead shares at RM3 per share and is still holding the shares today, he would be sitting on a paper loss of RM2,370.

“This perhaps reflects the deteriorating fundamentals of the group, which has been making losses since the financial year ended Dec 31, 2018 (FY2018). On the other hand, the indicative offer price of 80 sen represents a steep discount to the latest book value per share of RM1.85, which, of course, would erode further if the losses persist,” he tells The Edge.

“Therefore, in the short term, the offer price seems reasonable, given the limited potential upside amid the weak fundamentals. But in the longer run, if Boustead is able to turn around its fortunes, the stock may be worth more than 80 sen per share,” the analyst notes.

“There are pros and cons for a company to be listed or taken private. In this case, if LTAT has big plans to overhaul Boustead with restructuring measures that may lead to more short-term pain, it will be easier to implement the plan as a private entity. On the other hand, if they want the flexibility for Boustead to raise funds from the capital market, then Boustead should remain listed,” he adds.

While LTAT did not disclose the reason for seeking to take the group  private, Boustead’s stock valuations remain depressed. Its shares have lost 44% of their value in the last 12 months versus the FBM KLCI’s decline of 10%.

While depressed valuations might be an attractive reason for LTAT to take Boustead private, the move might not be the best from the point of view of minority shareholders, given the 57% discount to Boustead’s book value of RM1.85 as at Dec 31, 2019.

Bursa Malaysia filings show that Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and the Employees Provident Fund (EPF) Board are Boustead’s second and third largest shareholders, holding 9.19% and 4.99% respectively.

The analyst believes that whether Boustead’s existing shareholders would be willing to let go of their stake would depend on internal considerations of factors such as their holding period and whether they are able to find better investment opportunities elsewhere. “Interestingly, the EPF sold some shares last December and early January when Boustead’s share price was hovering around 90 sen to RM1,” he says.

Kenanga Research says it was not overly surprised by LTAT’s proposal to take Boustead private, considering that the latter has been facing mounting debts and losses over the past few years.

The research firm estimates that the privatisation would cost Boustead’s major shareholder RM658 million, assuming that this takeover is subject to the Securities Commission Malaysia waiving the mandatory general offers that this may trigger on other listed units that the group owns.

Boustead has three listed companies under its stable — Boustead Heavy Industries Corp Bhd (BHIC), Pharmaniaga Bhd and Boustead Plantations Bhd, with a shareholding of 65%, 56.09% and 57.42% respectively. It also holds a 20.76% stake in Affin Bank Bhd.

“At an indicative 80 sen per share, the privatisation works out to 0.48 times FY2019 net tangible assets of RM1.66 per share, which is lower than its historical average of 1.1 times,” Kenanga Research said in a note to clients last Friday.

The privatisation would also help LTAT restructure its businesses outside the scrutiny of public shareholders and regulators. The fund recently embarked on its overall transformation journey under its five-year strategic plan beginning 2019, while Boustead is undergoing its own turnaround programme.

Last year, LTAT’s performance was impacted primarily as no dividends were declared by Boustead and Affin Bank, compared with RM124.2 million in dividends received in FY2018. The fund was only able to announce better dividends in FY2019 of 2.5% compared with FY2018’s 2% as a result of a waiver from paying dividends on the government’s contribution to the fund for FY2019.

The past two years, however, have also been tumultuous for Boustead. Dividends have not been forthcoming as the group has not been making a profit since FY2018, impacted by losses and impairments incurred in the heavy industries and plantation divisions.

The group widened its net loss to RM1.28 billion in FY2019 from RM554.3 million the previous year, after taking an impairment charge of RM1.33 billion for its assets from the heavy industries and plantation segments. In addition, the pharmaceutical division was affected due to recognition of the remaining unamortised Pharmacy Information System costs amounting to RM247 million. Revenue rose by a marginal 1.4% year on year to RM10.33 billion.

According to Kenanga Research, Boustead is expected to continue seeing volatile quarterly results based on its historical volatile earnings trend.

“All in, we expect plantation earnings to anchor the bulk of earnings, and since 91% of its plantation estates are already mature, this hinges largely on crude palm oil price movements of which the outlook over the short term looks cloudy. The heavy industries division remains volatile with quarterly earnings oscillating between profits and losses,” the research firm said in a separate report on March 2.

“We expect the trading and manufacturing as well as pharmaceutical divisions to show pedestrian growth but deliver sustainable recurring incomes,” says Kenanga Research. It has a “market perform” call on Boustead, with a target price of 80 sen.

At end-December 2019, Boustead had RM893.8 million in cash and cash equivalents and borrowings totalling RM7.9 billion, leading to a RM7 billion net debt position. Its shareholders’ equity stood at RM3.74 billion.

While LTAT has stated that there is no certainty that it will proceed with the proposal, Bloomberg reported that the armed forces pension fund has already received approval for a loan to finance the deal. On Friday, Boustead said it had yet to receive an offer from LTAT.

The crown jewels of Boustead

As LTAT embarks on its portfolio rebalancing to avoid being over-dependent on a handful of companies, reports have emerged that it may monetise its investments across various entities via Boustead.

It was reported that Boustead made an attempt to sell its stake in Boustead Petroleum Marketing Sdn Bhd (BPM) last year. BPM, which operates BHPetrol stations in Malaysia, is 70% controlled by Boustead Petroleum Sdn Bhd and 30% by LTAT. The move, however, was blocked by one of Boustead Petroleum’s shareholders.

Meanwhile, BHIC has been reporting losses in the past two years due to lower maintenance, repair and overhaul activities, negative contribution from its associates and higher taxation. In FY2019, BHIC reported a net loss of RM116.6 million on revenue of RM168.9 million. As a result, it has not been paying dividends to shareholders since August 2018 when it declared an interim dividend of 1.5 sen per share, totalling RM3.73 million, for FY2018.

Currently, 65% of BHIC is owned by Boustead and 8.16% by LTAT. If LTAT’s proposal to take Boustead private happens, the latter’s ownership interest would effectively transform into a direct stake of 73.16% by LTAT of BHIC. This 73.16% stake in BHIC is valued at RM131 million based on last Thursday’s closing price of 72 sen.

Rumours of interest from several parties to buy a block of Boustead’s shareholding in Pharmaniaga also surfaced last November. Currently, LTAT owns a direct stake of 11.23% in Pharmaniaga, while Boustead owns 56.09%.

The proposed privatisation of Boustead would see LTAT’s stake in Pharmaniaga increase to 67.32%. At its close of RM2.51 last Thursday, the 67.32% stake would have a market value of RM441 million.

Boustead’s interest in Affin Bank is another potential monetisation avenue. It is known that former Boustead CEO Tan Sri Lodin Wok Kamaruddin had previously sought potential buyers for the stake in the second-smallest of the country’s eight banking groups by assets.

LTAT owns 35.33% of Affin Bank, while Boustead holds another 20.76% stake. Combined, their shareholdings amount to 56.09%, which is worth around RM1.7 billion based on last Thursday’s closing price of RM1.54. Affin Bank has the lowest return on equity — a measure of profitability — in the industry. At around 5.5%, it is about half the industry average. It made a net profit of RM487.77 million in FY2019, down 3% y-o-y.

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