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This article first appeared in The Edge Malaysia Weekly on February 25, 2019 - March 3, 2019

AN underperformer in its early incarnation, TIME dotCom Bhd has evolved over the decades and is now the top performer in Khazanah Nasional Bhd’s commercial fund where the latter pools assets focused on long-term growth targets.

Khazanah also has a fund that contains assets deemed to be in line with its strategic role of helping develop Malaysia. According to the company’s new managing director, Datuk Shahril Ridza Ridzuan, its strategic fund only contains Telekom Malaysia Bhd (TM), Tenaga Nasional Bhd, Malaysia Airports Holdings Bhd, Malaysia Airlines Bhd and the Iskandar Malaysia economic zone in Johor.

Its commercial fund holds more companies and includes CIMB Group Holdings Bhd, IHH Healthcare Bhd, Axiata Group Bhd, Astro Malaysia Holdings Bhd, UEM Edgenta Bhd and UEM Sunrise Bhd.

In his first interview with The Edge as managing director of Khazanah last week, Shahril made it clear that the company’s new approach to its commercial fund will be fully portfolio-based, but noted that it will take time to restructure its portfolio.

A number of solid companies stand out.

Bloomberg data shows that TIME is one of the outperformers in Khazanah’s portfolio as the telecommunications company has provided a total return of 913% over the last 10 years, translating into a compound annual gain of 26% over that period. That is impressive by most standards.

Over the same period, UEM Edgenta, CIMB Group and Axiata also saw a strong run-up in their share prices, giving total returns of 658%, 149% and 142% respectively.

Asia’s largest hospital operator, IHH Healthcare, is another outperformer with a total return of 79% since its listing in 2012, while UEM Sunrise yielded 49% over a 10-year period.

An exception is dominant pay-television operator Astro Malaysia, whose share price has declined 22% since relisting on Bursa Malaysia in 2012, two years after it was taken private by tycoon T Ananda Krishnan.

With such a portfolio, it will be interesting to see if Khazanah will dispose of its stars to capitalise on their profits, or cut its losses on some of the underperformers.

Investors are keeping a close watch in the light of Khazanah’s disposal of a 16% stake in IHH Healthcare to Mitsui & Co Ltd for RM8.42 billion.

Also of interest is the investment space occupied by Axiata, TIME and TM.

“It will be interesting to see what happens next with Khazanah’s investment in Axiata and TIME. If the sovereign wealth fund is looking to manage its fund in a portfolio approach, it will have to diversify away from the telecoms industry. They are competing on the same front, along with TM. But if you look at Khazanah’s stakes in Axiata and TIME, it will also be hard for any disposal to be done due to liquidity constraints.

“Of course, one can always argue that Axiata has a regional presence while TIME has a strong track record,” a fund manager with a local asset management company tells The Edge.

Indeed, Khazanah’s share of value in the Malaysian telecoms sector amounts to some RM17 billion — more than a tenth of the sovereign wealth fund’s total realisable asset value of RM157.2 billion (as at Dec 31, 2017).

Some question whether exposure in a sector known to be saturated both in terms of subscribers and competition will help the fund meet its long-term asset growth target.

Analysts covering both TIME and Axiata, nonetheless, remain optimistic, based on their recommendations and target prices.

For TIME, six out of seven analysts have a “buy” call, while the remaining one has a “hold”, with the 12-month average target price of RM9.47, indicating an upside potential of 15.1%.

As for Axiata, 19 analysts have a “buy” and 10 have a “hold”, with the 12-month average target price of RM4.50, indicating a return potential of 5.1%.

Bloomberg data estimates that Khazanah paid an average cost per share for TIME of RM1.67 and for Axiata of RM2.38, indicating a healthy profit gain should the fund decide to take profit. The average cost per share uses Khazanah’s historical holdings during its entire holding period and the volume weighted average price of the security during each period.

Apart from the telcos, its investment in CIMB Group has also been profitable as Bloom­berg data shows that Khazanah’s average cost per share was RM3.40, indicating a return of about 71% in the event of a disposal.

Its 92.5%-owned Indonesian banking arm, PT Bank CIMB Niaga Tbk, also appears to be performing more solidly, posting a 16.95% growth in net profit to IDR3.48 trillion (RM1.01 billion) for the year ended Dec 31 last year, on the back of an improvement in non-interest income and credit charges.

Currently, there are 11 “buy” and an equal number of “hold” calls on CIMB Group with an average target price of RM6.39, indicating an upside potential of 10.2%.

Ahmad Ramzani Ramli, an analyst at Kenanga, is one of those who have down­graded the stock to a “hold” because of demanding valuations amid challenging loan growth, an uptick in credit charges as well as downside pressure on net interest margin.

UEM Edgenta — held through Khazanah’s wholly-owned subsidiary, UEM Group Bhd — has also been profitable for the fund, posting a gain of about 14% since 2014.

The country’s largest integrated facilities management (IFM) provider, the company covers consultancy, services and solutions for the healthcare, infrastructure and real estate segments.

A research house covering UEM Edgenta believes the compound annual growth rate of about 9% in the IFM market is positive for the company. In the past year, UEM Edgenta has yielded a total return of about 20% and all three of the analysts covering the stock have maintained their “buy” call with an average target price of RM3.25, indicating a return potential of 17.3%.

The winners aside, Shahril has acknow­ledged the possibility of cutting losers. Bloom­berg data estimates the average cost per share of its investment in UEM Sunrise at RM1.22, indicating a potential loss of about 31%. It is worth noting that the group has been on a downward trend with a decline of about 65% in the last five years, although to be fair, nearly all property players are likely to be in the same boat given the dismal state of the property market.

As for Astro Malaysia, investors have shied away from the stock as digital pirated copies, streaming as well as Android TV boxes with pre-loaded software give consumers access to content either for free or for a small sum — usually through illegal channels — taking away some of the pay-TV operator’s previous dominance.

The emergence of giant media services player Netflix — another significant threat — along with smaller players such as iflix and dimsum.my, has noticeably raised the competition for eyeballs.

Khazanah’s investment in Astro Malaysia — held via its wholly-owned subsidiary, Pantai Cahaya Bulan Ventures Sdn Bhd — could have shrunk by about a third, based on Bloomberg estimates.

It is interesting to note that Khazanah was Ananda’s partner in the 2010 privatisation of Astro Malaysia. Both parties had offered RM4.30 per share for the remaining 27.09% not owned by their special purpose vehicle, Astro Holdings Sdn Bhd. The price was at a 5.9% premium to Astro Malaysia’s IPO price of RM4.06 when it first listed in October 2003.

The competitive environment notwithstanding, most analysts believe there is value in the media company as it has lost about 30% of its value in the past year. CIMB Equity Research analyst Kamarul Anwar believes regulatory intervention to block access to illegal channels will be a positive catalyst for Astro Malaysia.

He has an “add” call for Astro Malaysia with a target price of RM1.75, citing its strong yield of 6.4% as a positive. Most analysts have the same view, with 11 “buy” and seven “hold” calls. The average target price is RM1.81, indicating a return potential of 9.7%.

At the recent Kuala Lumpur Digital Content Anti-Piracy Summit, Communications and Multimedia Minister Gobind Singh Deo suggested that all related agencies should be placed under one ministry to combat digital piracy.

While it is too early to tell which of the companies under Khazanah’s commercial fund would be deemed “low hanging fruit” under its new mandate, the fresh direction points to interesting times for the Malaysian capital market, although sceptics observe that there had already been a few rounds of heightened activity under the previous administrations.

Proponents of Khazanah divesting its stake in government-linked companies will point to a higher free float as a positive for the domestic equities market. The sovereign wealth fund will also have more firepower to increase its international exposure and diversify its investments.

The larger liquidity could spur the capital market, which has remained largely stagnant over the last two to three years.

 

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