This article first appeared in The Edge Malaysia Weekly on March 6, 2023 - March 12, 2023

OVER the past few years, Boustead Holdings Bhd, its subsidiaries — Boustead Heavy Industries Corp Bhd (BHIC), Pharmaniaga Bhd and Boustead Plantations Bhd — and associate Affin Bank Bhd have been in the news a lot. However, other than Affin Bank, the news flow on the other entities has largely been negative with the spotlight on expensive acquisitions, huge impairments and the mismanagement of contracts.

Last week, Lembaga Tabung Angkatan Tentera (LTAT) — Boustead’s 59.42% parent — proposed to privatise the company at 85.5 sen per share, or RM703.25 million in total, in what is believed to be a precursor to a clean-up of the group.

In an interview, Datuk Ahmad Nazim Abd Rahman, LTAT’s CEO, shares his thoughts on the privatisation and what may happen after.

The Edge: Why privatise Boustead?

Datuk Ahmad Nazim Abd Rahman: The restructuring of Boustead group is the final key milestone in LTAT’s transformation. As a listed entity, it is costly and takes a lengthy process to go through the restructuring, value creation activities, M&A or divestment. To accelerate the process, we have to do it as a private company.

With all the issues at Pharmaniaga and BHIC, how does privatising Boustead help?

The impairments have been factored in. Impairments in Pharmaniaga and Boustead Naval Shipyard (controlled by Boustead, BHIC and LTAT) due to the LCS (littoral combat ship) issue have all been accounted for.

It is done. But if you go deeper into Pharmaniaga’s business, other businesses [other than the Covid-19 vaccine] are doing okay. They are still performing the concession agreement without disruption which has been profitable over the years. Although it’s a small-margin business, it’s been profitable. So, with the one-off vaccine impairment, hopefully we can go on, get renewal of the concession and go on with our business.

How come there was such a large impairment at Pharmaniaga?

This is a subject of ongoing audit, so I can’t say much on the outcome. But as a matter of good governance and prudence, the board decided to do full impairment of the unsold [supply of] vaccine.

Some say you might be leveraging the bad news about BHIC and Pharmaniaga to undertake the privatisation.

Fair comment. But the timing of the regulators’ clearance coincides with the release of the quarterly results. Even without the bad news, we would still be offering at the price range approved by the board.

You think the 85.5 sen offer price is fair, given that the net assets per share is RM1.64?

We think it is reasonable, considering that the average [share] price has generally been below 70 sen for the past year. The counter has low liquidity and it’s very difficult for the minorities to exit at a good price. So, what we are offering is a good premium. If we look at the one-year average price and yesterday’s (March 1) price, the premium ranges from 22% to 38%. It is 39% if you look at the six-month average price, so I think it is reasonable.

If you look at the price from an NTA (net tangible assets) perspective, you might think that it is unfair, but this is an opportunity to realise their investment and exit entirely. The company is also facing a high gearing level with about RM1.6 billion of principal repayment due next year. It will take a few years for us to realise the market value at NTA.

You expect the offer to be taken up?

I’m optimistic, I’m hopeful that it will be taken up.

What’s the difference between this round of privatisation and the previous attempt?

The last attempt was selective capital repayment, which means the undertaking has to be done at Boustead’s level. So, it means you would be using Boustead’s cash to repay the capital to the shareholders and then privatise the company. In this case, it’s a direct GO (general offer). Hopefully, it can be done quickly and it will be a more straightforward process.

What is so difficult about running the Boustead group?

There are a lot of things to do as priorities — you’ve got multiple priorities and multiple moving parts. But for us, the first priority would be to restructure the debt, which is currently at more than RM7.5 billion at the group level, and about RM3.4 billion at the holding company level. The RM3.4 billion is unsecured — clean loans given by the banks. So, we’ve got to settle this debt problem.

So, the first step would be debt restructuring. Then, the second step would be the value creation activity, which can take many forms depending on the sector the company is in.

What about strategic assets like defence and others?

We have to go back to the drawing board and see how much exposure we want in the defence industry.

You might pull out of it?

It’s an option, but we have to see. If it is a divestment, we have to see how we can execute the divestment. It will be challenging, especially considering that many of the companies within the BHIC group are joint ventures — whether it is with Airbus, Naval Group [or] Bofors. So, yes, we really have to go to the drawing board and look into this in more detail. It’s nothing concrete yet at this stage.

Yes, the funding is in place, internally generated funds. Since 2019, LTAT has gone through the transformation process. We have put in place all the relevant risk management and investment policies, as well as the governance and guidelines. So, if you were to compare us with established pension funds like the EPF (Employees Provident Fund) and KWAP (Kumpulan Wang Persaraan [Diperbadankan]), we now have a similar framework in place. This is like the last piece in the jigsaw puzzle — the elephant in the room that you really just need to focus on and address it once and for all.

Will shareholders accept the offer of 85.5 sen?

I hope so, because that’s the best for them. For the minorities, you can’t ever get a better price. In the current state of Boustead, I can probably assure you that the market price will never go back to the asset value, let alone to RM2 and above — the price that it used to be. So, no chance they will ever get to that, even to cross RM1.

With all the issues facing Pharmaniaga and Boustead Naval Shipyard, I don’t see a chance. So, if you don’t exit during this offer period, you would never get it. When was the last time we’d ever achieved 80 sen in the last three years? Perhaps once.

You’re confident of getting the privatisation done?

I’m very confident.

There seems to have been a lot of difficulties over the years. This is not the first time you’ve tried to privatise Boustead. There have been a lot of stumbling blocks. Do you foresee anything like that now with this privatisation attempt?

I think it’s all about managing the execution. You can plan, but you have to make sure that your plan is realistic and achievable. It’s really about the discipline in executing it, so execution is key.

Looking at the share price, it would seem that Boustead is badly managed.

If you look at operating companies across the group, Affin Bank is doing well. Asset quality has improved and is going in the right direction. The profit has also increased. For plantation, there is an issue with efficiency because it is dependent on high CPO (crude palm oil) prices, so that reflects the efficiency level in the company. BH Petrol is a cash cow as it has been giving very good dividends to us. Pharmaceutical business, we know what the problem is. We really need to nip it in the bud, restructure the debt, repair the balance sheet and do the value creation activities.

Is there a possibility of a government bailout at Pharmaniaga?

I don’t think the government would ever step in and bail out. We have to do it as a commercial entity.

Was Pharmaniaga buying the vaccine on the government’s instructions?

We don’t know about this. We need to determine what happened based on the outcome of the special audit.

You can’t do all the cleaning up without privatising the company?

It’s difficult.

You need a free hand to crack the whip?

Not just free hand. As I mentioned earlier, with the ongoing issues at Pharmaniaga, LTAT’s asset value cannot be left at the mercy of the market.

Do you have the government’s blessing to carry on with this privatisation?

It is a commercial undertaking, and is decided by the board.

What if the privatisation does not go through?

I don’t have a second option. It has to get through here. Otherwise, we will never resolve our problem, and as a result, the minorities [would] probably get stuck in the company.

Are you frustrated to see Boustead companies underperforming?

As a shareholder, of course, we’re frustrated.

What sort of approval do you need from the shareholders?

It is 90% of the remaining shares for us to invoke compulsory acquisition … We have 59.4%.

So, it’s quite a risky game if you can’t get the privatisation done?

I wouldn’t say a risky game, we already own 60%. We own another 20%. It really doesn’t make much difference if Boustead were to continue as a listed entity. But it would be a loss to the minority shareholders.

When do you hope to complete the GO?

We hope that we can close it by end of June.

What have you been able to achieve at LTAT since you came in?

We now have a fixed-income portfolio that comprises government securities and highly rated corporate bonds — it is a significant achievement because we’ve never had fixed income before. It is still small, but we hope to achieve a lot more. We now have all the relevant policies and framework, and as far as governance is concerned, they are all in place. Now is the last piece that we have to address.

How big is the fixed-income portfolio?

It’s quite minimal at the moment, slightly more than a billion in value, just about 13% of our AUM (assets under management). We’ve got to increase. The other thing is the divestment of some PE (private equity) assets. That is still ongoing. PE used to be 20% of the portfolio. We want to reduce it to 10%. Now it’s progressing very well.

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