Mainstream
Better all-round performance
Stephanie Jacob 
UEM Edgenta Bhd offered investors the best ROE with 28.33%, significantly higher than FY16’s 5.9%
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Riding on last year’s strong domestic economic growth and capital market, the 45 listed government-linked companies (GLCs) boosted their combined revenue and net profit by 2.76% and 20.3% respectively.

This month’s Focus List shows that their combined revenue in financial year 2017 (FY17) grew by RM8.8 bil and net profit by RM7.2 bil, to RM328.2 bil and RM42.6 bil respectively.

Their combined market capitalisation also grew to RM718.8 bil as of March 19 from RM703 bil in FY16.

The GLCs’ stronger results were in tandem with the better performance of the KLCI which was 9.4% higher year-on-year (yoy).

“GLCs witnessed better earnings prospects moving into 2017, with gross domestic product (GDP) growth surging close to 6%, led by strong recovery in the domestic consumption space (50% of GDP),” iFAST Capital Sdn Bhd research analyst Tan Wei Yine tells FocusM.

He notes a dual domestic and global economic recovery, as evident in the strong double-digit export growth and foreign direct investment inflow. Prices of commodities, particularly oil, have been fairly stable with an upward bias.

“All the positive elements served as positive inputs to the GLCs spanning across various industries, and have contributed to the rebound in revenues and profits in recent quarters.

“The turnaround in earnings figures have also reignited investors’ buying interest, which buoyed stock prices and contributed to the increase in overall market capitalisation,” he says.

GLCs are some of the largest listed entities on Bursa Malaysia, with interests in diverse sectors such as oil and gas, power, banking, property and plantations.

Many of them are also key players in their respective industries, with 13 being blue-chip counters and component stocks of the FBM KLCI benchmark index.

A GLC is defined as an entity in which a federal or state government has the largest or controlling stake. The interest is usually held either through a government-linked investment fund or a government-owned corporation.

Our list features seven government-linked investment funds and two government-owned companies, namely, Petroliam Nasional Bhd (Petronas) and the Federal Land Development Authority (Felda). Six state-owned funds also own stakes in several listed GLCs.

Sime Darby Plantations Bhd, which is owned by Permodalan Nasional Bhd (PNB), is excluded from the list due to lack of financial data as it was listed only late last year.

The second highest ROE was recorded by Boustead Plantations Bhd with 28.1%, which almost tripled its FY16’s 10.43%


ROE measure

We used the return-on-equity (ROE) measure to rank the listed federal and state-owned entities. The results were mixed with only 14 entities offering investors double-digit ROE, versus 15 in FY16. Nonetheless, the number of companies with positive ROEs increased to 38 in FY17 from 37 previously, with TH Heavy Engineering Bhd posting a flat ROE.

UEM Edgenta Bhd offered investors the best ROE with 28.33%, significantly higher than FY16’s 5.9%. Its earnings per share (EPS) also jumped 418.6% to 50.3 sen from 9.7 sen.

MIDF Research in its report notes that UEM Edgenta’s top line gained from the stronger performance of its healthcare segment, Projek Penyelenggaraan Lebuhraya (Propel) and consultancy division.

The research house has a positive outlook on the company. “We opine that prospects for most of Edgenta’s business segments are brighter with less volatility in earnings In addition, we note that new acquisitions such as Asia Integrated Facility Solutions Pte Ltd (AIFS) and KFM Holdings Sdn Bhd are starting to contribute more significantly,” it adds. Edgenta acquired AIFS in 2016 to boost its healthcare segment, while KFM was added in 2015 to boost its asset management division.

UEM Edgenta is controlled by Khazanah Nasional Bhd with a 69.1% interest via the UEM Group.

Khazanah has the largest collective shareholding among the federal and state-owned funds. It holds controlling or the largest stakes in eight entities with a combined RM301 bil in market capitalisation, or almost 42% of the GLCs’ total amount.

The second highest ROE was recorded by Boustead Plantations Bhd with 28.1%, which almost tripled its FY16’s 10.43%. Its EPS improved to 41.6 sen from 14.2 sen over the same period.

Boustead Plantations is owned by Lembaga Tabung Angkatan Tentera (LTAT) with a 57.4% stake via Boustead Holdings Bhd.

Maybank Investment Bank Bhd says Boustead Plantations outperformed expectations in FY17 on the back of surprisingly strong output and higher average crude palm oil selling (CPO) selling prices.

For FY18, however, the research house is neutral and expects the plantation company to see muted earnings due largely to expected lower CPO prices.

Rounding the top three on our list is Petronas Dagangan Bhd (PetDag) with a strong ROE of 27.2% in FY17, up from FY16’s 18.42%.

Kenanga Research expects PetDag to continue enjoying decent growth in its business volumes amid challenging domestic macroeconomic conditions. “The company has been an outstanding beneficiary of a stable low oil price environment. It is also a direct beneficiary of a mild but steady uptrend in oil prices,” it says.

PetDag is the marketing and retail arm of Petronas, which owns a controlling stake of 69.9% in the company.

Overall, the national oil corporation holds controlling stakes in six entities on our list. These companies are worth a collective RM176 bil, or 24.5% of the GLCs’ combined market cap.

In fourth spot is Bursa Malaysia Bhd with an ROE of 25.95%, up from 23.2% in the previous year. The market regulator’s single largest shareholder is the Capital Market Development Fund with a stake of about 19%.

Syarikat Takaful Malaysia Bhd is fifth with an ROE of 24.9%, similar to what it delivered in FY16. The insurance company is owned by pilgrim fund Lembaga Tabung Haji (LTH) via BIMB Holdings Bhd.

A positive ROE indicates that a company’s bottom-line profits are positive and have generated returns with the money shareholders invested, explains iFAST’s Tan.

Generally, a positive ROE means a company can effectively generate earnings from its investments. The magnitude of the figure shows whether the management is growing the company’s value at an acceptable rate – the higher the better, he adds.

However, Tan cautions that the metric has some limitations as it can be affected by a range of factors. This is because it uses the net income (bottom-line profit) figure from the company’s financial statement. “Depending on circumstances, a negative ROE does not necessarily translate to a bad investment. We advise investors to look at a few comparable profitability ratios and compare companies within the same industry prior to arriving at any investment decision.”

 

Maybank enjoys largest profit

Malayan Banking Bhd (Maybank) notched the biggest net profit, raking in RM7.8 bil versus RM7 bil in FY16. Maybank is owned by PNB, which holds close to 45% in the country’s largest banking group (see sidebar).

In total, PNB owns eight GLCs on our list, with a combined market cap of RM162.6 bil, or 22.6% of the 45 companies’ total market cap.

Tenaga Nasional Bhd slipped to second spot after its bottom line contracted by 5.6% yoy to RM7 bil from RM7.3 bil previously. Khazanah is its largest shareholder with a 28.1% stake.

CIMB Group Holdings Bhd is third with a net profit of RM4.61 bil, up almost 27% from FY16’s RM3.63 bil. Khazanah is the largest shareholder of Malaysia’s third largest bank with a 27.3% interest.

Top eight profit-makers

1. Malayan Banking Bhd

Malayan Banking (Maybank) was the most profitable government-linked companies (GLCs).

Its net profit in FY17 ended Dec 31 rose 11.96% to RM7.80 bil from RM6.96 bil in the previous year. It was boosted by stronger revenue from all business segments and key overseas markets, significantly lower impairment losses as well as better management of assets and liabilities.

 
On April 1, 2017, Datuk Mohaiyani Shamsudin was appointed chairman of its board – the first woman to hold the post. Interestingly, Maybank is also the first bank to implement extended maternity leave for female employees.

Moving forward, Maybank is focusing on creating sustainable value to the communities it serves, including maximising potential in Asean and meeting customer needs.

In maximising potential in Asean, the group aspires to bring financial services to all. It will also continuously transform itself through digital innovation to better serve customers in a fast, simple and efficient manner.

Maybank is helmed by group president/CEO Datuk Abdul Farid Alias, and controlled by Permodalan Nasional Bhd with a 44.98% stake.

 

2. Tenaga Nasional Bhd

For FY17 ended Aug 31, Tenaga’s net profit fell to RM6.91 bil from RM7.32 bil in the previous year. The utility giant will change its financial year end from Aug 31 to Dec 31 from FY18.

As part of its five-year international expansion, Tenaga made its maiden overseas foray into the UK in March. This is also in line with the group’s strategy on renewable energy (RE) expansion to position it as one of the top global utility players by 2025.

 
It intends to grow its RE portfolio to an optimal size via greenfield development or acquiring other RE portfolio of similar or complementary technology.

Locally, the company’s 70%-owned RM12 bil Jimah East Power (JEP) plant in Jimah, Port Dickson is under construction and scheduled for completion by December 2019.

Tenaga also holds a 51% stake in Southern Power Generation Sdn Bhd, which is undertaking a RM4.7 bil power plant project in Pasir Gudang, Johor, which is expected to be completed in the next two years.

Tenaga’s controlling shareholder is Khazanah Nasional Bhd with a 28.14% stake. The company is helmed by president/CEO Datuk Seri Azman Mohd.

 

3. CIMB Group Holdings Bhd

CIMB’s net profit rose 26.84% to RM4.61 bil in FY17 ended Dec 31 from RM3.63 bil a year earlier. It posted its best pre-tax profit of RM6.11 bil, on the back of a record operating income of RM17.63 bil, continued cost discipline and lower provisions.

 
CIMB has been leveraging the digital platform in a big way since the start of its T18 mid-term growth strategy in 2015, in its aim to become a leading Asean universal bank. On March 6, the group launched the 1-Minute Home Financing as part of its InstaApproval platform.

CIMB is on track to meet all T18 targets by end-2018. It will complete its presence in all 10 Asean countries with its first branch opening in the Philippines by end-2018. It will also launch its digital banking proposition in Vietnam in H1FY18.

CIMB is helmed by group CEO Tengku Datuk Seri Zafrul Tengku Abdul Aziz. Its largest shareholder is Khazanah Nasional Bhd with a 27.27% stake.

 

4. Petronas Chemicals Group Bhd

Petronas Chemicals’ net profit rose 37% to RM4.4 bil in FY17 ended Dec 31, from RM3.2 bil a year ago.

 
A MIDF Research report says the better results came within its expectations but beat the consensus view by more than 6%. Its sterling performance was driven by better average selling prices and stronger volume growth.

Looking ahead, MIDF believes Petronas Chemicals’ various segments will continue to perform well. “We remain sanguine on the company whilst expecting FY18 to perform on par or exceed that of FY17. The management has guided that it expects to match its FY17 performance, and is targeting to maintain group plant utilisation at 90%,” it says.

The company, helmed by managing director and CEO Datuk Sazali Hamzah, is majority owned by Petronas with a 64.4% interest.

 

5. Sime Darby Bhd

Sime Darby posted a net profit of RM2.7 bil in FY17 ended June 30, up 2.8% from the previous year’s RM2.61 bil.

 
For the first half of FY18, its net profit was 34.9% higher at RM1.74 bil versus RM1.29 bil a year ago, while revenue rose 13% to RM16.96 bil from RM15.02 bil.

Kenanga Research notes that the six-month performance came within its expectations.

It sees the company undergoing rationalisation of its logistics arm which could unlock some value. The research house has a perform call on the counter in view of potential emerging value from its motor, industrial and logistics divisions

Sime Darby is involved in diverse sectors such as motors, logistics, construction and healthcare. Last year the group hived off its plantation and property segments, both of which are now listed on Bursa Malaysia.

The group CEO is Jeffri Salim Davidson and Permodalan Nasional Bhd is the majority shareholder with a 52.2% stake.

 

6. MISC Bhd

MISC made a net profit of RM2 bil in FY17 ended Dec 31, down 28.7% from RM2.8 bil in FY16.

A UOB Kay Hian report says the results were in line with its expectations but short of consensus’.

 
“The petroleum segment recorded core profits as the increased lightering activities helped overcome the severely-depressed industry spot tanker earnings. However, the LNG (liquefied natural gas) segment’s [performance] was below the run-rate,” it says.

UOB Kay Hian expects MISC to deliver earnings, but notes downside risks due to ongoing challenges facing the sector.

“We believe H2FY18 is a better investment horizon on improving outlook for petroleum tanker recovery, the progress of mergers and acquisitions, and setting up of new businesses,” it adds.

MISC’s core business is providing shipping services to the oil and gas sector. It is led by president and group CEO Yee Yang Chien. Petronas is its main shareholder with a 62.7% stake.

 

7. RHB Bank Bhd

RHB, the fourth largest bank in terms of assets, posted a 15.91% higher net profit in FY17 ended Dec 31 to RM1.96 bil from RM1.69 bil in the previous year. The improved performance was driven largely by higher net funding income, lower loan loss impairment and reduced impairment losses on other assets, partially offset by higher overheads and lower non-fund-based income.

 
With the conclusion of IGNITE 2017, RHB has embarked on a new five-year strategy, FIT22, which is underpinned by three key strategic thrusts, namely, funding the group journey, investing to win in the medium term and transforming the organisation.

Digital enablement will be a core priority in FIT22 to achieve better productivity and efficiency, enhanced customer centricity and improved workplace for employees. The key focus will be the small and medium enterprise (SME) and retail segments to drive growth, as well as to build a connected ecosystem.

RHB is helmed by managing director Datuk Khairussaleh Ramli. It is controlled by the Employees Provident Fund with a 40.7% interest.

 

8. Petronas Gas Bhd

Petronas Gas (PetGas) posted a net profit of RM1.82 bil, up 4.64% from FY16’s RM1.74 bil.

 
MIDF Research says the company’s sales growth was due mainly to excellent plant and operational performance and reliability as well as favourable selling prices from its gas utility segment.

The research house expects PetGas to continue to perform well premised on its strong and diversified income stream and potential capital upside. It should also benefit from strong gross domestic product (GDP) growth.

PetGas is the country’s main gas infrastructure and utility company. Its core businesses are gas processing and utilities, as well as gas transmission and regasification.

The company is led by managing director and CEO Kamalbahrin Ahmad. Petroliam Nasional Bhd is its major shareholder with a 60.7% stake.



This article first appeared in Focus Malaysia Issue 278.