When the Armed Forces Fund Board (LTAT) recently confirmed that it is considering a proposal to take Boustead Holdings Bhd private, there were questions as to why the fund would want to do so when the company is bleeding.
Why not? LTAT simply cannot afford not to proceed with this deal or even offer at a lower price. It has to get this deal done before the year ends in order to pay good dividends.
LTAT has been paying good dividends over the last two decades and after dismal payouts in the last two financial years, it has to resume the good payout record.
It announced dividends of 2% for the financial year 2018, its lowest-ever dividend, compared with a minimum of 6% paid over the past four and a half decades.
The steep drop from that of previous years was mainly due to alleged discrepancies within the board including overpayments under the Barisan Nasional administration.
LTAT declared a dividend of 2.5% for FY19 on the back of a lower net profit of RM91.7 mil compared with RM221 mil for FY18.
Problem is, LTAT is overly reliant on Boustead for returns. It holds some 1.2 billion shares or 59.5% stake in Boustead. Assuming a share price of 65 sen, LTAT’s stake in Boustead is worth some RM780 mil, which accounts for about 7.8% of the fund’s total asset under management of about RM10 bil.
Imagine, how much the fund will be impacted if it had to mark-to-market its stake in Boustead? Let’s take Boustead’s share price of 95 sen as at Dec 31, 2019 and a drop to 65 sen at the end of the year.
This works out to be a 30 sen decline in value, and if these were to be marked to market, LTAT has to record a share investment loss of RM360 mil.
With an estimated membership of 250,000 in LTAT, poor payment may lead to 250,000 votes leaning to the opposition in the coming general election. This is substantial considering that there were 14.8 million voters in 2018.
Assuming the future returns for 2020 and 2021 are the same as the 2.5% dividend declared recently, LTAT will need additional RM900 mil profit to pay for the additional dividend to achieve a minimum of 6% in 2020 and perhaps 8% in 2021.
It is important for the fund to offer higher rates than those offered by the banks’ fixed deposit rates. A reasonably good dividend will appease the military personnel, which account for about 3% of the total voters in the country.
Surely, the Perikatan Nasional coalition-led government recognises the importance of securing the swing votes from this group of voters.
Judging from the series of news related to the privatisation, it appears that LTAT will make an offer soon. According to Bloomberg, the fund has already secured a loan to finance the deal.
Chances are the fund would need to sweeten the deal to ensure its success. It cannot afford to have other major shareholders to reject the deal. The institutional shareholders account for about 18% interest in Boustead. If LTAT gets their buy-in, it will have some 77% stake and needs another 13% to ensure the deal is in the bag.
Once Boustead is taken private, LTAT can ascribe a valuation for Boustead that will be able to support the fund’s dividend payout.
Looking at the company’s net assets per share of RM1.80 as at Dec 31, 2019, it would probably need to up the price closer to 90 sen in order to entice higher take-up rates.
The fund would also need to make a firm offer soon. It has to do so within two months from the first preliminary announcement, ie May 29. Once the two months have lapsed and no extension of time was given by the Securities Commission, LTAT would have to wait for six months to pass before it can make another offer.
There are indeed compelling reasons for LTAT to ensure that the privatisation of Boustead is a success, as much is at stake. It only has one chance to make this right and do so before the year ends.
Failing which, the fund will have difficulties paying good dividends and this will have a bad repercussion on the current administration to keep it in power. – June 1, 2020
