Malaysia - Diversity pays off for Khazanah

A DIVERSE portfolio of companies under Khazanah Nasional, the Malaysian Government-owned investment arm, is helping to shield its investments from volatile global markets amid dark economic clouds gathering over the horizon presently.

The diverse portfolio also shields Khazanah from being overexposed to any particular industry and with its investments more diverse today, it will also help to spread out the risk each investment carries across various industries.

In the annual presentation of its 2011 results to the press this week, Khazanah's managing director Tan Sri Azman Mokhtar pointed out that Khanzanah's portfolio of investments was much more diverse today compared with eight years after its inception.

“When we started in 2004, our portfolio was very heavy on utilities, in particular the power and telecommunications (industry). But today it is quite balanced between some key sectors like banking CIMB Bank Bhdbeing the main one, media and communications and property,” he says. Azman also points out that the utilities industry, which consists of investments in Tenaga Nasional Bhd (TNB) and a water project in Saudi Arabia the Shuaibah Phase 3 Independent Water & Power Project - comprises 10.8% of Khazanah's total portfolio.

It is also notable that Khazanah today invests in key sectors in the country such as healthcare with holdings in companies like Pantai Holdings Berhad, Faber Group Bhd and Pharmaniaga Bhd.

It owns some smaller but significant stakes in companies which have already built up their brand name on the home turf over the years such as Parkson Holdings Bhd (7.83%) and is still holding a stake in Astro All Asia Networks plc (29.3%) which was delisted in 2010.

Khazanah's stakes in UEM Land Bhd has surged more than 400% since its listing in November 2008.

Geographically, Khazanah has diversified its investments out of Malaysia over the years and today, 90% of its portfolio is in Malaysia while another 10% is invested in countries such as neighbouring Singapore (4.9%), China (1.6%), India (1.5%), the Middle East (1%) and other countries (1%).

Azman explains that figure, however, was not exhaustive per se as companies such as CIMB Bank and Axiata Group Bhd are categorised as Malaysian companies while in practice these were companies which have invested in other parts of Asia.

Azman says the more reflective ratio of the state investment arm's investments in Malaysia and out of the country was about 75:25 to 80:20.

Talking about its overseas ventures, Azman recounts “it is not an easy task at all” given that the odds are usually stacked against foreign investors who are less knowledgeable of the business climate and culture in the country that it enters.

However, Azman maintains that all of Khazanah's overseas investments so far have been profitable. He points out to the press that Khazanah's decision to buy into Parkway Holdings Ltd had been vindicated whenMitsui & Co Ltd subsequently entered into the holding companyIntegrated Healthcare Holdings (IHH) Bhd through the acquisition of a 30% stake in IHH for RM3.3bil.

Taking a look at Khazanah's performance over the past eight years shows that its investments had consistently recorded a long term growth in both profits before tax, realisable asset value (RAV) and net worth adjusted (NWA) of its portfolio.

Meanwhile, both RAV and NWA ratios are the measure that Khazanah employs to measure its total portfolio size. NWA is calculated by deducting total liabilities from RAV and is adjusted to measure the value created.

Its RAV had grown by RM57.2bil from RM50.9bil in 2004 to RM108.1bil last financial year while Khazanah's NWA had seen a growth of 10.2% per annum from RM33.3bil in 2004 to RM70bil last year.

It is to be noted however, that comparing with 2010 however, these RAV and NWA figures declined slightly in 2011. Its portfolio RAV declined to RM108.1bil in 2011 from RM112.6bil in 2010, while NWA also declined to RM70.0bil from RM75.2bil respectively.

Khazanah had said that this year-on-year drag in portfolio performance is due to the performance of three of its portfolio companies which were affected by regulatory and industry issues namely CIMB due to the regulatory uncertainty in Indonesia, TNB by the gas shortage issue and in the aviation industry.

If these laggards were excluded from its portfolio, Khazanah's portfolio would have posted a “modest growth” in 2011, it said.

It is to be noted that however that Khazanah's profit before tax more than doubled to RM5.33bil in 2011 from RM2.08bil in the previous year and dividends repatriated to the government was at a record high of RM3.0bil.

The surge in profits and dividends declared was attributed to continual divestment of its investments especially the recent RM23bil privatisation of PLUS Expressways in 2011, Khazanah says.

Moving forward, Azman says that Khazanah was cautious on its investment outlook with dark clouds looming over the economies in the European Union and the USA.

“Our strategy is that we have been net sellers in the market as we are quite cautious in the markets but we are selling into strength,” Azman says.

From 2004 till 2010, Khazanah's gains on divestments was at RM11.6bil while over the same period the nation's investment arm had also invested a total of RM39.7bil in other economic sectors.

In 2011 alone, Khazanah made gains on divestments of RM2bil and made new investments totalling RM5.8bil.

This also explains why Khazanah's holdings are somewhat quite different today when compared with its inception in 2004. In the period from 2004 to 2011, Khazanah made gains on divestments totalling to RM13.6bil and invested RM45.5bil.

Khazanah says its focus this year will be to conduct more divestments of non-core assets and non-core holdings in a gradual and orderly manner while it wants to continue with strategic divestments of selected companies and maintain prudent and innovative liability management at the same time.

Healthcare may be in the spotlight this year as Khazanah and Mitsui & Co Ltd could float Integrated Healthcare Holdings Bhd, which is expected to be the one of the largest listings in the country should it be conducted in Malaysia. Azman says that all their healthcare companies are ready for listing and that the key now was to choose the correct timing. He did not say when exactly but maintained that it will be done by this year.

Integrated Healthcare Holdings is 70% owned by Khazanah and the former is the holding company of various other healthcare companies, including wholly owned Singapore-based Parkway Holdings, Malaysia's Pantai Holdings, IMU Education and Apollo Hospitals (11.2% stake).

DANIEL KHOO

The Star

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