Wednesday, April 1, 2009

EPF – please exercise better governance

Shareholders of MMC Corporation Berhad (MMC) recently approved its proposal to acquire Senai Airport Terminal Services Sdn Bhd (SATS). MMC will pay RM1,700,000,000 CASH to parties related to its substantial shareholder. This deal had attracted substantial criticism from the start. Here are some facts and figures from a very unhappy fund manager with a large chunk of retirement money under EPF’s stewardship:

1) SATS’ main asset is Senai Airport and 2,718 acres of land held under Enigma Harmoni Sdn Bhd (EHSB).
2) The airport operations, which have made losses for the past 5 years, are being bought for RM580m CASH, based on discounted cash flow. Of course, I agree that discounted cash flow is a relevant metric, but the RM420-620m discounted cash flow valuation by Ernst & Young (EY) beggars belief:
a. The airport operations have been loss-making for the past five years. To arrive at its very high discounted cash flow valuation, EY makes some heroic assumptions, including forecasting passenger traffic growth more than 30 years away – up to 2053!
b. By that time, it assumes Senai Airport will handle almost 22 flights per hour, or one flight every 3 minutes and 21m passengers! Do you consider that achievable?
3) MMC is paying RM1.12bn CASH for 2,718 acres of land valued at RM2.0-2.2bn by valuers Knight Frank Ooi & Zaharin Sdn Bhd and IPC Island Property Consultants Sdn Bhd (IPC). A bargain? Hmmm … For a start, consider that EHSB itself acquired the land for just RM332m in December 2007.
a. Now, barely two years later, Knight Frank and IPC say the land value has gone up 6-7x! Again, discounted cash flow (in the guise of potential development value) is brought in to justify the valuation.
b. Note that SATS, as of June 2008, had already booked in a RM264m revaluation surplus, and its total net book value (including the airport) was RM185m. The assumptions Knight Frank and IPC used to come up with such a massive gain over SATS previous valuation is a very good question.
c. Using this RM2.0-2.2bn valuation, MMC claims the land is being bought at 0.83-0.95x net asset value. This is utter rubbish. The standard method when evaluating listed companies is based on the net asset value of the land bank as it is today, not on prospective profits from the future development of that landbank.
d. Using SATS own RM185m book value, MMC is paying 9x the book value based on normal valuation methodology. Over on Bursa Malaysia, the listed companies are in fact trading at 0.4-1.6x book. MMC is paying well over the range.
4) Finally, MMC is advancing RM417m to EHSB to repay advances made by its outgoing shareholders. No mention here is made of when and how MMC will get back that RM417m, nor the interest rate that MMC is charging. Is MMC offering an interest-free loan?

EPF owns about 7% of MMC, and while EPF has not disclosed whether it voted for or against the deal, I also note it has not taken a public stance either way. In the meantime, MMC’s share price tanked as investors hated the deal. Its share price fell 61 sen on 5 Aug 2008 when the deal was first announced, wiping out RM2.6bn of market capitalization in one day. Since then, the share price has collapsed further to about RM1.40, wiping out RM4.05bn of market capitalization – our EPFs share of that loss is RM0.3bn! True, markets overall have fallen – the KLCI itself was down 26% in that period, but MMC’s share price collapsed by nearly half (49%)!

Let’s see what happens with the new, incoming CIO (Chief Investment Officer), now that no-nonsense Johari Muid has been moved to other duties. Dare we hope for a more activist EPF that will protect our retirement money?

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