(Mar 13): There was no fanfare accompanying Khazanah Nasional’s announcement of a record-high operating profit in the first full year of its refreshed mandate last Monday. The announcement coincided with Muhyiddin Yassin’s first day at work as the country’s eighth prime minister as well as news that one of its executive directors had tested positive for Covid-19.
Unlike last year, there were no heated social media exchanges by politicians this year on Khazanah’s (under)performance. Former Economic Affairs minister Mohamed Azmin Ali recorded a simple “kudos” to Khazanah’s senior management team and staff “for delivering such a strong performance for 2019” on his social media channels on March 1.
At the time of writing, there had been no comeback on former prime minister Najib Razak’s Facebook post about how the value of Khazanah’s net assets rose from 2008 to its record high in 2017 under his regime but fell under the seventh prime minister Dr Mahathir Mohamad.
What was not pointed out was that the figures that Najib used for 2008 to 2018 were the net worth adjusted (NWA) value of Khazanah’s entire portfolio, reportedly before it adopted a dual-fund structure — which split its assets into a Commercial Fund and Strategic Fund with independent targets and objectives — and cannot be compared with the net asset value for the Commercial Fund alone. The NAV for the Commercial Fund is also not comparable to previously reported realisable asset value (RAV) numbers for the overall portfolio.
Simply put, it was not an apple-to-apple comparison.
The Commercial Fund’s NAV of RM73.1 billion ($24.1 billion) as at end-2019 actually grew 6.9% from RM68.4 billion as at Dec 31, 2018. The fund generated an 8.3% time-weighted rate of return (TWRR) for 2019, substantially above its target of inflation (0.7% in 2019) plus 3% on a five-year rolling basis.
Khazanah’s refreshed mandate is to grow the country’s long-term wealth. The financial aspect of its transformation into an intergenerational wealth fund is done through the Commercial basket, which is being rebalanced to become a significant income generator for Malaysia — one that can sustainably supplement the federal government’s annual budget, Khazanah managing director Shahril Ridza Ridzuan told The Edge in an interview in February last year.
About 17.6% of Singapore’s Budget 2020 was covered by what it calls a net income return contribution (NIRC) of S$18.63 billion — which includes 50% net investment returns from Temasek Holdings, GIC and the Monetary Authority of Singapore — and is more than the expected individual receipts from corporate tax, personal income tax as well as the goods and services tax this year. The city state has enjoyed a boost from NIRC to its budget since the start of the millennium.
Malaysia has some way to catch up on this front, but is fortunate to have dividends from Petroliam Nasional while Khazanah rebalances its portfolio.
Shahril tells The Edge in an email reply: “With the refreshed mandate, the key performance measures for our Commercial and Strategic Funds are their respective long-term target rate of return. Since 2019 is the first full year of our refreshed mandate, we will have a better picture of the long-term performance of the Commercial Fund and Strategic Fund moving forward.”
Khazanah did not release the NAV of its Strategic Fund, which includes Malaysia Airlines, PLUS Malaysia, Telekom Malaysia, Tenaga Nasional, Malaysia Airports Holdings and other developmental assets that bring long-term economic benefits to the country. The target returned for this basket is measurable economic benefits and 10-year Malaysian Government Securities (MGS) yield on a rolling five-year basis.
Lower Malaysia Airlines impairment
Those who have been paying attention would remember that Khazanah’s headline RM6.271 billion pretax losses for 2018 had followed a strategic review of its investments, which resulted in a RM7.3 billion impairment provision that year.
“Roughly half” (up to RM3.65 billion) of the RM7.3 billion impairment for 2018 was attributed to Malaysia Airlines, which Khazanah nationalised in 2014 after paying RM1.4 billion for the 30% stake it did not own.
For 2018, Khazanah’s total impairment fell by a third to RM4.9 billion.
“The impairment made for Malaysia Airlines in 2019 is less than the impairment in 2018. The aviation sector continues to be very challenging and this year will be worse, given the impact of Covid-19. Accordingly, we are always careful to ensure that the value of Malaysia Airlines in our books reflects the actual operating environment,” Shahril says.
According to him, “roughly 71%” (about RM3.479 billion) of the impairment for 2019 came from the Strategic Fund, with the rest being impairment on “selected commercial assets”.
Khazanah has said the national carrier needs a cash injection of about RM1 billion a year to survive, and that was before the Covid-19 outbreak hit air travel. The International Air Transport Association (IATA) warned on March 5 that Covid-19 could cost passenger airlines US$63 billion to US$113 billion in lost revenue this year, more than double its forecast of US$29 billion just a fortnight ago on Feb 20.
“We are closely monitoring the Covid-19 situation and its impact [on] Malaysia Airlines. It is difficult to estimate, as the situation is still evolving globally. We cannot comment on investment and capital requirements, as there are many different moving parts in the current operating environment, including the impact of Covid-19 as well as a competitive process currently underway, which may affect valuations, terms and negotiations,” he says.
In a statement last Monday, Khazanah, which shortlisted four out of nine proposals received for potential partners for the national airline, says it will continue to work closely with the government and Malaysia Airlines to decide on an appropriate strategic option.
Divestment gains boost profit
Khazanah’s profit from operations was RM7.36 billion in 2019, helped by higher divestment gains, lower impairments and robust portfolio returns — a turnaround from the red last year and beating the previous highest reported headline profit of RM5.34 billion in 2011.
Operating expenses also fell 28.2% to RM484 million from RM674 million — reflecting a reduction from 50 basis points over its assets under management to 35 bps, a ratio it hopes to maintain at 30 to 35 bps through 2024.
Divestment gains rose to RM9.9 billion in 2019 from RM1.4 billion in 2018.
“The divestments we undertook were part of our efforts to rebalance and diversify our overall portfolio. Divestment proceeds are used for new investments and to manage our debt levels, among other things,” Shahril says, noting that the divestment gains were from partial and full divestments from domestic and foreign investments including IHH Healthcare, Alibaba Group Holding, Tenaga Nasional and Farfetch.com.
“Most of the divestment gains in 2019 were from the Commercial Fund, as we focused on rebalancing the portfolio towards our targeted long-term strategic asset allocation,” he adds.
Khazanah’s debt was reduced by 17% to RM45.8 billion compared with 2018, helped by repayment from proceeds of divestments and excludes the effects of the PLUS toll restructuring, which was announced in January.
“The restructuring was designed such that it protects the interests of both shareholders and debt holders, while providing considerably lower toll rates that are fixed for the duration of the new concession period. With the restructuring, PLUS will continue to provide positive returns to shareholders,” Shahril says, without disclosing specifics on how it would affect Khazanah’s numbers for 2020.
He did say, however, that PLUS’ existing debt of about RM30 billion — which is not part of Khazanah’s debt — “will be restructured in line with the extension of the concession period to ensure that PLUS bondholders are protected”.
The restructuring — which sees an 18% reduction in toll rates on PLUS highways for a 20-year concession extension, the government saving RM42 billion over the new concession period ending 2058, as well as Khazanah and the Employees Provident Fund remaining as PLUS shareholders — “is now at the stage of discussions with stakeholders to put into place the necessary amendments to existing agreements”, Khazanah’s statement reads.
It is understood that the deal, which entails a RM7.5 billion securitisation of PLUS’s future cash flow, also included a fresh government guarantee that will help PLUS reduce borrowing costs as well as enable it to free up cash required to maintain PLUS’s AAA bond rating. Khazanah owns a 51% stake in PLUS via UEM Group while the EPF has the remaining 49%.
No dividend pressure?
Despite the record-high profit, Khazanah was not compelled to pay dividends higher than the RM1 billion declared for 2019, down from RM1.63 billion in 2018. The amount pencilled in was also RM1 billion for 2020, according to official data from the Ministry of Finance when Budget 2020 was tabled. It remains to be seen whether this will change under the new regime.
In reply to a question on dividends for 2020, Shahril says: “Annual dividend payments to the government are proposed by Khazanah’s management based on our cash requirements for investments and debt repayment. The process requires the dividend amount to be agreed [upon] by our board of directors and the government. As Khazanah does not receive fresh capital injections from the government, much of our proceeds from divestments are reinvested.”
Asked whether Khazanah was free to reinvest last year’s record-high profit to rebalance its portfolio and was not compelled to pay higher dividends to the government, Shahril’s response was simply “Yes”.
That is good news for future generations, as Khazanah would need to have a sizeable pool to have the chance to become a new pillar of revenue for the country for the long haul. The challenge of finding growth amid the tough investing landscape is already great, even with reasonable expectations from stakeholders.
“We will continue to pursue the long-term targets for our Commercial and Strategic Funds that we had set at the start of the refreshed mandate. Among other things, we will also focus on diversifying the Commercial Fund, working with the government to enhance regulatory frameworks governing our investee companies [including for Malaysia Airlines and MAHB], and helping these companies to create further value [including Axiata, CIMB and IHH],” Shahril says.
He reiterates how 2020 “will be very challenging” as the world braces for a global economic slowdown.
“It will be very difficult to repeat our 2019 performance, but we believe that the things we did last year put us in a good position to face the challenges this year. In particular, our portfolio restructuring will increase the sustainability of our assets for the long term.”