WHEN crude oil and crude palm oil prices started to decline in 2014, so did the share price of Boustead Holdings Bhd. Investors grew anxious about the diversified group’s earnings prospects and the sustainability of its dividend payments, which was a key reason to hold the stock.

As it turned out, the group posted a net profit of only RM13 million in its financial year ended Dec 31, 2015 (FY2015), its worst earnings since FY2002 when its net profit was RM69 million. The weaker profit was attributed to the massive losses suffered by its 65%-owned shipping unit, Boustead Heavy Industries Bhd (BHIC).

The group declared a dividend of only 20 sen, the lowest in the past five years, for FY2015.

As at June 30, Boustead Holdings’ share price had almost halved to RM1.82 from a five-year high of RM3.28 in October 2014.

The stock regained lost ground, hitting RM2.10, after the group announced that its net profit had shot up 78 times year on year to RM225.8 million in its second quarter ended June 30 (2QFY2016) and surged 68 times y-o-y to RM204.3 million in its first half.

However, the big leap in earnings has not convinced investors because a chunk of the group’s profit in 2QFY2016 came from gains on the disposal of its stake in Jendela Hikmat Sdn Bhd and some plantation land. The group was also in a net debt position of RM5.98 billion as at June 30.

And when Boustead Holdings deputy chairman and managing director Tan Sri Lodin Wok Kamaruddin sold his three million shares in the group at RM2.22 apiece or a total of RM6.66 million in September, it did not paint a rosy picture of the group’s future.

However, Lodin, 66, who has been on Boustead Holdings’ board since 1984, denies that he sold the shares because he had no confidence in the conglomerate. He reveals that the share sale was to pay off a bank loan he had taken out to subscribe for the group’s rights issue early this year that raised up to RM1.05 billion.

Lodin, who holds a master’s in business administration from the US, wears many hats. Apart from helming Boustead Holdings, he is also the CEO of Lembaga Tabung Angkatan Tentera (LTAT) — the controlling shareholder of Boustead Holdings with a 60.84% stake. 

He was the chairman of 1Malaysia Development Bhd but stepped down from the controversial government strategic investment fund along with the other board members following a probe by the auditor-general. The outcome of the investigation is classified under the Official Secrets Act. 

Some quarters opine that as the chieftain of LTAT, Lodin’s main task is to ensure regular dividend payments from Boustead. But he admits that it would be no easy feat for the fund to maintain last year’s return of 12%, given the challenging economic conditions.

“In the past years, we made decent profits from trading on the stock market but many blue chips have come down and very few counters are doing well. So, we have to depend on dividends and other contributions,” he tells The Edge in a rare interview.

Boustead Holdings’ dividend per share ranged from 20 sen to 39 sen in the past five years. In FY2011, the group declared DPS of 

39 sen, which translated into a dividend yield of 6.7%. Dividend yield dropped to 4.65% in FY2015 despite Boustead Holdings’ lower share price.

Nonetheless, Lodin is optimistic about sustaining dividend payments as he believes the group is now on a sound financial footing after extensive restructuring, particularly of BHIC, and the disposal of non-performing assets. 

“It is not a policy statement but we have indicated to our shareholders that we will continue to declare at least 70% of our net profit. In fact, early this year or late last year, it went up to 90%. Again, it is a fine balance. If we don’t need the money and the banks are not pressing for payment, we just give it to the shareholders,” he states. 

Lodin stresses that the group does not declare dividends based on unrealised profits and that asset sales are not meant for generating cash for dividend payments when the group earns less profit.  

Over the past two years, Boustead Holdings has been selling non-core assets to reduce its gearing. This year alone, it sold its 30% stake in Jendela Hikmat, gaining RM198 million, and non-core land bank in Kulai, which brought in about RM120 million. It also sold three chemical tankers at US$5.7 million each (about RM71.58 million in total) and Johan Ceramics Bhd for RM28 million cash.

“Some might think we liquidated or sold assets to make up for the shortfall in revenue and profit coming from those sectors. I don’t agree because we were rightsizing for competence at every level of our operations and to ensure we were cost-effective and efficient. This was going on for the last four to five years,” Lodin points out.

He believes Boustead is in a good position to ride a recovery in the economic climate. To him, Boustead’s improved earnings performance in 1HFY2016 is evidence that the group is reaping the fruits of its restructuring. 

“Even though a chunk of it came from the disposal of assets or non-core businesses, that is just a part of the whole exercise. If there hadn’t been a decline in crude oil and crude palm oil (CPO) prices, probably we would have achieved better results,” he says. 

High gearing

Lodin seems committed to declaring regular dividends. While this may come as good news to many of Boustead’s shareholders, some quarters are worried about the group’s high gearing ratio of 0.9 times. 

The challenging economic environment has exacerbated concerns over the group’s massive borrowings of RM6.97 billion because borrowing expenses put pressure on cash flow. 

“If I can maintain the group’s gearing at 0.6 times and I have excess cash to declare 5% to 6% [to our shareholders], I will do it. It is all about balancing our cash flow, profit and so on. The whole idea is that our operation must be carried out on a sustainable basis,” says Lodin. According to him, although the group’s current gearing is at 0.9 times, he hopes to achieve the target of 0.6 times within the next two years. 

He does not deny that the group’s current high debt level is due to over-expansion in the earlier years. One of its bigger acquisitions was an 87% stake in Pharmaniaga Bhd, a major supplier of medicine to public hospitals, from UEM Group for RM534 million. 

In the same year, it acquired MHS Aviation Bhd, a leading provider of helicopter transport services, emergency medical services as well as search and rescue for Malaysia’s oil and gas industry, for RM100 million cash.

“Why do I need to bother when I can get a loan at 4% to 5% and the return is 12% to 13%?” asks Lodin, who opines that it is an acceptable proposition to use bank money to produce profit with no capital required, although not all projects are viable eventually.

“For us, if we can justify the investment and get a return of 8% to 9%, which is enough to give our shareholders a yield of 6%, why not? Not many public-listed companies give that kind of returns but we do.”

According to the group’s FY2015 annual report, Boustead Holdings’ subsidiaries that are making losses include Boustead Naval Shipyard Sdn Bhd, MHS Aviation, Boustead Shipping Agencies Sdn Bhd and University of Nottingham.

To stop the bleeding at these subsidiaries, Lodin says management has scaled down Boustead Shipping and is in the process of closing down Boustead Engineering. But he will keep MHS Aviation and the University of Nottingham as these subsidiaries are supporting the group’s other businesses.  

“We take on a new business but if it has not generated the expected return after four to five years, we will halt the operation. We have closed down half a dozen [of our businesses] in the last few years. No sentiment,” he says.

Lodin indicates that he will concentrate on disposing of Boustead Holdings’ non-core assets and streamline its business rather than make acquisitions. But he emphasises that this does not mean that Boustead Holdings is desperate to sell.

“I am not going to be sentimental about assets. If you come to me with good book value, multiple, I am quite prepared to consider. It is a question of striking a balance between strong cash flow and sustaining revenue and profit.”

Lodin also discloses that some of the group’s plantation land will be converted for use for property development — another way for the group to unlock the value of its land assets.

“We are open to proposals. For example, we have a piece of plantation land in Kedah, which is prime for property development ... so we have started a bidding process and we are getting some interesting proposals from some of the big property boys.” 

Despite the slowing economy, Lodin is confident of Boustead’s ability to grow its earnings in 2HFY2016 and FY2017, supported by the improvement in its core businesses.  

“I am quite sure that the results will not only be supported by the disposal of non-core businesses and assets but most divisions will contribute well to the group’s total revenue and profit and we will also sustain the group’s operating profit.”

Lodin expects the plantation business to be the group’s key earnings driver this year as CPO prices are likely to improve to about RM2,800 per tonne in the next two years. This will come amid lower production and higher demand as the weak ringgit has made the edible oil a cheaper substitute.

“It is good for us because in the last few years, 30% of our revenue came from our palm oil business,” Lodin says. He hopes the plantation arm can achieve a yield of 30 tonnes per hectare through a better operating system and planting materials. Currently, the yield per hectare is about 22 tonnes. 

While analysts and fund managers remain sceptical about the recovery of BHIC, Lodin, who is also the chairman of the shipbuilder, sees light at the end of the tunnel. He believes BHIC could return to the black in FY2016.

“In the last one or two years, BHIC registered heavy losses. I believe we have overcome that. We stopped taking commercial projects late last year and we have delivered almost all outstanding jobs, although some with heavy losses. Those that were not taken up, we sold. So, all has been resolved,” Lodin says.

Positive outlook

Moving forward, Lodin says he wants BHIC to focus on just a few big projects, mainly government navy contracts, although the margin is low.

BHIC, which reported a net loss of RM30.74 million in FY2015 and dragged down Boustead Holdings’ overall financial performance, returned to profitability in 2QFY2016. 

The shipbuilder’s net earnings surged 175% y-o-y to RM25.26 million in 2QFY2016 ended June 30. However, its net profit in 1HFY2016 fell 64.6% y-o-y to RM6.22 million.

The group’s property business remains steady despite the slowing property market. Its new project, My Town Shopping Centre in Jalan Cochrane, Kuala Lumpur, is targeted to open in January next year and is expected to contribute positively as it has secured 70% tenancy, including IKEA.

“Even though we are going to get it done when the market is not so strong, we believe it is a good time to have the store in operation. Then we would have six to seven months and, hopefully, the economy will start to pick up again by the second or third quarter of next year. If that happened, we are there ready to take advantage of the strong market,” Lodin says.

As for Pharmaniaga, which has been affected by the government cutting spending, the group will expand into halal and herb-based drugs to create more opportunities.

Lodin opines that Pharmaniaga will be able to take advantage by providing lower-cost drugs because in the next five years, more drugs will be coming out of patent protection.

The company has also won approval to manufacture drugs for EU countries. “For us, Pharmaniaga is one big business that will contribute well to our profit.”

After having been put on hold for more than a year, the automated traffic enforcement system (AES), which has been rebranded as the automated awareness safety system (AWAS), is expected to start running by the end of this year. If the system takes off, this will provide the group with another source of recurring income.

“Based on conservative figures, we believe we can get a decent return in a certain period of time. At least, it will be  sufficient to support our shareholders,” Lodin says.

According to him, the details have been ironed out and are being finalised. The Ministry of Transport will announce the implementation soon while another matter regarding the system — the financial model —has been approved.

A fund manager who used to invest in Boustead for high dividends comments that if BHIC is out of the woods, it could be a turnaround story for Boustead Holdings.

As the counter has fallen 27% year to date, the fund manager opines that investors looking for dividend stocks should consider the conglomerate for long-term play. According to Bloomberg data, the counter offers a dividend gross yield of 6.7%.

However, the upside potential for the near term may be limited due to low liquidity and the earnings prospects for its banking arm, Affin Holdings Bhd.

Indeed, the fund manager sees more value in the group’s property division as it provides recurring income.

Tan Sri Lodin Wok Kamaruddin wears many hats. While his main qualification is in business administration, Lodin is also a chartered banker with a Bachelor of Laws. To many, though, his name brings to mind Lembaga Tabung Angkatan Tentera (LTAT).

When he turns 66 this year, Lodin would have spent just over half his adult life running the fund since he took over as its CEO in 1982. That is slightly longer than the 32 years he spent as a director of Boustead Holdings Bhd, a subsidiary through which LTAT controls the rest of the Boustead group of companies.

Therefore it might be said that Lodin’s career has been defined by his pervasive role at LTAT. That is until what seemed to be an important appointment threatened to tarnish the good name he built over the decades in Corporate Malaysia.

It was on Aug 11, 2009, that Lodin was appointed to the board of 1Malaysia Development Bhd (1MDB), a company mandated by the Finance Ministry to make strategic investments to drive economic growth. When the then board chairman Tan Sri Mohd Bakke Salleh resigned, Lodin assumed the post.

The rest, as they say, is history. As alleged wrongdoings at 1MDB led to global investigations, it is worth noting that most of the questionable dealings took place under Lodin’s watch. So when he resigned, along with the other board members in April this year, the scandal may have already hurt his reputation. 

The Edge: Is it a relief that you are no longer involved in 1MDB? As the chairman of 1MDB, was that the toughest time you had in the corporate world?

Tan Sri Lodin Wok Kamaruddin: I took it on as another responsibility [given to me] by the prime minister.

I maintain and believe strongly that the projects mandated for 1MDB to spearhead — such as the Tun Razak Exchange, Malaysia’s first financial services centre; the redevelopment of the Sungai Besi airport into Bandar Malaysia; and the energy business — are projects of great value and indeed would have contributed tremendously to the country’s economic development.

I did my very best to implement at board level the same types of checks and balances that I had done for the groups that I was involved with. I tried my best to get [1MDB] management to observe corporate governance and transparency processes. I must say the board and I feel that we have done our best.

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