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Our ‘expensive’ stock market
The 30-member FBM KLCI, which is about to celebrate its “full moon” after replacing the Kuala Lumpur Composite Index (KLCI) as the stock market’s benchmark on July 6, is not sending out the right message to woo investors.

According to Bloomberg, FBM KLCI is now priced at a price-earnings ratio (PER) of 20.5 times. As the number suggests, it looks surprisingly more expensive than Hong Kong’s 42-member Hang Seng Index at 18.5 times, and Singapore’s 30-member Straits Times Index (STI) at 16.2 times.

Is our stock market really more expensive than that of Hong Kong and Singapore, where trading activities are more vibrant?
The answer is both yes and no.

Yes, our stock market is expensive because the FBM KLCI’s 30 constituents, said to account for more than 60% of the Main Board’s market capitalisation, have government-linked companies (GLCs) that are tightly held by government institutions.

When a stock is tightly held, it is likely that its valuations are well supported and hence, it becomes expensive.

Note that GLCs such as Bumiputra-Commerce Holdings Bhd (BCHB), Sime Darby Bhd, Malayan Banking Bhd, Tenaga Nasional Bhd and Axiata Group Bhd have a combined weightage of 43.9% on the FBM KLCI. Their valuations are not cheap compared with their peers listed on the Hong Kong Stock Exchange (HKSE). Take BCHB’s PER of more than 18 times, which is more expensive than HKSE-listed Industrial & Commercial Bank of China Ltd’s (ICBC) 14.9 times. ICBC is the world’s biggest bank by market value.

However, one can safely say no, our stock market is not expensive because if one looks beyond the 30 constituent stocks on the index, there is a large number of medium-sized firms with good fundamentals listed on Bursa Malaysia, whose valuations are priced at single-digit PER. Yet, the cheap valuations of these firms are not reflected on the FBM KLCI.

It all boils down to what one wants to believe. If one wants to be proud of how well the local stock market has performed compared with its regional peers, the FBM KLCI is an ideal index. However, if one wants to make money from the local stock market, one should look at other broader indices, such as the FBM 100 Index or FBM Emas Index. These indices have more stories to tell.

Growing beyond our borders
With a fund size of 10 billion units, Amanah Saham 1Malaysia (AS1M), which was launched last Friday, is the government’s biggest unit trust fund to date. Several features of this equity fund ensures that it will be popular, especially among small investors.

Fundamentally, its attractiveness comes from the social agenda of redistributing the nation’s wealth that drives the fund manager, Permodalan Nasional Bhd (PNB). This over-riding goal gives PNB the incentive to be generous with its dividends.

Indeed, PNB’s unit trust funds — such as the Amanah Saham Malaysia and Amanah Saham Wawasan 2020 — have been paying dividends in excess of 6% in the last decade, which is higher than fixed deposit rates. So, it makes sense for investors who want a low-risk vehicle to grow their money to buy into the new fund.

The AS1M is meant to give the capital market a boost and draw money into productive investments, as Prime Minister Datuk Seri Najib Razak said when launching the fund.

Another point that Najib made is particularly noteworthy. He hoped that the companies under PNB would “widen their business activities beyond the borders of this country”. It is a signal that it is time for local businesses to tap into the high-growth economies in the region and beyond for the next phase of the country’s development.
The day has come for local businesses to get into the global marketplace. The sooner we do this, the quicker we will be on track for renewed growth.

Guarantees in letters of support

As expected, former Transport Minister Tan Sri Chan Kong Choy echoed what his predecessor had said in relation to the letters of support that he had signed which enabled Kuala Dimensi Sdn Bhd (KDSB) to raise funds for the controversial Port Klang Free Zone (PKFZ) project.

Both Chan and his predecessor Tun Dr Ling Liong Sik told the Public Accounts Committee that the letters of support were not and cannot be construed as letters of guarantee.

However, the contents of the letters clearly show that the ministry would ensure Port Klang Authority (PKA) make payments for bonds raised by KDSB for the PKFZ project.

For instance, the letter signed by Chan states that “the Ministry of Transport will at all times ensure that PKA is in the position to meet (on a full and timely basis) its liabilities in respect of the repayment amount” for bonds raised for the development of the transshipment project.

It further states that the ministry “shall not take any action nor cause PKA to take any action which may result in PKA being unable to perform its obligations in respect of the repayment amount”.

Ling’s letter to KDSB, which facilitated the purchase of the land by PKA, specifically states that the port authority had disbursed RM108.85 million to KDSB as deposit for the purchase and that “the balance consideration totalling RM979.61 million shall be paid by PKA over a period of 15 years”.
Aren’t these statements tantamount to guarantees? Don’t they effectively mean that PKA has to meet the financial obligations? Were such questions not posed by the members of the PAC to the two ex-ministers?

Merely stating that the letters were in support of the project and cannot be construed as guarantees is not enough. Can it absolve them of their responsibility towards the project’s cost overruns? If that were the case, why did the Treasury instruct PKA to make a RM660 million payment to KDSB last month despite the objection of the PKA board? Surely something is not right here.

This article appeared in Corporate page of The Edge Malaysia, Issue 766, Aug 3-9, 2009.

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