This article first appeared in The Edge Malaysia Weekly on May 4, 2020 - May 10, 2020

STATE-controlled unit trust fund Permodalan Nasional Bhd (PNB) is building up its resilience to the increasingly challenging operating environment — tweaking its investment strategies, diversifying its portfolio and investing in new asset classes in the international financial markets — in response to the Covid-19 outbreak and rout in oil prices.

The outbreak has resulted in a shutdown in many parts of the world, causing the global economy to come to a standstill. This has also resulted in oil prices tumbling, with the benchmark Brent Crude falling below US$25 per barrel as transport has almost ground to a halt.

To make matters worse, until recently, Saudi Arabia and Russia were at loggerheads over how much oil production should be cut to stabilise prices. The former is the de facto leader of the Organization of the Petroleum Exporting Countries (Opec), while the latter is an important member of Opec+.

In a response via email to questions by The Edge, PNB says, “Inevitably, due to the pandemic and the oil price war, we are likely to see in the immediate term that companies will face earnings pressure. Our strategy has been to diversify our portfolio so as to build up our resilience to ride out such challenging periods. We will also continue to accelerate diversifying our portfolio via investments into new asset classes in the international financial markets. Most important is that our focus is mainly on the medium and longer term, looking beyond the immediate term.

“Notwithstanding this, PNB is continuously reviewing assets with a view to reinvest in counters with better prospective yields and long-term return potential to drive an efficient use of capital. In the near term, this includes tapping into prospects offered by the current market mispricing. Moreover, liquidity management at PNB has been enhanced significantly to allow for flexibility in the management of our investment portfolio,” it says.

The government-linked investment company (GLIC) adds that its participation in the domestic equity market accounts for 68% of its portfolio, and in the recent year, it has diversified into other asset classes, including fixed income and real estate.

PNB’s website shows that its investments are broken down into 13 core and 11 strategic companies, among a host of other assets, including properties (see table).

Oil and gas investments in the spotlight

Apart from national oil company Petroliam Nasional Bhd, the only other government-linked organisation to have significant exposure to oil and gas is PNB.

Looking at its annual reports, PNB and its related companies have a 60.18% stake in Velesto Energy Bhd, 38.21% in Sapura Energy Bhd, 12.82% in Bumi Armada Bhd, 10.11% in Petronas Gas Bhd, 8.27% in Petronas Dagangan Bhd, 7.9% in Petronas Chemicals Group Bhd, almost 6.5% in MISC Bhd and 6.36% in Serba Dinamik Holdings Bhd, among others.

Collectively, the market value of PNB’s stakes in these companies is more than RM11 billion.

It is also not a secret that many of the shareholdings are under water. Two of the companies that have been hardest hit are Sapura Energy and Velesto.

Last week, Sapura Energy suffered a net loss of RM4.56 billion on the back of RM6.45 billion in revenue for its financial year ended January 2020. A chunk of the losses, RM3.73 billion, were a result of provisions for impairment on goodwill and property, plant and equipment, and anticipation of extended delays towards completion of projects brought about by Covid-19.

Once a darling of the local bourse, Sapura Energy has been hit by the downturn, and as at end-January this year, had accumulated losses of RM4.47 billion.

As at end-January, Sapura Energy had cash and cash equivalents of RM772.37 million. Its long-term borrowings stood at RM7.11 billion while its current liabilities amounted to RM3.14 billion. Sapura Energy’s finance costs for the financial year ended January 2020 was RM664.56 million. However, it is noteworthy that the company had RM22.93 billion in total assets as at end-January.

Last month, company officials had said they were in discussions with banks on refinancing borrowings, and that the exercise is slated for completion by year end.

On the high gearing levels of oil and gas companies, PNB explains, “High gearing is prevalent in most oil and gas companies, not just in Malaysia, but around the world due to the capital-intensive nature of the industry.”

PNB’s large stakes in Sapura Energy and Velesto

PNB’s 38.21% shareholding came about after Sapura Energy raised RM4 billion in a cash call — RM3 billion from a five-for-three renounceable rights issue at 30 sen, and RM1 billion via a two-for-five renounceable rights issue of new Islamic redeemable convertible preference shares at 41 sen each.

In total, PNB forked out RM2.68 billion in early 2019, which seems huge but is less than 1% of its fund size of close to RM300 billion as at end-2018.

Nevertheless, last Wednesday, Sapura Energy ended trading at 8 sen a share, giving it a market capitalisation of RM1.28 billion, which would mean that PNB is sitting on a large paper loss.

“Demand is, however, cyclical depending on conditions in the global economy and this can be made worse by any supply mismatch. While there may be fundamental shifts that may take place, the demand for oil and gas is by no means expected to disappear in the near and medium term,” says PNB.

In May 2017, Velesto (then known as UMW Oil & Gas Corp Bhd) proposed a 14-for-five rights issue of more than 6.05 billion new shares (4.84 billion rights shares and 1.22 billion Islamic redeemable convertible preference shares) at 30 sen apiece to raise RM1.8 billion, largely to reduce debt and finance costs. PNB and its units also undertook to acquire the excess rights shares not taken up by other shareholders.

To recap, UMW Oil & Gas (now Velesto) was a 55.7% unit of PNB-controlled UMW Holdings Bhd. A demerger of UMW Holdings and UMW Oil & Gas in October 2017 resulted in the former’s 55.7% being transferred to PNB, making it a direct subsidiary.

However, a check on UMW Oil & Gas’ 2016 annual report indicates that PNB and its various Amanah Saham funds had at least 68% of the company as at end-March 2017, which means it was not a straightforward matter of PNB taking up the rights issue for the 55.7% shareholding as the largest shareholder. UMW Oil & Gas’ 2017 annual report indicates that PNB and its funds held 61.98% in the company as at end-March 2018.

Considering the rights and preference shares started trading on Oct 25, 2017, a rough estimate puts PNB’s investment in Velesto’s rights and preference shares at above RM1 billion.

For its year ended December 2019, Velesto registered a net profit of RM33.22 million from RM670.75 million in revenue. As at end-2019, the company had accumulated losses of RM2.15 billion.

As at end-December last year, Velesto had deposits, cash and bank balances of RM239.98 million. On the other side of the balance sheet, it had long-term borrowings of RM980.96 million and short-term debt commitments of RM312.29 million. For the year ended December 2019, Velesto incurred RM81.45 million in finance costs.

PNB on its investments

PNB says its investments have a medium and longer term horizon, and that all investment opportunities are evaluated based on their own merits and undergo a rigorous evaluation process. This includes an evaluation of a company’s fundamentals and the outlook for the industry, which then go through a multi-layer governance process to ensure it meets PNB’s investment criteria and objectives.

“Our investments into the oil and gas companies are no exception to this process,” it says.

The GLIC adds that based on evaluation and analysis, it took these investments as an opportunity to enter the industry since valuations had significantly gone down during the downturn. The recent decline in stock prices, PNB says, was initially driven by geopolitical developments and more recently by the pandemic, which has resulted in depressed global demand for crude oil, leading to oil prices plunging to US$20 per barrel.

“The time is now for resilient leaders in the industry to have a key role in steering the companies to weather the storm while also preparing for the changes that are likely to occur in the months ahead. To weather through the current storm, it is important for the companies concerned to work together with lenders to formulate their financing structure and terms to manage the exceptional circumstances confronting the industry. For example, matching the loan horizon with the long-term nature of the assets,” PNB says.

“This may also include making difficult decisions to monetise assets or to implement other aggressive cost-cutting measures. What is key for companies is to be transparent to the lenders and bankers on the company’s requirements. This is the time when companies with good balance sheets, and good leadership and resilience will persevere to ride out this difficult period,” it sums up.

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