This article first appeared in The Edge Malaysia Weekly on May 4, 2020 - May 10, 2020
MINISTRY of Finance (MoF)-owned Urusharta Jamaah Sdn Bhd (UJ) has been in the spotlight lately, divesting shares at a time when the market is soft.
To recap, UJ took over assets from pilgrim fund Lembaga Tabung Haji (TH) in 2018. The assets include stakes in 106 listed companies, one unlisted plantation counter, and 29 properties, including four hotels, and a plot of land at Tun Razak Exchange. UJ forked out RM19.9 billion for the assets, which had a net book value of RM10 billion. UJ also issued sukuk to the tune of RM19.6 billion to facilitate the acquisition.
Its 10-year mandate is to not only protect the value of the assets it has today, but to create and grow the value of its portfolio. “This is aimed at reducing the government’s financial commitment to the rescue plan of TH,” says UJ CEO Izad Sallehuddin in emailed replies to The Edge. Izad had stints in local and foreign financial institutions, including Maybank Investment Bank, UBS and Citigroup Global Markets, in a career spanning 16 years.
The Edge: When UJ took over TH’s assets in late 2018, what was the criteria, and was the selection of assets done by TH or by UJ? We ask because while the assets UJ took over were generally termed distressed, they also included shares in IJM Corp Bhd, which is not distressed.
Izad Sallehuddin: UJ was established as a special-purpose vehicle (SPV) to take over and manage the underperforming assets that were transferred by TH to UJ, with a view to enabling TH to deal expeditiously in terms of its financial standing.
Given that the current management of UJ was not privy to the decisions undertaken by TH in terms of its investment strategy prior to the transfer of assets to UJ, we are not at liberty to elaborate on this.
We do not have the visibility on how the selection process was undertaken at that point in time. However, we can tell you that it remains our objective to operate efficiently and effectively for the public good and that we would not compromise our efforts to manage the assets transferred to the utmost of our ability.
The price tag of RM19.9 billion — how was that arrived at and was it a figure from the pilgrim fund or was there a back and forth negotiation with UJ?
It would be clearer if we first explain that the main objective of the transfer of assets was to resuscitate and revive TH’s financial situation at that juncture by acquiring underperforming and non-performing assets of TH.
As mentioned, UJ is an SPV set up in order to facilitate the rescue of TH, which points to the fact that it was not so much a negotiation process, but more an imperative needed to resuscitate TH’s financial situation at that juncture.
With regard to the ‘price tag’, we think what relates to a more important concern back in late 2018 would be ensuring or rather facilitating TH to restore its financial position. Therefore, UJ will continue to ensure that its objectives are achieved in the interest of the public in a manner that is effective and efficient.
When UJ took over the assets in late 2018, what was the first thing you did?
Our objective was to ensure that we had the right team with the requisite expertise to manage this SPV, with a view to delivering sustainable growth to the portfolio of assets, over a fixed tenure.
From the onset, Prokhas was managing UJ for a couple of months before the decision was made by the government to establish a structured and dedicated management team for UJ.
Following this, in April 2019, I was appointed as CEO of UJ.
The immediate priority was the appointment of key team members as well as structuring clear systems, protocols and governance levels. UJ recruited an ex-banker, Farouk Kamal (prior working experience in Credit Suisse, JP Morgan and Deutsche Bank) as the head of equities and Solleh Ramli (ex-CEO of Rangkaian Hotel Seri Malaysia) as head of property. They joined UJ only in 3Q2019.
Given the urgency of the financial situation at that time, we had to hit the ground running. The sukuk was successfully issued to TH in May 2019. We also had to make the tough decision to bite the bullet and impair the losses resulting from the transfer of assets worth RM9.633 billion in actual market value for RM19.9 billion in a two series sukuk (RM19.6 billion) and RM300 million cash. A huge part of the impairment losses came from the equity portfolio.
Today, we believe TH is in a much better position financially, thanks to this exercise.
Pursuant to the transaction with TH, it is now incumbent on UJ to effectively manage the assets responsibly in consonance with its mandate.
To this end, following approval from the board on the overall business strategy of UJ in September 2019, we started executing our plan of action.
On the equities side, we formed an investment panel which consists of experts in the field, including former top key personnel of government-linked companies, asset management companies and banks, to oversee our investments, [and] which also reports to our board. A robust and sound governance framework was important to remain transparent in the way we conduct ourselves as a new company. Therefore, we implemented guidelines and SOPs (standard operating procedures) to abide by the industry standards.
As you would be aware, management of any equities portfolio requires both internal and external strength.
Towards this end, our strategy involved collaborating with external fund managers (EFM) to manage portions of our equities portfolio. However, at this juncture, only a small portion of our portfolio has been farmed out. Rest assured, we have conducted a thorough assessment process involving our investment panel while establishing key parameters and KPIs (key performance indicators) that have been set for the EFMs. This has allowed UJ to diversify our risk, strengthen knowledge transfer with reputable fund managers, and most importantly, kickstart the rehabilitation of our portfolio.
In troubled companies such as TH Heavy Engineering Bhd (THHE) where UJ is the dominant shareholder, why was the existing management maintained?
We are committed to creating value in THHE and have been working hard together with THHE management over the past year to assess the current state of the company as well as to deal with some of the legacy issues we inherited.
UJ has appointed several board members to oversee and strengthen the performance of THHE.
Essentially, we have had one year to assess this investment and review how we should turn it around with clear and firm mandates in place, established on the bedrock of good governance.
Following this, THHE recently announced that it has signed an MoU with ICE Petroleum Ventures Sdn Bhd, another local oil and gas player with projects mainly outside Malaysia with key global clients, as part of THHE’s plan to get out of the PN17 status. The potential transaction is being explored between the two parties currently.
THHE has also recently made an announcement that its CEO has tendered his resignation. THHE is currently exploring its options for the most suitable candidate and will make an announcement at the appropriate time.
What prompted UJ to start selling shares recently when many counters are at multi-year lows? What is the strategy here?
In full transparency, there was no cash injection by the government to UJ for further investments. In the light of the urgent need to restore TH’s financial position, assets with a market value worth RM9.633 billion were transferred to UJ in exchange for RM19.9 billion (sukuk plus cash). Further impairments needed to be undertaken upon further valuation of the assets that were transferred to UJ, specifically on the properties and unlisted company.
As stated earlier, UJ will have to manage the assets responsibly, which means UJ will need to be actively involved in making investment decisions to restructure the portfolio.
We have to look at our portfolio holistically. These assets were already considered underperforming, giving a low yield or no yield to TH, which were transferred to UJ at huge premiums. As in any trading cycle, there will be some sectors and stocks that we prefer, and the only way to get exposure to that is by selling some of our holdings as UJ is not receiving any cash injection for reinvestment purposes. This will enable us to buy into counters that we believe may perform better in the medium to long term after the end of this tumultuous period.
Ongoing portfolio management, including buying and selling of stakes in companies, is within the ordinary course of business.
We have to be mindful of our need to reinvest capital in other companies that provide better prospective yields and capital appreciation in the mid to long term.
This will subsequently enable the group to invest in other equities on Bursa Malaysia with stronger fundamentals to ride out current market volatility. To this end, UJ has taken new positions in a series of shariah-compliant counters in various sectors which include, and are not limited to, utilities, finance and insurance, ports, electronics manufacturing services and construction, to name a few. This is all the more timely as we are able to seize the opportunities offered by market mispricing at this juncture.
Ultimately, the group aims to build a portfolio of resilient investments that can weather evolving market conditions and continuously generate value, more so as there will not be any further capital injection by the government for reinvestment purposes into UJ’s portfolio.
In the light of the need to manage the assets responsibly, we understand the importance for our team to have a good grasp of both the strategic and operational processes within the company.
Therefore, we needed time to ensure UJ’s employees are well equipped, the necessary systems and structure are in place and that compliance with proper policies and procedures were being observed prior to commencing trading. UJ was essentially a new asset management company that was being established and getting this right was of paramount importance.
Our mandate is clear, which is to rehabilitate and restructure the assets under our care and to maximise asset recovery value. This is all done in order to reduce the government’s commitment as a result of the rescue plan of TH.
In a down market or up market, the strategy remains the same. We need to continuously make assessments as to which companies in our view have further downside and which ones have further upside. From those assessments, we will accordingly make the necessary decisions to the portfolio. Proceeds raised from the sale of shares are being reinvested back into the stock market.
The equity portfolio we inherited was not ideal. The concentration of the portfolio was heavily disproportionate towards a small number of stocks. The stock and sector weightings were not well balanced. We also held large positions in illiquid, small-cap counters which had no analyst coverage. As responsible fund managers for UJ, we certainly had to take action on the issues highlighted above to manage our risks.
We have to go back and look at the main objective/rationale of the establishment of UJ.
We were established as an SPV to save TH and take their underperforming assets off their books. We have an obligation to create and maximise value, with a view to minimising the government’s fiscal commitment to the rescue plan of TH. Therefore, we will fulfil our obligation. We need to actively rehabilitate the portfolio of assets, which will include restructuring the portfolio.
However, to do this, we have had to take the hit and impair our assets.
The time is ripe to look forward and restructure the portfolio into one that is more solid and viable.
All proceeds are being ploughed back into the market. We have taken advantage of opportunities offered by recent market mispricing movements to invest in better-quality companies at attractive valuations.
We are already seeing tangible results by virtue of the fact that as at the end of the first quarter of 2020, our NAV (net asset value, taking into account our trading activities) was higher in comparison to the NAV of the inherited portfolio at the end of the same period, had we not done anything at all (which we have used as a benchmark). This is the simplest way to compare our performance at the moment.
This demonstrates that even though market timing may not be ideal, due to the switch into other stocks in sectors that are more attractive, we have managed to uplift value in our overall portfolio. We must caution, however, that these are still early days and the results of our portfolio restructuring, as with any others, should be effectively measured in two to three years’ time.
Why wasn’t a sale done earlier when the markets were stronger? You took over the assets in late 2018, and didn’t do much until now.
We understand your concern in regard to this, but as stated above, it can be attributed to several converging factors such as resource constraints, complexity of asset portfolio and ensuring that the necessary groundwork has been laid out.
Given the limitations we encountered, we believe we have tried our level best to expedite our strategy execution timeline. Despite the less than ideal timing, our NAV at the end of the first quarter of 2020, taking into account recent buying and selling activities, was higher in comparison to the NAV of the inherited portfolio at the end of the same period, had we not done anything at all. This is the simplest way to compare our performance at the moment. This clearly is a positive outcome, but I would caution that tangible results can only be seen two to three years post-portfolio restructuring.
To reiterate, UJ is disposing of some of its equities in current market conditions, as it boils down to restructuring the portfolio in order to buy into positions that we believe may offer higher potential capital appreciation and provide more sustainable returns.
Company valuations are all relative. The capital that we have built has also allowed us to position ourselves into companies at low valuations.
News reports have it that you were sitting on a loss of more than RM10 billion when you took over the assets. What is the figure now?
Our FY2019 accounts are in the midst of being finalised, however there are delays due to the Movement Control Order.
Nevertheless, as has been stated clearly, we acquired assets with a market value worth RM9.633 billion, which were transferred to us for RM19.9 billion (sukuk and cash).
When the team came on board, we also conducted another round of valuations and sensitivity analysis on our own post-transfer to validate the numbers. The losses were mainly contributed by impairments from the equity, properties and plantation asset that we own. We had to bite the bullet and ensure those impairments are reflected in the first year.
What are your KPIs, and do you have to brief the MoF, your shareholder on a regular basis?
Our primary KPI is to reduce the government’s commitment incurred as a result of the TH rescue plan. UJ as a company only has assets transferred to us at the initial stage without any cash injection for reinvestment purposes. The only way to reduce the government’s commitment is to grow the value of these assets, hence our current portfolio rehabilitation initiative.
This involves equity portfolio restructuring initiatives and strategies to increase the yield of the properties we own. We report to the board of directors of UJ and we update the MoF on a very regular basis.
What are the parameters for UJ? For instance, do you need to get your shareholders’ approval before you sell and is there a plan on how long UJ will be relevant?
UJ has a finite life of 10 years and the management reports to the board. There are currently four officials from the MoF on the board, which has three independent directors. Our initiatives and strategies need to be approved by the investment panel and the board as necessary.
We have a seasoned and experienced team of professionals, who are driven by a robust governance structure, with a clear mandate to resuscitate assets that are under our care. Hence, our parameters are driven by improving our portfolio for the long-term benefit of our shareholders.
Where do you hope to see UJ in five years?
With our ongoing portfolio management strategy, we aim to cultivate a healthier portfolio with solid stocks.
We are very mindful that we have to grow our portfolio with a view to improving its overall health and transform it into a much better portfolio than what we inherited.
In addition, by working together with the companies in which we hold a substantial stake such as THHE and Pelikan International Corp Bhd, we hope to see positive changes to allow these companies to strengthen further.
Similarly, for our hotel business, we hope over the long term to improve its viability and see a more sustained turnaround.
You issued sukuk to the tune of RM27.55 billion. What are the salient features of the debt papers and do you see any difficulty servicing this debt?
Given the government’s commitment to the rescue and restructuring plan of TH, we do not foresee any difficulty in the government being able to fulfil this commitment. In fact, it has been recorded as a commitment in the government’s books.
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