This article first appeared in The Edge Malaysia Weekly on October 9, 2023 - October 15, 2023

IT was an opportunity to save the armed forces pension fund without involving any public money. But for whatever reason, that has gone up in smoke.

An estimated RM2 billion in taxpayers’ money that could have been used to build public amenities such as hospitals and schools, now has to be channelled into Lembaga Tabung Angkatan Tentera (LTAT).

LTAT, which has RM11 billion in assets under management (AUM), faces a challenging path to financial health following the termination of a strategic collaboration agreement (SCA) between the fund, its wholly-owned unit Boustead Holdings Bhd and plantation giant Kuala Lumpur Kepong Bhd (KLK).

Now, LTAT is undertaking a RM1.11 billion privatisation exercise to take full control of Boustead Plantations Bhd (BPlant), with a possible capital injection of RM2 billion provided by the government.

The government was reported to have allocated RM300 million last week to help LTAT address its liquidity issues, and is looking for a total of RM2 billion by year end to “save” LTAT.

The money would help LTAT avoid losses, Prime Minister Datuk Seri Anwar Ibrahim was quoted as saying in news reports last Monday, as he revealed the financial support at the launch of the Felda Segalanya event at Felda Chemomoi, Teriang, Pahang.

While chief executive Datuk Ahmad Nazim Abdul Rahman is coy about the fact that LTAT could use its internally generated funds to take over BPlant, it is likely that the public coffers will be tapped to restructure the Boustead group.

“I can’t say with certainty the exact amount that we are going to need [to restructure Boustead group], but there are different ways to approach the restructuring,” Ahmad Nazim tells The Edge in an interview last Thursday.

“Of course, the debts [at Boustead group] will have to be settled, at least partially, or whatever that is due this year and next. But there is also room for a debt rationalisation exercise,” he says, without confirming or denying the fact that the fund will need a cash injection from the government.

Minister of Defence Datuk Seri Mohamad Hasan told the Dewan Rakyat on Sept 18 that Boustead would need RM800 million by year end, and another RM1.7 billion to redeem its Islamic Medium-Term Notes (IMTN).

For LTAT, the most important objective is to protect the pension fund that manages the savings of the more than 140,000 veteran armed forces members who are on the pension roll, as well as the 115,456 members currently serving the armed forces. To do this, it is imperative for LTAT to restructure the ailing Boustead group since it makes up about 50% of its investment portfolio.

Ahmad Nazim acknowledges that it is not sustainable for a pension fund to have a high concentration of one company in its investment portfolio — especially one that lacks stable earnings and accretive businesses with low financial risk. In a nutshell, Boustead is certainly not the goose that lays the golden eggs for LTAT.

According to Boustead’s financial results for the quarter ended March 31 — the last publicly available financial report for the group — it had RM3.987 billion in borrowings with a maturity period of less than 12 months. On the other side of the balance sheet, its deposits, cash and bank balances stood at RM565.8 million, far below its current borrowings. Boustead’s businesses only generated RM11.8 million from operations during the quarter.

Data provided by Bond + Sukuk Information Exchange show that Boustead has RM2.26 billion of sukuk that will reach maturity in less than a year. If the company is not able to redeem the debt on its own, LTAT would have to step in, as there could be a domino effect on the group’s debt instruments.

These issues are exacerbated by the need to restructure LTAT’s other assets, such as Pharmaniaga Bhd and Boustead Properties Bhd (BProp).

Ahmad Nazim says a capital injection for Pharmaniaga’s financial health is on the cards, alongside the restructuring of Boustead’s debts.

“If you read the news, for the company [Pharmaniaga] to get back to a positive balance sheet, we would need at least RM500 million. But that doesn’t have to come entirely from LTAT. It can be done as part of a strategic partnership agreement with a strategic partner,” he adds.

Ironically, a strategic partnership with a market player was the route that LTAT was taking to save BPlant, to get an injection of funds from the market, without the need to resort to public funds. Will there be detractors again if LTAT embarks on the same route to restructure Pharmaniaga?

To recap, the SCA was not a divestment of BPlant to KLK. Instead, LTAT, Boustead and KLK would collaborate to restructure BPlant and put it in a healthier financial and operational condition so it could eventually create value for its shareholders.

Under the offer, KLK planned to extend a mandatory general offer of RM1.55 per share to raise its shareholding to 65%, and to subsequently delist the company. KLK currently has a direct stake of 3.09% in BPlant, following its latest acquisition of 6.11 million shares on Sept 29.

LTAT and Boustead, meanwhile, would hold the remaining 35% in BPlant, compared with the 68.01% they have now — 10.59% under LTAT and 57.42% under Boustead.

The proposal was seen as a good deal for LTAT, considering BPlant’s below average fresh fruit bunch (FFB) yields and how KLK planned to fund the replanting costs required for half of BPlant’s plantations, which some estimated would be about RM150 million annually for several years.

In the six months ended June 30 (1HFY2023), BPlant booked a net loss of RM304,000 compared with a net profit of RM508.38 million in 1HFY2022, as revenue fell 40.43% to RM400.98 million from RM673.11 million with the normalisation of crude palm oil prices.

The deal would have seen LTAT and Boustead receive RM1.15 billion from KLK for the 33% stake, as Boustead raced to address its short-term debt obligations totalling RM3.99 billion as at end-March.

“Yes, that was the original idea, to partially monetise, to allow Boustead to deal with its debt issues. The structure would have allowed us to enjoy the long-term value creation that might happen with KLK as a partner,” says Ahmad Nazim.

“At the same time, the structure of the deal, they would carve out two estates in Penang and Selangor to allow value creation at the BProp level. So, there is value creation, value enhancement prospects, at all levels for LTAT, Boustead and BProp.”

Now that the SCA has been terminated, LTAT will just have to take a longer route to meet its objectives, laments Ahmad Nazim. Its objectives — to resolve Boustead’s issues, to have the pension fund diversify its investment portfolio and to maintain at least 60% of its investments in liquid assets — remain. Currently, only 32.5% of LTAT’s assets are liquid, he says.

With the Boustead group being 50% of LTAT’s investment portfolio, it is reasonable to believe that some of its assets will be up for sale in the future so that LTAT will be able to increase its liquid assets to 60% of its total AUM.

Ahmad Nazim also talked about the possibility of BProp going for listing in the future, with the condition that the restructuring of the Boustead group is done right.

“At this stage, a restructuring or rebalancing of the investment portfolio of LTAT may not necessarily involve divestments or a sale. It can be done in many ways, like entering into strategic partnerships for long-term value creation and so on, while partially divesting our stakes,” he says.

“But we have no plan to divest any of our assets entirely. That is not the idea of restructuring and rebalancing our portfolio.”

Selling assets to streamline activities and generate returns is not foreign to LTAT and its investee companies.

In March 2019, Boustead disposed of the Royale Chulan Bukit Bintang hotel to Hotel Royal Ltd for RM197 million. Following the deal, Boustead recognised a disposal gain of RM84.6 million, boosting its earnings in the quarter ended March 31, 2021.

In September 2021, BPlant signed an agreement to dispose of five parcels of land measuring 664ha in Kulai, Johor, to SIPP Power Sdn Bhd for RM429 million. In April 2021, Boustead signed an agreement with Sunway Bhd to dispose of a 6.59-acre freehold tract in Jalan Cochrane for RM233.39 million.

The disposal of these assets, while providing cash inflow to Boustead and BPlant, did not do much to address their ailing financial and operational positions. The debts at Boustead are still sizeable and have exceeded its cash balances, while BPlant was still in the red as at 1HFY2023.

Unperturbed by the bad track record, Ahmad Nazim believes that LTAT will be able to successfully restructure Boustead and BPlant, with the caveat that the restructuring is done right.

“If we do it right — we have a clear objective for any monetisation exercise — then I think we can achieve anything that we set out to achieve. Our immediate objective is to at least have sufficient funds to partially settle the debts [at Boustead],” he says.

“So, that objective is clear to us. Whatever funding to be raised, from any monetisation exercise, is to be for that purpose.”

LTAT needs support to restructure its investment holdings and put its assets on a good financial footing. Sadly, if the fund is curtailed once again from doing what is right for its members, the onus will be on the government to resolve the situation.

Just a few years ago, Lembaga Tabung Haji’s underperforming assets had to be transferred to Minister of Finance Incorporated-owned Urusharta Jamaah Sdn Bhd to save the pilgrims’ fund. LTAT may have to do the same now.

And eventually, taxpayers will have to pick up the tab. 

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