This article first appeared in The Edge Malaysia Weekly on May 6, 2024 - May 12, 2024

ARMED forces fund Lembaga Tabung Angkatan Tentera (LTAT) has generated a lot of interest for many reasons, putting it in the crosshairs of investors and the market in general.

Asked where he hopes to see LTAT in three years, new Minister of Defence Datuk Seri Mohamed Khaled Nordin tells The Edge: “Being a pension fund, one of the main measures is, of course, for LTAT to be able to consistently offer the best return/dividends to all its contributors.

“Apart from that, I expect LTAT to be able to execute its strategic reform and venture into investment schemes or activities that will not only benefit LTAT but also help create a more productive and competitive ecosystem for all its subsidiaries.”

Mohamed Khaled, who has been the minister of defence since December 2023, was also chairman of LTAT’s flagship company Boustead Holdings Bhd from May 2020 to August 2021, which would indicate that he is well aware of the many problems at LTAT.

In April, Mohamed Khaled had stated that his ministry was committed to carrying on the restructuring of LTAT under its Strategic Plan 2023-2025 known as MAMPAN25. There have been many such plans in the past, but whether any have been successful is moot.

“We have only one goal. We want to optimise the performance of LTAT with the best business model without giving up strategic interests in various entities that have great potential,” Mohamed Khaled is reported to have said when announcing LTAT’s dividend early last month.

The two-year strategic plan, he said, includes plans to restructure LTAT’s business model and shareholdings in strategic companies.

LTAT was established in August 1972 under the Armed Forces Fund Act, also known as Act 101, and is a statutory body that manages the pension fund for officers, members of other ranks of the Malaysian Armed Forces and veterans. As at end-December 2023, LTAT had assets under management of close to RM11.54 billion.

In an email response to queries from The Edge about his immediate plans for the fund, LTAT CEO Mohammad Ashraf Md Radzi says: “Looking ahead, our focus remains on improving the quality of our balance sheet, enhancing financial performance and fortifying the organisational effectiveness of our strategic investee companies. We also aim to further diversify our investments into the intended asset class in order to continue growing our recurrent income. The immediate action is to optimise capital recovery from assets previously identified as part of our Strategic Asset Allocation recalibration goals to our ability to provide sustainable returns.

“In doing so, we foresee challenges, including aligning our diverse stakeholder expectations. As we embark on this journey, we welcome collaboration and partnership with stakeholders, both internal and external, to achieve our shared objectives and ensure the long-term sustainability and growth of LTAT and its investments.

“I’ve had the honour of serving LTAT for four years now, initially joining as chief financial officer and later fulfilling two terms as acting chief executive during transitional periods.

“Over this time, LTAT has diligently laid the groundwork for robust governance and implemented best organisational practices through our comprehensive Transformation Plan spanning 2019 to 2023.”

Mohammad Ashraf was chief financial officer of LTAT from March 2020 before being promoted to CEO in early April this year.

While both Mohamed Khaled and Mohammad Ashraf seem hopeful, others familiar with LTAT say reviving the armed forces fund will be an uphill task.

A market watcher familiar with LTAT says: “The focus should remain on Bou­stead Holdings. The decision to maintain the status quo on the current operating model means half of LTAT’s funds remains exposed to a single entity … It’s difficult to justify the continuation of this approach from the risk management perspective of a pension fund.” 

LTAT’s flagship Boustead Holdings, which it privatised last June, holds most of the fund’s assets.

LTAT’s main 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 in the armed forces. To do this, it is imperative for LTAT to restructure the ailing Boustead Holdings, since it makes up about half of its investment portfolio.

LTAT controlled 59.4% interest in Boustead Holdings when it was listed on Bursa Malaysia, and forked out RM703.2 million, or 85.5 sen, a share to take it private, with the aim of better manoeuvring the group while keeping it away from the limelight and the glare of corporate Malaysia.

The major assets under Boustead Holdings and LTAT include wholly-owned Boustead Plantations Bhd (BPlant), 54.96% in pharmaceutical company Pharmaniaga Bhd, which is in the cash-strapped Practice Note 17 category, 48.8% in Affin Bank Bhd and 72.38% in defence contractor Boustead Heavy Industries Corp Bhd (BHIC).

Given the concentration of LTAT’s investments in the Boustead Group, it had planned to balance and diversify its portfolio. Guided by its strategic asset allocation framework, it would reduce its shareholding in the companies in which it had at least 50% interest.

For its financial year ended December 2022, Boustead Holdings chalked up net profits of RM37 million on the back of RM15.11 billion in revenue. In FY2021, Boustead Holdings raked in RM170 million in net profits from RM11.31 billion in sales.

A check on the Companies Commission of Malaysia (SSM) shows that as at end-December 2022, Boustead Holdings had total liabilities of RM10.62 billion, of which almost 70%, or RM7.4 billion, were current liabilities. On the other side of the balance sheet, it had total assets of RM15.89 billion.

Boustead Holdings paid out only RM30.4 million in FY2022 and made no dividend payments from FY2019 to FY2021.

Being the pension fund of the armed forces, however, LTAT is constantly under pressure to deliver dividends. For FY2023, it announced a 5% dividend involving a total payment of RM485.08 million. The 5% payout in FY2023 was similar to that in FY2022, and better than 4.1% in 2021, 3.5% in 2020, 2.5% in 2019 and 2% in 2018.

Asked where LTAT obtained the funds to pay such good dividends, Mohammad Ashraf says, “LTAT adheres to a stringent dividend policy and reserve fund guideline, which serve as the foundation for determining our annual dividend rate. Our financial performance metrics, notably retained earnings (post-dividends) and net profit, have demonstrated year-on-year enhancements. This was mainly attributed to both equity and fixed income investments and are represented by all-cash income.” (See table.)

When announcing the 5% dividend, Mohamed Khaled reportedly said, “We wouldn’t announce dividends like this if we didn’t have a strong and solid financial position.”

Notably, in March this year, the Auditor General’s Report on Federal Agencies for 2022 had it that LTAT’s reserves stood at a negative RM376 million in 2020, RM258 million in 2021, and RM338 million in 2022. It highlighted 41 old stock portfolios with an unrealised loss of RM662 million as at end-December 2022, which contributed to the deficit. The report also says LTAT declared dividends in 2022 based on non-cash gains from the divestment of two holdings.

LTAT has disputed this deficit in reserves, and says its combined reserves at the end of FY2022 showed a net positive balance of RM160 million.

The Edge’s question on the availability of funds at LTAT is hinged, however, on former defence minister Datuk Seri Mohamad Hasan saying last October that the government would provide a financial guarantee of RM2 billion to LTAT to buy out BPlant. This RM2 billion financial guarantee is over and above an allocation of RM300 million to help the armed forces fund address its liquidity issues.

To recap, LTAT, Boustead Holdings and plantation giant Kuala Lumpur Kepong Bhd (KLK) had hatched a plan last August that would involve KLK acquiring 33% of BPlant from LTAT and its parent Boustead Holdings, at RM1.55 a share, or for RM1.15 billion. The plan involved LTAT hanging on to 35% of BPlant, as its total stake was 68%, and letting KLK run the joint venture and incur high replanting and fertiliser costs.

The plan fell through after widespread resistance from opposition politicians who were unhappy that KLK was buying out what they considered a bumiputera company. The resistance came even though KLK offered the best deal in a tender.

As a result, LTAT had to privatise BPlant, forking out RM1.11 billion for the remaining stake it did not own, to avoid legal repercussions, as it had made a joint bid with KLK to buy out the minority shareholders of BPlant.

In a nutshell instead of gaining RM1.15 billion from the sale of 33% to KLK, LTAT was forced to dish out RM1.11 billion for the remaining 32% in BPlant it did not own.

Boustead Holdings and LTAT are now in talks to sell about 25% in Affin Bank to the Sarawak government, which has accumulated almost 5% in the banking group. The market value of this 25% based on Affin Bank’s market capitalisation of RM5.91 billion is about RM1.48 billion.

With Sarawak buying a controlling block, however, there could be a premium being forked out, but this is conjecture at press time, and it is noteworthy that Affin Bank’s stock has gained more than 25% over the past year.

Other than Affin Bank, there were also plans to sell a strategic stake in PN17 classified pharmaceutical outfit Pharmaniaga, but it is unclear whether this will take place.

Other troubled assets such as BHIC’s 20.77% stake in the troubled Boustead Naval Shipyard Sdn Bhd — now known as Lumut Naval Shipyard Sdn Bhd — is being sold to the Ministry of Finance for RM1. Lumut Naval Shipyard gained fame after the botched RM9.13 billion littoral combat ship project, in which the government had injected more than RM6 billion, or more than 65% of the original costs, with none of the six vessels built.

In March this year, The Edge reported that BPlant was in talks to sell 1,200 acres of plantation land in Kulim, Kedah, to Kulim Technology Park Corp Sdn Bhd for about RM400 million. It is understood that the talks are still ongoing, but could be concluded soon.

Smaller assets such as Power Cables Malaysia Sdn Bhd, in which LTAT has a 60% stake, was also slated to be hived off, but what has transpired or how drastic the changes are in LTAT’s restructuring remains to be seen. 

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