This article first appeared in The Edge Malaysia Weekly on July 29, 2024 - August 4, 2024

THE Human Resource Development Corporation Bhd (HRD Corp) has come under the spotlight as it made investments involving “put and call option (PCOA) agreements”.

Other than publicly traded companies, many of which are linked to tycoon Tan Sri Vincent Tan Chee Yioun and businessman Datuk Eddie Ong Choo Meng, HRD Corp — a government agency under the Ministry of Human Resources — also invested in private companies linked to Tan, namely Berjaya Capital Bhd and Singer (Malaysia) Sdn Bhd.

In an email reply to The Edge, HRD Corp spokesman explains that 85% of its investment portfolio comprises “low-risk” investments — fixed deposits, bonds, sukuk and unit trusts. The rest of its investments in the companies are considered “moderate risk”.

“To protect its investments, HRD Corp does not trade in shares in the open market. Instead, shares are purchased through a put and call option with corporate and personal guarantors as added layers of protection for HRD Corp’s investments,” HRD Corp says (see table).

The agency says its investments in derivatives commenced in 2020 with Widad Group Bhd (KL:WIDAD), 7-Eleven Malaysia Holdings Bhd (KL:SEM) and Berjaya Food Bhd (KL:BJFOOD).

“At the time, the market was quite uncertain with the looming Covid-19 [pandemic]. The derivatives would swing quite heavily; however, in net [sum of share price, put option value and call option value], it should be 8% to 8.5%.The put and call is a mechanism to hedge the risk to ensure the equity is not exposed to price fluctuation,” HRD Corp explains.

HRD Corp, which collected more than RM2 billion in levies from more than 80,000 employers last year, had investments in various kinds of capital market instruments amounting to RM1.45 billion at end-2023. It also held RM2.46 billion in cash and bank balances.

It goes on to explain that 51.2% or RM1.94 billion of its RM3.79 billion initial investment is in the form of cash and bank deposits, 18.8% or RM712 million in stocks, derivatives and preference shares (14.3% or RM542.5 million in stocks and derivatives, 4.5% or RM170 million in Redeemable Cumulative Convertible Preference Shares [RCCPS]), 13.7% or RM520.3 million in bonds and sukuk, RM472.3 million or 12.5% via Amanah Raya Bhd and RM143.8 million or 3.8% in unit trusts (refer to chart).

The agency also highlights that it has garnered a 3.4% return on investment in 2021, 3.7% in 2022 and 5.2% in 2023.

Overall, HRD Corp clarifies that it has invested in 16 companies on Bursa Malaysia (see table), and that the investments are collectively in the money, and valued at RM622.29 million as at June 30, 2024 compared with RM597.18 million of initial cost.

While the group stated that it invested in heavyweights like Malayan Banking Bhd (KL:MAYBANK) and Axiata Group Bhd (KL:AXIATA), they make up only 0.5% or RM3 million of its total investment in stocks.

Looking at the data shared, it looks like HRD Corp invested heavily in Berjaya Group, Chin Hin Group and Hextar group of companies.

It invested a total of RM170 million in RCCPS from Berjaya Capital and Singer, both private companies. Berjaya Capital is the holding company for Berjaya Group’s financial services business, including unit trust fund management, investment portfolio management, insurance and stockbroking, held under Inter-Pacific Securities Sdn Bhd.

Meanwhile, Singer, widely known for its sewing machine business, is a marketing company selling household appliances including washing machines, fans, cookers, refrigerators, and even furniture. Berjaya Corp assumed management control of Singer in 1989 following several equity acquisitions and later became a wholly-owned subsidiary of Berjaya Retail Bhd in 2010.

Beyond investments in the RCCPS, HRD Corp holds equity stakes in Berjaya Corp Bhd (KL:BJCORP), Berjaya Food, and 7-Eleven Malaysia Holdings, according to the companies’ annual reports.

HRD Corp says its initial investment in these three companies are worth RM177.79 million.

The government agency has 4.12% equity interest in Berjaya Corp, 4.5% in 7-Eleven Malaysia and 4.9% in Berjaya Food, based on the companies’ respective annual reports.

Combining these with the RCCPS investments, HRD Corp’s total exposure to Berjaya Group is RM347.79 million, or half its equity-related investments.

Based on the provision in Section 2(1) of the Companies Act 2016, preference share is defined as:

“... a share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise …”.

They are different from ordinary shares in a company. Preference shares carry rights to dividend (usually at a fixed rate) which ranks for payment before that of ordinary shares and have preference with regards to distribution of assets upon dissolution of company.

The redeemable feature in the preference share allows holders to redeem such shares at a specific date of a certain amount. The convertible feature allows holders to convert their preference shares to ordinary shares according to terms and conditions.

Nonetheless, there is also a cumulative feature, which means HRD Corp may not get a yearly dividend where the unpaid dividends will be carried forward to the following years. However, there were no dividends owed disclosed in its annual report.  

HRD Corp says its investment in RCCPS only started recently, in 2023.

Berjaya Capital’s 2023 annual report shows that on March 29, 2023, the company issued 39.45 million RCCPS at RM2.78 per share, raising a total of RM110 million. These RCCPS have a three-year maturity and an 8% annual dividend.

Meanwhile, Singer’s 2022 annual report discloses a June 26, 2023, subscription agreement with HRD Corp for 60 million RCCPS at RM1 per share, totalling RM60 million.

Aside from the Berjaya group of companies, HRD Corp also invested in Chin Hin Group of companies: 2.34% in Chin Hin Group Bhd (KL:CHINHIN), 2.39% in Chin Hin Group Property Bhd (KL:CHGP), Signature International Bhd (KL:SIGN), and 2.85% NCT Alliance Bhd (KL:NCT).

Also, HRD Corp invested in the Hextar group of companies linked to Ong, namely Hextar Global Bhd (KL:HEXTAR) and Hextar Industries Bhd (KL:HEXIND). Ong is also a shareholder of Teladan Group Bhd (KL:TELADAN), one of HRD Corp’s investee companies.

HRD Corp also bought shares in Widad under a PCOA agreement on Oct 12, 2020, according to the National Audit Department’s report on HRD Corp.

In the report’s briefing notes, the National Audit Department stated that HRD Corp’s entry price in Widad was 62 sen a share. Widad’s share price has fallen from 49 sen in mid-January to a low of 5.5 sen last Friday.

Widad’s 2023 annual report shows that HRD Corp owned a 3.12% stake, or 96.46 million shares, as at April 18. That block of shares is worth RM5.31 million compared with its investment cost of RM59.8 million. 

NOTE: The article has been amended regarding the right of holders of preference shares on Aug 22, 2024. 

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