The Short Position

Published: Saturday March 8, 2014 MYT 12:00:00 AM
Updated: Saturday March 8, 2014 MYT 11:58:17 AM
The Short Position

Starting this week we will feature a regular column, The Short Position, that slices and dices corporate and economic issues dominating the domestic as well as foreign capital markets. We hope this short analyses will help readers view issues in a different light.
Bursa's reprimand

BY any measure, it’s significant when Bursa Malaysia says it has publicly reprimanded in a single day, not one, not two, but three companies, and imposed fines of over RM1mil. This happened on Feb 28.
Yet, this received little of the attention it deserved because the media releases came out on a day when there was a deluge of information flowing through the stock exchange’s website.

Feb 28 happens to be the last day for listed companies whose financial year ends in December, to issue their fourth-quarter results. And as it has always been, it was down to the wire for a lot of these companies.

The last time the stock exchange had issued three or more public reprimands at one go was on Jan 19, 2011, when four companies were penalised for breaching the listing requirements. However, the total fines then came up to RM525,000.

We have to go back to 2011 again to find the most recent instance when in one day, Bursa Malaysia punished directors of listed companies by slapping them with fines amounting to more than RM1mil. On June 22 that year, the exchange publicly reprimanded seven directors of Golden Plus Holdings Bhd, with each being fined RM200,000.

The Feb 28 enforcement actions involved Silver Bird Group Bhd (now known as High-5 Conglomerate Bhd), SAAG Consolidated (M) Bhd (which was delisted in September last year) and Hytex Integrated Bhd.

All three companies were reprimanded for failing to ensure that certain announcements were “factual, clear, unambiguous, accurate, succinct and contains sufficient information to enable investors to make informed investment decisions”. In addition two key Silver Bird directors at the time of the company’s breach were fined RM500,000 each, while five SAAG directors were fined a total of RM175,000.

A public reprimand (as opposed to a private reprimand) has a name-and-shame element. However, the deterrent factor is diluted when statements on the penalties aren’t given a better chance of being picked up by the media and given due prominence.

In the interest of maximising coverage, can there be any harm in waiting a day or two to inform the public about the reprimands and fines? After all Bursa Malaysia’s listing rules stipulate that the exchange can publicise any enforcement action “in any manner as the exchange deems fit or expedient”.

Perwaja's deal

The deal struck by Perwaja Holdings Bhd with two key government-owned utility providers, Petroliam Nasional Bhd (Petronas) and Tenaga Nasional Bhd (TNB), has given a lifeline to the beleaguered steel producer.

But it could set a dangerous precedent.

Perwaja is not the only steel mill that is in trouble. The whole industry is reeling from competitive imports, volatile raw material prices and higher costs of domestic production.

The likes of Hiap Teck Venture Bhd, Malaysia Steel Works (KL) Bhd, Ann Joo Resources Bhd, Southern Steel Bhd and many other smaller steel millers are also suffering from losses. Not to mention, the giant of all steel mills, the Lion group that has plants producing long and flat steel products, has postponed repayment to bond holders.

What if all these players also seek similar reprieves from Petronas and TNB?

In Perwaja’s case, it had reached amicable settlements with Petronas and TNB for the millions owed to the utility providers.

No details were provided, but speculation has it that Perwaja, which was established with government funds, has got an 18-month reprieve, followed by a 43-month repayment plan.

Assuming this is true, this works out to a repayment stretched out to a 5-year period. Would others get similar deals? If so, this would effectively further postpone the long-needed consolidation and restructuring of the local steel industry.



EPF's return

The 6.35% dividend declared by the Employees Provident Fund (EPF) for 2013 was the highest since 1999. Upon closer scrutiny, while the payout is good, its sustainability is doubtful because a large chunk comes from its returns on investments in equities.

The dividend cost the EPF RM31.20bil, which is 13.66% higher than the RM27.45bil paid in 2012. Paying the dividends was aided by a record gross investment income of RM35bil, the EPF said, which was 12.81% higher than the RM31.02bil gross investment income recorded in 2012.

Last year, the EPF with 13 million members, needed RM4.91bil for every one percentage point of dividend declared. As its membership grows, the amount needed to pay every one percentage point of dividend is expected to grow by between 8% and 9% annually.

The robust stock markets helped EPF achieve its high dividends and it said equities was the largest contributor to its gross investment income last year, generating RM19.52bil, and up 40.39% compared with RM13.90bil recorded in 2012.

Out of a total fund size of RM586.6bil as at end of last year, RM252.1bil or 43% was invested in equities.

Five years ago, the amount invested in equities was 27.05% of its fund size of RM371.3bil in 2009.

The risk of having a large exposure to equities may make some members nervous, given the volatile global markets. Should there be a fall in markets caused by shocks, the implications would be adverse on returns.

Having said that, the EPF is also in a predicament. It needs to invest to generate a fairly healthy return. But the asset classes particularly in Malaysia, are either too small or unable to generate the yearly returns it needs to keep its members happy.

Having so much money in equities, and presumably much of that in Bursa Malaysia, is also unhealthy for the market.

The money that EPF and other local institutional funds have invested in the FBM KLCI component stocks effectively has seen some blue chips “cornered” to some extent.

The EPF’s need to generate returns is challenging given its growing size. A way out is perhaps to relax its restrictions on foreign investments and other asset classes so that it has more options.