Thursday, February 7, 2013

EPF must say no to Petronas

QUESTION TIME As a long-term investor, the Employees Provident Fund (EPF) should reject Petroliam Nasional Bhd’s (Petronas) offer to buy the shares it does not own in listed shipper MISC Bhd for RM5.30 per share because it considerably undervalues MISC.

Otherwise, EPF, which is the retirement savings repository for over 12 million Malaysian workers and which manages close to RM500 billion of funds, could well lose a golden opportunity to stay invested in what may be one of the most undervalued blue chips on the Malaysian market.

 Furthermore, if EPF does not accept Petronas’ offer for its 10.3 percent stake in the shipper, it can thwart the offer by itself, an express condition of which is that Petronas must obtain acceptances which will give it control of at least 90 per cent of MISC.

For Petronas, it seems strange that it wants to take a RM20 billion company - among the largest of listed companies - off the stock market when it has been listing many of its assets systematically on Bursa Malaysia over the years.

Petronas has merely said that taking full control of the company will provide Petronas with “greater flexibility in deciding MISC’s strategic direction”. In effect, further restructuring of MISC will be done behind closed doors.
MISC's strong institutional shareholders
The national oil corporation may be frustrated with low market valuations for MISC despite its strong underlying fundamentals, but that is hardly something that it should be worried about, especially since most of MISC’s other shareholders are strong institutional shareholders who have very long-term views in mind.
 The big problem is the non-LNG shipping area which collectively lost over RM1.5 billion in 2011, and is expected to have lost some RM1.25 billion as of last year. That is basically the crux of MISC’s migraines - its investments in the risky non-LNG shipping business.With the sale of the container and logistics business completed last year, some RM500 million in losses will no longer be repeated. But there are still heavy losses in petroleum shipping (estimated at RM450 million last year by analysts) and chemical shipping losses (RM250 million).

The mistake that MISC made was moving out of its primarily LNG shipping business into other areas of shipping which were much more risky. While some moves - such as the acquisition of American Eagle Tankers in 2003 - paid initial dividends, they bit back in a very big way when the downturn came. Regular shipping is not for the uninitiated.

But once these businesses are cleared out or turned around, MISC will be in ship-shape and will start re-exerting its underlying fundamentals. Analysts estimate current fundamental value as high as RM8 per share, with most analysts putting it around RM6.

Shares tell the story
At RM8 a share, Petronas’ total value will be over a third more than the offer value, and EPF’s 10.3 percent stake will be worth some RM3.668 billion or RM1.25 billion more than that under the Petronas offer.

NONEThe share price should go up in time. Right now, despite Petronas’ RM5.30 per share offer which gave a near 20 percent premium over the last traded price of RM4.45, the share price is trading near a 10-year low (see chart).

For Petronas, (if MISC does the right things) eventually value will come back. And let those funds which have invested in MISC for years and have been there through thick and thin, benefit from the efforts MISC and Petronas would no doubt make to improve MISC’s value.

Keeping MISC listed will continue to ensure that it is under public scrutiny, and therefore, the pressure will be on the company to do things with good corporate governance, take competent steps to sell loss-making units or turn them around, and get approval for shareholders for these steps.

petronas petrol oil facility in terengganu kerteh 141108 01If MISC takes measures that add value to the company, it can be pretty sure that it will get shareholder support.

For those funds (which include EPF), you have a duty to your members to obtain the best possible deal for them. And that certainly does not mean selling off the company at its low point. Get together and stave off the takeover and use your power to ensure that MISC and its controlling shareholder, Petronas, do everything possible to put value back into the shipping company.

There is no need to take MISC private, not for Petronas, not for EPF, not for the other funds and certainly not for the minority shareholders. Dropping the takeover will be in everyone’s interest.

P GUNASEGARAM is publisher and founding editor of KiniBiz. He believes that companies should stick to their core business. Otherwise, set up another company with separate funding to do so.

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