JCorp: Biting the Bullet?

Mohd Farhaan Shah and Risen Jayaseelan tell us about an impending debt at Johor Corp in the online STAR today. I have taken the liberty to abridge it accordingly to be brief.

Are there really viable options? Will Johor Corp bite the bullet?

New CEO of Johor Corp (JCorp), Kamaruzzaman Kassim said that the Corporation  will not be selling any of its assets to repay bondholders' RM3.6bil when the papers are due on July 31, 2012. That route is now out of the question,so it seems.

This is suppose to put a market dampener on speculation that key assets in the JCorp group, such as QSR Brands Bhd (that owns KFC Holdings (M) Bhd) and London-listed New Britain Palm Oil Ltd (NBPO), will be up for sale at any time soon.

Kamaruzzaman, named JCorp CEO last week confirmed that JCorp had appointed CIMB Bank and Maybank Investment Bhd as advisors.

Kamaruzzaman said that both these banks were the biggest lenders to JCorp. This means that both banks may own the bulk of the RM3.6bil bonds that are due in 2012. [Does it not remind you of the EPF-RHB thingy?]

The financial advisers apparently have suggested some ideas including the issuance of new bonds. [Expecting some form of haircut here?]

The CEO  has explained that the RM3.6bil debt was due to JCorp's aggressive investment since 2000, mainly in landed property and industrial areas.

JCorp has been in the news in recent weeks after it rejected two bids to take over QSR Brands Bhd. One was by a company linked to tycoon Tan Sri Halim Saad and another by the Carlyle Group.

While JCorp has a number of prized assets in the group, it doesn't own most of these assets directly. JCorp owns 53% of Kulim, which owns 50% of NBPO and 57.5% of QSR. QSR then owns 50.6% of KFC.

So if these assets were to be sold, the sale proceeds would be trapped at Kulim.

What that means is that if the money Kulim got from the sale of NBPO or QSR were to be paid out in dividends, JCorp would only get half of that, with Kulim's other shareholders enjoying the proceeds as well.

This is likely the main reason for JCorp opting not to divest its assets to repay the loan. When JCorp-controlled Kulim rejected the two bids, it said that it believed more value could be realised in QSR and KFC in the long run.

According to JCorp's 2009 annual report, it had RM705mil in cash but a whopping RM6.62bil in debt and with hardly any free cash flow.

It also paid around RM500mil in interest payments and RM1.7bil in loan repayments. Despite being perceived as asset rich, it only booked a paltry RM5mil in dividend receipts in financial year 2009.

So, it would be interesting for QSR and KFC shareholders what JCorp will do come 2012 when the bonds are due for payment. Will they be paying out bumper dividends  at QSR and KFC so that JCorp can survive a cash crunch? Good question.

JCorp is one of the country's largest state economic development authorities and has around 250 companies.

Rollover, Rover?

Bursar KL: Information for the Potential Retail Investor

Jagdev Singh Sidhu analyzed the buying and selling patterns of both local and foreign investors on Bursa KL throughout 2010 excluding December.

Here is his report from the online Star.

"Local retail investors have been net sellers of stock for all but one month up to November this year, but the pace of buying has slowly caught up with selling as the stock market rose towards its record high levels at the end of the year. [ So local investors are net sellers]

According to trade statistics from Bursa Malaysia, retailers bought RM8.93bil worth of stock in November and sold RM8.99bil worth of shares. In terms of purchases, the highest amount of shares bought or sold was in January when retailers bought shares worth RM9bil but sold RM9.1bil.

The pace of transactions declined thereafter but started to pick up in September when purchasers rose to RM5.58bil versus selling RM5.72bil worth of equity.

In October, buying and selling rose to RM7.57bil and RM7.73bil respectively and in November, when the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) hit a record 1,528 points, retailers bought RM8.93bil worth of shares and sold RM8.99bil worth.

The pace of purchases also reflected the monthly value of trade done on Bursa Malaysia. Data for December has not been released.

In terms of value, the highest month of transactions based on value was November when RM39bil worth of trade was conducted. The month also saw the entry of the largest IPO in the country, Petronas Chemicals Group Bhd, which attracted a great deal of interest among institutional investors.

The value of transactions has also mirrored the FBM KLCI’s ascendency to its new peak.

Total value of trade in October was RM36.5bil and RM31.6bil worth of share transactions were done in September.

Trade value has been consistently rising since July when total transactions were RM26.1bil. The value of transactions has somewhat tracked the rising amount of foreign investor interest in the stock market.

Foreign institutions have been net buyers of Malaysian shares since June but over the last couple of months, the amount of the net purchases by foreign institutions has been shrinking.

As foreign investors have been net buyers of Malaysian shares over the past 6 months, most of that extra liquidity or shares available for purchase has come from local institutions.

Local institutions have been net sellers of shares on Bursa Malaysia since June and only emerged as net buyers in November.[Sell low, buy high? Or have they bought into Petronas Chemical?]

One of the highest months of purchases by local institutions was in March when local funds bought RM12.8bil worth of stock and sold RM13.1bil in shares.

Total transactions by local institutions dipped thereafter but started to pick up once again in September when such funds bought RM9.7bil worth of shares and sold RM14bil worth.

The net selling gap then dropped as interest in Malaysian shares picked up again and in October, local institutions bought and sold RM12.8bil and RM14.2bil worth of shares.

In November, local funds reversed their selling trend of previous months when it bought RM12bil in stock and sold RM11.5bil in shares.

Foreign investors have also increased their buying of Malaysian shares in recent months and in August bought more shares than local institutions.

Foreign investors continued to buy more shares on Bursa Malaysia compared with local institutions in September but in October, as the market continued to charged towards its record high, local institutions poured more money into Malaysian shares compared with foreign institutions.

In November, local institutions’ purchase of stocks at RM12bil was higher than foreign institutional funds which snapped up RM11.5bil worth of shares."

So it looks like local buyers are net buyers for all months except in November. My guess is that the local buyers are just the same local funds particularly EPF, Pension Funds, SOCSO, Khazanah, ValueCap and so on and so forth. There is some action on some penny stocks that are dividend paying and  those affiliated with political interests.

That second liners are hardly moving is indicative that the common retail buyer is not in the market.

New Malaysian Code on Takeovers and Mergers 2010

Well, maybe in some small ways, investors may have the feeling of  getting better protection. with the enforcement of the new Malaysian Code on Takeovers and Mergers today.

The last major review of the code was in 1998.

Given the number of developments in the capital market in the last 10 years, the commission felt that it was time to reissue the code, industry observers said.

Its major changes also came from extensive consultations with various parties, they added.

"The 2010 Code replaces the Malaysian Code on Take-Overs and Mergers 1998," the SC announced yesterday.

"The 2010 Code, together with its Practice Notes (PNs), provides protection to a wider group of investors, enhances transparency and improves efficiency in line with capital market developments, locally and abroad," it added.

Key changes in the 2010 Code benefiting shareholders included protection for investors of foreign companies and real estate investment trusts (REITs) listed on the local bourse, shorter settlement periods and enhanced disclosures in offer documents and independent advice circulars.

Effective immediately, all companies, including foreign incorporated ones and REITs listed on Bursa Malaysia, are subjected to the code.

In the past, the code only regulated public companies incorporated under the Companies Act 1965, regardless whether they were listed or not.

The 2010 code now allows a voluntary takeover offer to be carried out with a higher acceptance threshold as a condition.

The new code has reduced the settlement period in a takeover offer to 10 days from 21 days for settlement via cash consideration, and 14 days for settlement via shares.

Schemes of arrangement, compromise, amalgamation and selective capital reductions now have the same effects as takeover offers.

The Securities Commission believes that there should be parity in the protection afforded to shareholders in the implementation of such schemes.

Another major change in the code relates to the announcement on potential takeover offers.

The 2010 Code requires a potential offeror or offeree to make an announcement on possible offers where there are unusual changes in the price of the potential offeree's shares.

If the offeror denies that he is making an offer for the offeree, he will be barred from making any takeover bid within six months.

The code now requires only one-stage application to be made, instead of two stages previously, for exemptions from mandatory offer obligations arising from the issuance of new securities and share buyback schemes.

It also waived the need for the Securities Commission's approval for the appointment of independent advisers by the board of an offeree.

Merril Lynch: Underweigh Malaysia!

I was reading Yow How Chieh's article in the Malaysian Insider today (16 December 2010). It makes sober reading and has foreboding implications for Malaysians in 2011 and much beyond.

Here is his article.

"The Najib administration’s New Economic Model (NEM) has failed to excite investors, with Bank of America Merrill Lynch maintaining this week its call to shed investments in Malaysia.

Despite the government’s high hopes on the NEM, the investment bank this month continued to rate Malaysia as a “big underweight” in emerging markets.

An underweight call is a recommendation to investors to reduce their investments in a particular security, asset class or, in this case, a country.

Malaysia managed to trim its underweight rating from over 50 per cent in November to 46 per cent this month but still only managed to come in second-last among the 15 countries studied by the investment bank.

This is despite the fact that emerging markets continue to be the equity region of choice for investors worldwide, with investments persisting at historically high levels.

Investors have so far greeted Prime Minister Datuk Seri Najib Razak’s highly anticipated NEM with disinterest, owing to lack of detailed policies, timelines and the apparent rollback of ambitious Bumiputera quota reforms detailed in the first half of the year.

The bold recommendations set out in the first part of the NEM to boost competitiveness by reducing quotas appear to have been sidelined in the second part launched recently.

Observers attribute this to stiff resistance from Malay rights groups concerned that such moves will erode the community’s interests.

Economists and political analysts have also criticised the NEM for its lack of innovative thinking and timidness, which they said does little to dispel lingering investor skepticism.

Malaysia also remains unattractive to Asia Pacific investors, with Merrill Lynch increasing its underweight rating four-fold for the country from November.

Topping the Asia Pacific list were strongly overweight Taiwan, Hong Kong, South Korea and China, with Singapore coming in fifth despite its downgrade to neutral.

Making up the rest of the underweight club were Southeast Asian nations Thailand, the Philippines and Indonesia, along with New Zealand, Australia and India.

Nonetheless, Malaysia looks set to end the year as the fourth fastest growing emerging market after China, India and Turkey, and is expected to remain number four in 2011.

Developed markets, which bore the brunt of the financial crisis, will continue to contract, with the possible exception of sluggish growth in Europe. Emerging markets, on the other hand, face the risk of overheating next year and increased likelihood of “policy mistakes” in the form of insufficient or excessive money tightening.

Merrill Lynch expects the ringgit’s outperformance this year to fade due to a likely 50 basis point interest rate hike over the next 12 months by Bank Negara Malaysia, in response to increasing private investment in the economy.

Slow implementation of the Economic Transformation Programme (ETP) due to political resistance and the low priority of fiscal consolidation were cited as possible risk factors to the national currency.

Also of concern were “some small risk” that Umno may lose more seats in the next general election — expected to take place next year — as well as higher inflation due to rising food and fuel prices.

The government embarked on a second wave of subsidy cuts earlier this month, which saw RON95, diesel and LPG prices go up by five sen per unit and sugar price increase by 20 sen per kg.

The price hikes are expected to put upward pressure on inflation, which Merrill Lynch predicts will rise from 1.8 per cent this year to 2.8 per cent next year, before dropping slightly to 2.5 per cent in 2012.

Malaysia’s real GDP growth is also expected to drop to 5.2 per cent in 2011 and 5.4 per cent in 2012 from the expected 7.2 per cent expansion this year, putting at risk the 6 per cent annual growth needed to propel the nation to high-income status by 2020.

KFC's Ayamas Expansion

For a change, let us hear about some new directions that KFC is taking.

KFC Holdings (Malaysia) Bhd (KFCH) currently has 50 Kedai Ayamas outlets in the country. It intends to open 25 new outlets in 2011.

Each outlet will cost RM350,000 and total investments will add up to RM9 million.

Kedai Ayamas will begin its new delivery service. It will be piloted at eight outlets in the Klang Valley, with an initial investment of RM200,000.

KFC believes that the delivery service is relatively untapped and a great potential avenue for revenue.

Thee spokesman also intimated that KFC opened 15 outlets this year and recorded a sales growth of 43 per cent in the first nine-months of this year when compared with the whole of  2009.

He added between 65 per cent and 70 per cent of the new outlets coming up next year would be located around the Klang Valley.

"With our roll-out plan, we expect to maintain a double-digit growth next year. Our customers prefer to go to our Kedai Ayamas outlets simply because we can guarantee the quality of our chicken," he said.

He also said the company had three processing plants in the country currently with a combined capacity to process about 140,000 chickens per day.

"Over 60 per cent of the chickens are distributed to our existing outlets while the remaining will be refined into further processed products to be sold under the brand name of Ayamas," he said.

KFCH is currently a unit of Johor Corporation via its subsidiary, Kulim (Malaysia) Bhd which holds a 57.5 per cent controlling stake in QSR Brands Bhd, which in turn controls KFCH.

The rise,fall and rise again of the shares of KFC for the year is most interesting within the intended corporate takeovers background.

KLK: Tighter Grip on Nitrile Latex Market

If you want to know of the latest corporate incursion of KL Kepong, you have to read Ooi Tee Ching's online article.in the Business times today.(16 December 2010)

Here is his article.

Kuala Lumpur Kepong's 19 per cent owned Yule Catto has bought PolymerLatex for RM1.85 billion

Kuala Lumpur Kepong Bhd (KLK) , which owns 19 per cent of Yule Catto & Co plc, is set to tighten its grip on the world’s supply of nitrile latex following the British firm’s 443 million pounds (RM1.85 billion) purchase of Germany’s PolymerLatex Group.

Chemical maker Yule Catto, listed on the London Stock Exchange, is already the owner of the Synthomer Group’s polymers business.

The PolymerLatex acquisition will bring together the world’s two biggest suppliers of butadiene or nitrile latex with a combined turnover of more than 1.2 billion pound and more than 2,000 employees.

Synthomer’s unit in Malaysia runs a 130,000-tonne per year nitrile plant in Kluang, Johor.

On the other hand, PolymerLatex operates a 100,000-tonne a year nitrile latex plant in Pasir Gudang, Johor.

Nitrile latex is used mainly to make synthetic rubber gloves.

KLK executive director Datuk Lee Hau Hian said the purchase will strengthen Yule Catto’s core business.

“It will allow Yule Catto to achieve cost synergy in research and product development,” Lee told Business Times yesterday.

Asked if a bigger sized Yule Catto could lead to price-fixing of nitrile latex, Lee said: “No, it will not because it takes two to make a deal. Both Yule Catto and nitrile glove makers must be happy in order for the industry to grow”.

Hartalega Holdings Bhd managing director Kuan Kam Hon said Yule Catto’s acquisition is a good thing for the former.

“I don’t think there’ll be any issue of price-fixing because there is no monopoly. The market is becoming bigger and we see new players from South Korea and Taiwan,” he said when contacted yesterday.

“When we source for nitrile latex, it’s not a decision based solely on price. Technical support is very important,” Kuan added.

Hartalega is the world’s largest nitrile glovemaker and is the biggest consumer of nitrile latex in Malaysia.

Yule Catto is issuing rights shares to fund the PolymerLatex purchase. Its investors are offered four new shares for each three they currently own at 116 pence.

KLK, in a filing to Bursa Malaysia on Tuesday, said it will take up all its rights.

This means the company will pay RM209.8 million for its portion.

Yule Catto chief executive Andrew Whitfield reportedly said the enlarged group could compete more effectively in a consolidating emulsion polymer market.

He expected the deal to allow it to achieve STG20 million (RM98.8 million) in cost savings.

So, if you are watching how KLK is performing in the medium term, this nitrile investment could be a net contributor of strategic significance.

KFC: Gobbling up Profits Like a Turkey

Imagine this!

For the first nine months of 2010,KFC Holdings (M) Bhd has amassed an income of more than RM1.83 billion.

Since January 2010, 34 KFC restaurants have been built.By the end of 2010, another 38 more new KFC restaurants will open its doors to Malaysians. The investment outlay for the new restaurants is RM45 million. Then in 2011, another 25 restaurants will open at a development cost of RM60 million. Of these 15 will be drive-ins.

It cost  about RM3 million to build a KFC drive-in restaurant compared to RM1 million for a normal one.

Currently, KFC has 511 restaurants in Malaysia and more than 69 in Singapure, Brunei and India .Some  18,000 workers are employed by KFC.

According to an KFC spokesperson, "Apart from operating the KFC restaurants, the company is involved in retail activities through the supply network of chicken-based products under the Ayamas brand, the Ayamas Shop and Restaurant RasaMas.

"We are also involved in the breeding, processing and hatching of chicken eggs, apart from additional business such as a bakery and sauce production," he explained.

With more KFC outlets to be opened in India and Cambodia, the fortunes of KFC looks better with each passing year.

Currently, KFC trades at RM3.80 per share. It should go back to its peak at RM4.50 very soon.

The Contrarian Winner

A year ago,in November 2009,two of the richest men indicated that the global economic panic was over and it was time to start going into quality stocks.

Despite lingering shocks from the  longest, deepest recession since the Great Depression, they vouched that capitalism is still alive and well.

Warren Buffet assured us that "The financial panic is behind us," and recently called for an "all-in wager" on the U.S. economy by acquiring railroad Burlington Northern Santa Fe.

He added that "The bottom has come in stocks. Don't pass on something that's attractive today."

Sitting facing each other in an auditorium filled with nearly 1,000 cheering people at Columbia University in New York, the CEO of Berkshire Hathaway Inc. and Microsoft founder Bill Gates fielded questions from Columbia Business School students on the recession, investing and what's the next Microsoft.

They were the two to provide the first reassurances that the U.S. economy had not collapsed since the last time the two sat in front of a student audience, in Nebraska in 2005.

"We proved that we can make mistakes," said Gates.

"But the fundamentals of the system, a marketplace-driven system where we invest in education and a great infrastructure for the long-term, that's continued."

Even in the country's "darkest hour," he said, American businesses were still innovating.

"Last fall was really blindsiding," Buffett said later.

Still, "I did not worry about the overall survival of our economy."

The worst recession since the 1930s may be over, but the recovery isn't expected to be strong enough to stem job losses and get businesses hiring again.

Employers shed a net total of 190,000 jobs in October, a government survey showed Thursday.

It was the 22nd straight month of losses.

And the unemployment rate jumped last month to 10.2 percent, a 26-year high.

Buffett also commended the Bush administration's actions last September, saying "only the government could have saved things" after the collapse of Lehman Brothers triggered the freeze-up in credit markets and panic on Wall Street.

In the future, however, Buffett said "there should be more downside to the head of any institution that has to go to the federal government to be saved for reasons of the greater society. And so far, we have been better at carrots and sticks in rewarding CEOs at the top. But I think some more sticks are called for."

The two endeared themselves to the audience with tips.

Buffett exhorted students to "marry the right person" and said, "The worst investment you can have is cash."

Gates, meanwhile, said he sees big opportunities in environmentally friendly energy and medicine.

"Capitalism is great," he said.

So,those who heard their advice have definitely made a pile despite the sovereign debt issue in Europe and the silly fracas between the two Koreas.


Did you?