Bought Gamuda and Sold MRCB

I decided to buy Gamuda as I thought that the selling was overdone. I was not around during that time, this trade was made in 8 November 2018.

Generally, I thought that the MRCB announcement of compensated for its highway was already accepted by the investing public. Despite selling, I still think that MRCB is still undervalued but I feel that Gamuda is a better bet in the long run.

I think despite both are not apple to apple, but Gamuda is a better company in terms of capabilities and capacities. Although it has lost several contracts like the MRT3 and HSR due to postponement, Gamuda is still a more solid company in the long run.

Buying MRCB

The day to day announcement of cancellation of projects have spooked the market so much so that I feel there has been certain stocks being oversold quite a lot.

One of the example is MRCB which had just had a fund raising late last year. From that exercise, I think what the investing community has been thinking of MRCB is that it is about the HSR project alone.

To be fair, the fund raising is not purely for HSR but as per my article earlier, it is part of its reorganization exercise where it cures its balance sheet and at the same time refocus. MRCB has gone from owning many parcels of land that has lower GDV to larger projects where each GDV is much larger.

Key among them are the MX1 project which is the city center project on Kwasa Damansara, Bukit Jalil etc. Many of these projects are private projects which have been secured.

Through several exercises, MRCB had raised close to RM3 billion over the last 6 months and those would have improved its balance sheet, while having larger order books.

As a result, I have sold Tropicana which does not get impacted during the bloodbath and bought MRCB.

The Edge: Dr Mahathir on toll concessionaires

The most recent Edge Weekly is quite a meaningful edition as it had the opportunity to interview Tun Dr Mahathir i.e. the first to do so in a private setting after GE14 where Pakatan Harapan had won the election.

I managed to get a copy during the weekend, and Dr Mahathir was enquired about his views on toll abolishment in stages as in the Pakatan Harapan's manifesto.  Here are some of it (but please go and buy a copy as there are much more to read especially on ECRL, HSR etc).

TheEdge: The national debt is already so high. The government has zero-rates GST, reintroduced petrol subsidy and is reviewing toll charges. These will cost the government money. How is it going to handle the situation?

Tun Dr Mahathir: Much of the work being done now is to downsize the financing of the government. By doing away with all these expensive projects, we are already reducing (debt) servicing costs.

.....

I must admit that when we were campaigning, we proposed things so that the people would want us to be the government. But, of course, we have to manage these promises. For example, the toll review is not going to be immediate, it will be in a gradual manner.

Is the government going to acquire all the toll concessionaires?

Some we have already acquired. But we have to work with the private sector. I have read some of the proposals; they sound quite reasonable. You see, the main point is we don't want to punish the people (toll operators). At the same time, we have to ensure the government has some money to build roads.

Based on the above, it is unknown what he meant by "Some of the toll we have already acquired." Could he have meant that PLUS was for example is already 51% owned by Khazanah, the only government owned that I know which is owned by the government. Many other toll businesses are either owned through PNB (a government managed fund), EPF or some of them the shares are passively owned by Malaysian funds.

Toll business which traditionally have been the safer bet assets, have been hammered especially when several individuals have appeared to justify that they will follow the Pakatan Harapan's manifesto of abolishing toll in stages. From there, the toll concession shares have suffered drastic drop and some of them have been owned by my investment fund. These are WCE, Ekovest, LITRAK, MRCB.

What was initially feared is that the government will be using a clause which is available in the toll contract i.e. in the "expropriation clause" where the government can acquire them for national, public interest or public security.

Of course, the argument from many (including me) is that in doing so, it will collapse the capital and bonds market where toll concessionaire's bonds are among the highest in total.

What I think may happen?

As mentioned by EPF's CEO, the toll business acquisition has to be looked at holistically. In my mind, holistically means it has to be looked at in its entirety and it may involve Khazanah, PNB and EPF in acquiring these assets. The bonds may also be repackaged and new shares may also be offered in the capital market.

One may ask: But, it does not eliminate toll charges. Yes, but in reducing the toll charges, it is already a win. When the government together with the funds are able to negotiate a package with the toll owners, they can relook at an optimum charge towards the users as well as a decent return for the investors i.e. the funds.

It has to be understood, rightly so, some of these toll businesses have made quite a lot throughout the concession period. Among them are LITRAK and PLUS and these have been the topic of contention among the politicians like Tony Pua.

Hence, by acquiring the concessions outright at a fair price and repackage the toll rates, they may seem to be the best option.

MRCB is into something really BIG?

Seldom I see exercise done in this manner. And seldom an organization can do it at this scale. After raising about RM400 million a year ago in three tranches of private placement - expanding its share base by 20%, it does a rights issue in less than a year.

Back in November / December last year, MRCB raised additional funds at 1 for 1 rights at 79 sen per share. My question is why?

Although felt like not much, MRCB had a major fund raising exercise over a period of 18 months - as mentioned above first a 20% private placement, then rights issue which raised RM2.26 billion, followed by sale of land to EPF for RM1.144 billion and probably another big one in the sale of EDL i.e. Eastern Dispersal Link for another RM1 billion or more. Confused?

I am. But this potentially signifies something really big may come on stream.

I am not one of those who think speculatively, but with a total add-ons of funds of potentially more than RM4 billion, it definitely does makes me turn around and look further.

Cash add-ons of RM3.9 billion (excluding EDL deal with the government)

To understand their exercises, perhaps let me list down one by one:

1. private placements of 20% raising RM408 million - which includes the MD's additional subscription, Bank Rakyat, Tabung Haji.
2. sale of 80% of the land which MRCB gotten for refurbishing the Bukit Jalil stadium to EPF. This amounts to RM1.144 billion. Yet to compete, but potentially will be done in near future.
3. the biggest one which is rights issue raising RM2.257 billion at 1 for 1. Obviously the MD and EPF took up the shares.
4. Sale of Setapak land for RM100 million to Tabung Haji.
5. negotiation with government to settle the EDL project in which case the toll collection has been stopped since 1 Jan 2018. One has to note that this is one of the toll highway which is loss making, hence the sale could be a goo thing for MRCB.

What are other major projects which the company has managed to secure or in the process of finalising?

1. MRT2 projects at Cyberjaya City valued at RM148 million
2. Cyberjaya City project which it will invest RM229 million for a controlling stake. See the link with the MRT2 project.
3. Big one - Kwasa Damansara which it will subscribe for probably the most premium land (commercial center) there for 70% stake - project called MX1 - costing RM737.88 million.
4. project delivery partner for LRT3 with George Kent - the project is a RM9 billion project.
5. partnership with Gamuda to bid for High Speed Rail project - which I think the partnership has a fairly good chance of winning considering that Gamuda has experience in the MRT1 and MRT2 while as mentioned MRCB is working on the LRT3 with another partner.

Although it is still a big question, unless with the reason of improving the gearing of MRCB, I like the fact that the above exercises focuses on what the group clearly wants to own and what it wants to dispose. Of course, only a few companies can do the way they want it to. For example, not many would be able to have the chance to negotiate and dispose the Bukit Jalil land to EPF and have a fairly good deal out of it.

The group in the last 18 months exercise has managed to focus on three things.

1. Get the large scale projects like PDP for HSR, LRT3, MRT3, DASH Highway;
2. push for development into larger mixed development like Kwasa and Cyberjaya;
3. sale of less strategic land while still be able to keep the construction work. The sale of land at Bukit Jalil and Setapak does not mean they are out of the projects but yet they are construction partner for these projects. I think this is sweet. 

In looking at the past, of course MRCB is not very attractive. Its margin was low and gearing was quite high - that gearing problem is almost being solved. Still, because of that I am not able to figure out how good is the group able to bring financial benefits to its shareholders.

But I like the exercises so far.

Reply from the Deputy CEO / CIO of EPF

I received a reply through my facebook from the Deputy CEO of EPF,  Dato' Shahril Ridzuan - here are his reply with regards to my articles on his share trades and ownership in MRCB and being offered IPO shares through his directorship in FGVH.

Dato' Shahril Ridzuan:

I noticed your postings on FGVH and MRCB with interest. I just wanted to clarify that at EPF, we have clear policies prohibiting our staff from trading on the markets due to potential conflicts of interest. These policies do allow our staff to sell securities that they owned prior to joining EPF.

In relation to FGVH, I had already declined my IPO entitlement and had in fact asked them to allot it to the settlers instead. I believe the prospectus has to legally state that I am entitled to subscribe if I want to.

In the case of MRCB, all my shares in the company are from the company ESOS and rights issue. As you know, I was the MD there for several years and a large chunk of my entitlement vested after I had joined EPF. I have never acquired shares from the open market. Subsequent sales have been to settle my financing under the ESOS scheme and also to reduce my holdings in MRCB to reduce its weightage in my own personal finances.

I hope that clarifies the points raised. Appreciate if you could also let your readers know. I tried to leave a comment on your blog but it didn't seem to work...

Also, this is a personal reply since the references in your postings seemed to be about myself (rather than EPF) and I want to assure you that I have, and will continue to, always act professionally in the interests of EPF.

My comment:

I would like to thank him for his quick reply and in my opinion he is definitely doing the right thing by rejecting shares in FGVH. Kudos to him for offering his portion to the settlers as the 800 shares per settler's family is a little pathetic, don't you think. However, seriously come to think of it, imagine - there may be a mess if too many shares are allocated to 112,000 households. The selling can be uncontrollable. Maybank for example has 60,187 shareholders as at 8 Feb 2012.

I would like to apologize if my postings harm him in any manner as it was never my intention to do so but rather as an observer who would like to protect his live long savings as well. I wish him the best.

Is there anything wrong if EPF's CIO trades the same stock for himself and you?

After the findings of FELDA directorship and shareholdings, I looked through Annual Reports of MRCB, a company where Dato Shahril Ridza is a director and EPF acts as the controlling shareholder. I found out something which to me is not right and worrying. Acting as the Chief Investment Officer (CIO) of EPF and director of MRCB, he trades on both sides - which means as an individual shareholder of MRCB and CIO of EPF, he trades MRCB stocks for himself and EPF. See below where I have summarised his holdings from MRCB's Annual Report.

EPF is the controlling shareholder of MRCB.

Notice that from the chart below when he purchased shares of MRCB on his personal capacity, MRCB's share performance was at its low and he started to sell down, the shares of MRCB was at its high.

This is not an attempt to attack any person, however I feel that as the CIO who is in charge of more than RM470 billion (one of the most powerful person in the world in terms of money management), he should not hold any shares that EPF invests into. It is important for a person who holds such a position to have strong discipline in what he is doing especially how fund owners perceive him to be. Already, the ever growing EPF fund is holding more than 35% of its total fund in equity - and it is growing. As the CIO of EPF, he is representing all working Malaysians in terms of our retirement funds. The misnomer of trading MRCB shares on his personal capacity while double acting as the leading investment officer of the largest fund in Malaysia is just plain wrong.

I do not hold any trust funds, as I am one who does thorough checking on anything I own whenever I decide on having it especially investments, however with EPF I have no choice - and to see this is saddening. Frankly, I am sickened by it.

Related article:
Reply from the Deputy CEO / CIO of EPF