In Bad Company
By S. Jayasankaran
Issue cover-dated March 8, 2001
Razali Ali struggled to keep the frustration out of his voice. The chief executive of financial-services company Commerce Asset Holding was explaining why the company had embarked on a share-buyback exercise. "The true value of our shares isn't reflected in the price," he told a press conference on February 26.
Quite. Over a year, the shares of Commerce, which wholly owns Bumiputra-Commerce, the country's second-largest bank, have fallen almost 40% to 7.35 ringgit ($1.93) apiece. Nor is it likely to recover any time soon. Only six of the 25 Malaysian securities houses covering the stock rate it a "buy"--the rest have it as a "sell" or, in the less-than-subtle analyst reluctance to calling a spade a spade, a "hold."
Call it the Commerce paradox. That's when investors shun a company with good, proven management only because they're suspicious about its owners. And Commerce has two large, politically connected shareholders that loom over its fortunes. The Renong conglomerate owns 12% of the group while the New Straits Times Press has 13%. Both are close to Malaysia's ruling party, both are moving to cut debt and both want to sell out. That means there is a potentially large overhang of Commerce shares waiting to be unloaded which, by definition, would drive its price down.
Make that three large shareholders. The third: the government itself, which owns 32% of Commerce. That's been both a blessing and a curse. In 1999, it enabled Commerce to take over state-owned Bank Bumiputra, arguably the country's worst bank: Over 14 years, it's been rescued three times to the tune of billions of taxpayers' ringgit. Still, the Bumiputra-Commerce merger was possible only because the government promised to take over Bumiputra's bad loans at full value. So far, Commerce has sold 10 billion ringgit worth of such loans to the government.
But it's created other problems going forward. Staffing exploded to 11,000 people and costs now constitute 46% of revenue compared to the industry's 35% average. But layoffs are politically sensitive because they involve ethnic Malays. Bank Bumiputra is overwhelmingly Malay. Commerce can afford to cut up to 2,000 jobs, analysts estimate, but that's near impossible given the highly charged political atmosphere currently. Razali says "the board has yet to consider" any layoff schemes. In short, cost cuts would come slowly, a realization that's been factored into Commerce's share price.
The major unease over Commerce, however, is its exposure to a current flotation. In February, Renong proposed selling 22% of its telecommunications concern, Time dotCom, to investors for 1.69 billion ringgit. Ten banks, led by Commerce's merchant-banking unit, underwrote the issue.
But the public stayed away and the offer was 75% undersubscribed. It doesn't matter to Renong --it will after all get its money from the underwriters--but analysts tracking Commerce fear that the underwriters would get stuck holding the shares.
"If the shares tank on listing, say by one ringgit, we think in the worst case Commerce could have to make provisions for at least 100 million ringgit," says Gan Kim Khoon, the research head for Arab-Malaysian Securities in Kuala Lumpur. "That's why there is so much negativity over the stock."
Indeed, the impact of Time dotCom on Commerce's balance sheet was the most frequently asked question at the press conference on February 26. Commerce's management gave evasive replies--for example, saying "it's well within our capability"--which didn't help matters with analysts or investors.
They really should have been more frank. Highly placed sources reveal that Commerce sub-underwrote out most of its Time dotCom allocation to government agencies, so that its net exposure could be even less than 20 million shares. That's peanuts in an offer of over 400 million shares and would do little damage to Commerce's balance sheet, even if the shares tank badly.
Moreover, the listing would also retire close to 4 billion ringgit of Renong group debt, some of which would add positively to Commerce's balance sheet in the form of writebacks. (The group was and is a big lender to Renong--but the conglomerate does not have representation on Commerce's board.)
Perhaps the lack of transparency on Commerce's part has hurt it. But if there's a broader moral to this particular story, it is this: The concern that some Malaysian companies depend upon political connections and government support for their survival tends to hurt anybody even remotely connected with them.
The shares of the various Renong group companies are all trading at 30%-70% discounts to net asset values. Although it's managed independently of Renong and is reasonably profitable--519 million ringgit in net profit for the year to December 31, 2000, up 34% from the previous year--Commerce is being tarred by the same brush. No wonder Razali seems frustrated.