Active roles in investee companies for investment stability

THEY say never put all your money into one basket. But in the case of Permodalan Nasional Bhd (PNB), they had enjoyed a good run for many years by putting most of their money into the local financial markets, riding the boom of Malaysia’s economy.

Still, the fund had suffered during downturns, turning to their reserves at one point. More so now, with numerous troubles hitting the local markets drastically, from falling oil prices to the global trade war and now, the coronavirus pandemic.

Naturally, PNB’S earnings are in jeopardy. As such, asset diversification is the way forward for the fund.

This week, PNB launched its new mid-term strategic plan dubbed “Focus 4”. This plan is for the period of 2020 to 2022 and includes an ambitious asset diversification programme. It also entails a blueprint for PNB to take on a more active role in its investee companies under what it calls a “stewardship framework”. Below is an excerpt of an e-mail interview with PNB president and group chief executive Jalil Rasheed:

PNB is sitting on huge paper loss due to its substantial stakes in Sapura Energy Bhd and Velesto Energy Bhd, among others. What is PNB’S plan for these companies? Was it a mistake to invest heavily in oil and gas companies?

The recent decline in prices was initially driven by geopolitical developments and more recently by the pandemic, resulting in a depressed global demand for crude oil and leading to the plunge in oil prices. Nobody could have foreseen that oil prices would plunge this much.

We are working with the boards of these companies to ensure that they are cost efficient, with proper governance and controls. The oil and gas sector is very cash intensive, so the cycle mismatch can hurt. There is a need for financial restructuring to happen.

PNB’S participation in the domestic equity market, which today accounts for 68% of our portfolio, has provided us with a steady and recurring dividend stream all these years, which has been an important source of income for us.

The time is now for resilient leaders in the industry to have a key role in steering companies to weather the storm, while also preparing for further changes that are likely to occur in the months ahead.

Under the PNB’S stewardship responsibility initiative, was the recent long-overdue salary cuts at Sapura something PNB had pushed for? Will the same be applied to other companies in its stable?

While PNB is an engaged investor, we will not interfere with the decision-making of our investee companies, as they have their own management structure and protocols that they have to follow. Our participation is through the board where we have nominee directors to safeguard our interest.

However, we can advise them on the situation and what measures they can take to address it. Our board members give guidance to companies on measures that should be taken.

We believe that Sapura has taken a difficult but yet necessary step to mitigate impact of Covid-19, particularly with the declining oil prices.

This is a good example of being agile in this current situation.

Companies must be able to undertake proactive measures to address critical issues like this to ensure longterm resilience.

With regards to other companies, this would be subject to the needs and operations of each company, as different companies have different needs and regulations they will have to adhere to, and we are in constant discussion and engagement with them.

Our role as shareholders is to give a framework, vision and oversight to the board, who then act as check and balance for the management to execute this vision. We know our role as shareholder.

Aside from the oil and gas sector, a number of PNB’S strategic companies such as Sime Darby Property and UMW Holdings are trading close to their all-time low. How will this impact PNB’S trading income in the coming years? Plus, a number of companies are showing weakness in their profit and how will this hurt the dividend flow and also income distribution to your members?

Focus 4 provides us with a springboard to address the challenging situations which could adversely affect our income over the long-term, focusing on areas that are more attuned to the market environment to ensure that PNB has an all-weather portfolio to withstand prevailing economic headwinds.

It is important that our investee companies have relevant and capable members at board level to provide guidance to weather through this and we are working closely with them on this.

In addition to working with our strategic companies, Focus 4 also looks into greater diversification.

PNB will continue to accelerate portfolio diversification via investments into new asset classes and geographies, including global real-estate opportunities with attractive yields. A key target is to tactically increase global exposure to 30% by 2022, from PNB’S current global exposure of 8.5% as of end-2019.

In tandem, to optimise returns amidst the persistent low-yield environment, PNB is reviewing its portfolio with a view to invest in counters with better prospective yields and long-term returns potential to drive a more efficient use of capital.

Due to the ongoing global pandemic and oil price war, companies are expected to continue to face earnings pressure, not only in the Malaysian market but globally as well.

This will inevitably cause a knock-on effect on dividends but for PNB, this does not have to mean abandoning our aim to grow our income in the long term and this should apply to our unitholders too.

Maintaining a long-term focus is more important now and as active managers of our funds, we will adjust our portfolios based on our Strategic Asset Allocation targets and take advantage of the current market mispricing to weather this crisis.

Part of Value Creation is us working closely with our companies in ensuring operating efficiencies. Like Focus 4, which is focused on operational excellence rather than aspirational targets, we have given similar targets to our investee companies where focus is on cost, margins and leverage, rather than market capitalisation, factors management has no control over.

The property market is expected to remain soft in the coming years due to increasing numbers of unsold units and overhang in commercial properties. As one of the major shareholders in several big property developers, and one of the largest private landowners in the Klang Valley, what is your outlook on the property market, moving forward, and how is PNB coping with the underperformance of the property companies?

It will continue to be challenging and especially after the post Covid-19 period. However, PNB’S concentration risk in the sector of 5% is still relatively low. Notwithstanding this, we monitor our property companies’ performance closely based on the Stewardship Framework and we work on value creation plans with them to address growth and financing matters.

We are also clear about our stand in the property market, that we will not be developing any more properties internally as we would like to focus more on diversification of our investments. We already have property development companies within our stable and PNB will step away and focus on being an asset allocator as it should as an investment institution.

We started the diversification process early on, before the pandemic began, by venturing into logistics and warehouse assets that are beneficiaries to the boom in online shopping. We started in Europe and are looking at similar opportunities in Asia as well.

Many of the property companies are showing bankruptcy signals in their financial z-score. What is the risk to PNB’S portfolio of property companies and how is it going to target the overall risks inherent to the property sector?

Our portfolio of property companies is exposed to the same risks as others in the sector, given current market conditions, and we believe they are in a position to survive this downturn because our companies have strong balance sheets and good land bank.

For other property investments, be it locally or abroad, we continuously assess and undertake measures according to market conditions. For example, overseas, we do not invest in companies but in portfolio of assets.

These portfolios are targeted and address specific markets and more resilient. Spreading this across various countries also balances the risk profile better.

Q: PNB is working to diversify its portfolio and targeting to increase its overseas exposure by 30% of its portfolio. How is PNB going to finance this venture and what will be the asset allocation strategy when it comes to investing overseas? Will PNB be able to get approval from the authorities to convert foreign currency for investing overseas?

It was with this in mind that we have created our Treasury Desk, which oversees not just PNB’S liquidity management but also other aspects of our treasury operations such as funding and foreign exchange.

Raising foreign financing is an option for us, given low cost of capital. However, given the current global climate, we will deploy capital carefully taking into account strength and weakness of the ringgit.

In line with the government’s call to reduce the role of government-linked investment companies (GLICS) in the public sector and PNB’S initiative to diversify its portfolio, is PNB exploring to reduce its controlling stakes in listed companies?

We remain a long-term investor with strategic interest in companies. This means these companies are held for PNB to have an economic interest in high growth industries that are proxies to the Malaysian economy.

This is something that we continuously review to see whether our investments still fit with our strategic intent. This review process is normal as part of any investment organisation’s long-term planning.

Our investee companies also comprise a significant portion of the FBM KLCI market and good performance from the companies will result in a positive impact on the FBM KLCI.

With proper planning and strategies, we would be able to move the needle and help the companies that we have stakes in to grow and achieve their best potential by achieving some of the value creation initiatives we have.

This would also allow Malaysia to elevate its corporate governance standing, which could subsequently eliminate the GLIC discount that exists, and attract higher valuations.

PNB wants to get more involved in guiding the companies it has investments in through more engagements with the board. Is that the right thing to do and will it send a message PNB knows more than the board of companies it invests in?

The Stewardship Framework was established because we believe there is always room for improvement. There was a lack of a platform where all our investee companies gather to discuss common issues frequently.

As you know, markets are changing and dynamics are fluid. Therefore, it could be useful for everybody to learn from each other on best practices. There is a lot of potential synergies that could be explored within the wider group in terms of our social responsibility.

We work together with the board members of all of PNB’S investee companies to ensure that the best policies and practices are implemented.

Discussions have already commenced on these areas. PNB knows its role as shareholder well, demarcating that clearly from board and management.

For PNB, we also believe that we are in a position to be a value-adding partner to our companies by leveraging on our knowledge and skills from our internal capabilities and external networks.

We have also undertaken many exercises the past 42 years, so we have expertise to offer.

Overall, we want to put in place a framework which can help PNB to articulate these aspirations and expectations more clearly to our investee companies.

The idea is to ensure every company is run uniquely but to also be sure that where we can work together, we should.

FOR THE FULL Q&A, PLEASE READ IT ON STARBIZ ONLINE.