Bain: Asean conglomerates must dig deep

Southeast Asia’s conglomerates have to work harder to remain competitive in the rapidly changing business climate, according to findings of a recent survey by Bain & Co.

In 2014, its research found conglomerates were thriving in Southeast Asia, outperforming their counterparts in developed markets and consistently delivering higher shareholder value than companies in the region that focused on a single business.

Since then the business climate has become much more challenging with the global slowdown in GDP growth, China’s economic restructuring, slumping commodity prices and increased political risk in Southeast Asia and beyond.

The survey was conducted to update how conglomerates respond to the strong headwinds, with Bain expanding its research to include 67 large family- and government-linked conglomerates in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam over a 10-year period (2006 to 2015).

The survey found although creating value has become much more difficult, conglomerates continue to outperform their focused peers, albeit by a noticeably reduced margin.

Median total shareholder return (TSR) fell from an impressive annual 29% from 2003 to 2012 to a respectable 13% from 2006 to 2015. (TSR is defined as stock price changes, assuming reinvestment of cash dividends.) Pure plays saw median TSR decline from 19% to 11% over the same period.

It is still possible for conglomerates to achieve outstanding returns in Southeast Asia. During the same time period, those in the top quartile gained a median annual TSR of 25%, much higher than the 3% for the bottom quartile.

Surprisingly, the top 10 have proven to be highly diverse, spanning different sizes, countries and industries.

Winning conglomerates focus on businesses where they can achieve leadership positions, said Bain.

For commodity-heavy players, that means reconsidering their fundamental portfolio makeup and also determining how to better handle volatility and uncertainty. For example, Olam rigorously assessed macro trends to pinpoint the sources of risk in the almond business before making one of its biggest acquisitions in 2009 — the A$288 million purchase of 50% of Australia’s almond-growing area.

With its scale and cost efficiency, Olam’s almond business could remain profitable even in times of commodity price slumps, resulting in Olam becoming the world’s second-largest almond grower.

Capital structure and ownership model should be reviewed to optimise the tradeoffs between access to capital and company control.

With the exception of the Philippines and Vietnam, Asean’s top listed companies saw negative revenue growth between 2011 and 2015.

Major new sources of profitable growth to consider are mergers and acquisitions (M&A), international expansion and building a digital footprint. The survey found Asean conglomerates that executed 10 or more acquisitions and divestment deals achieved a median TSR of 13% during 20112015, far higher than those not taking part in M&A, at 2%.

Central Group, Thailand’s leading retail conglomerate, repeatedly used M&A, which contributed to annual revenue growth of 19% from 2011 to 2015.

The research found conglomerates perform best if they either commit to international expansion, as Thailand’s Charoen Pokphand Group has done, or double down on their domestic market, the path of the Philippines’ Ayala.

Conglomerates that focused on overseas expansion achieved a median TSR of 9% from 2011 to 2015, while those that increased their share of domestic revenue achieved a median TSR of 13%. However, conglomerates that simply stayed the course achieved a median TSR of 3%.

With digital disruption upending industries, conglomerates face a severe challenge from smaller, nimbler companies. Yet conglomerates can encourage each of their businesses to develop their own digital strategies while separately pursuing new or highly disruptive opportunities centrally, said Bain.

It is critical to tackle costs and improve productivity. Only about 30% of Asean’s conglomerates reduced operating expenses as a percentage of revenue from 2011 to 2015, but those that did achieved a median five-year TSR of 6% compared with 3% for cost underperformers.