In our continuing series on 1Malaysia Development Bhd, KiniBiz compares and contrasts the way 1MDB operates to its big brother Khazanah Nasional Bhd, also owned by the Ministry of Finance. The conclusions are that while Khazanah has done a lot, especially under its second managing director Azman Mokhtar, with a considerable amount of transparency, 1MDB has started off on the wrong foot with many of its actions being highly questionable. Which raises the question of whether it was necessary to set up 1MDB in the first place.

In a research report yesterday, TA Securities speculated that the opposition Pakatan Rakyat coming into power could spell the end of 1Malaysia Development Bhd (1MDB), and its assets could be transferred to state controlled investment arm Khazanah Nasional Bhd.

“Perhaps, the only difference between both sides of the divide is the fate of 1MDB,” TA Securities said in its report.

The comparison between the two has been ongoing since 1MDB first came about in September 2009— when it transferred from Terengganu Investment Authority (TIA) to federal control.

On paper there is little differentiating the two, with broad guidelines governing both.

On 1MDB’s website, it is stated that “1MDB is a strategic development company wholly owned by the Government of Malaysia.  As a strategic enabler for new ideas and new sources of growth, 1MDB leads in market-driven initiatives to help transform Malaysia into a thriving economy.”

Khazanah on its website says that its role is, “To promote economic growth and make strategic investments on behalf of the Government which would contribute towards nation-building.

“Khazanah is also tasked to nurture the development of selected strategic industries in Malaysia with the aim of pursuing the nation’s long-term economic interests.”

An analyst sums it up…“It’s all basically rhetoric,” she said.

But then again there is a huge difference between the two.

Many of Khazanah’s companies today were bought as distressed assets, bought from politically connected individuals, as opposed to 1MDB buying choice, mature assets at inflated prices.

Halim Saad

Back in the day, Khazanah came under a lot of flak, when it was perceived to have bailed out Halim Saad and his flagship Renong Bhd and United Engineers Malaysia Bhd (UEM), Malaysia Airlines (MAS) and Technology Resources Industries Bhd or TRI from Tajudin Ramli.

“Khazanah was viewed as bailing out politically linked individuals, it was a tough time for Khazanah then having to battle on many fronts—turning the companies around, court battles with Tajudin Ramli, and managing public perception even,” a seasoned market watcher said.

The early days of Khazanah Nasional

While Khazanah started operations in 1994, the investment arm sprang into action after taking over beleaguered Renong and UEM controlled by the then poster-boy for entrepreneurs Halim Saad, and assets held under Tajudin Ramli, MAS and TRI.

Renong and UEM have the distinction of being Malaysia’s most indebted companies with borrowings exceeding RM30 billion, back then.

UEM was privatised by the government i.e. Khazanah in 2001, and a full-fledged restructuring commenced including an asset swap and inter-company debt restructuring. Also the floatation exercise of PLUS Expressways was concluded which raked in some RM2.5 billion,

UEM World, which replaced Renong’s listing status, had as many as six core businesses – environmental services, engineering and construction, property development, cement manufacturing, pharmaceuticals and project management among others.

UEM World acquired stakes in four companies, UEM Builders Bhd, Cement Industries Malaysia Bhd, Kinta Kellas (now known as Opus International Group), and Pharmaniaga Bhd for RM1 billion. UEM World meanwhile disposed of its stakes in Commerce Asset Holdings Bhd, Camerlin Group Bhd, Faber Group Bhd, Park May Bhd and Time Engineering Bhd to UEM.

Renong SPV bonds which were issued to PLUS/UEM in 1999 were restructured with lower rates, extended maturity and haircuts which many were unhappy about.

To illustrate the diversity of Renong and UEM — among its assets was one Crest Petroleum Bhd which was sold to the Sapura group for RM105 million, which was the forerunner to oil and gas giant SapuraKencana Petroleum Bhd.

With Tajudin Ramli, it was about the same— Khazanah acquired a slew of assets.

Khazanah controlled Telekom Malaysia Bhd acquired 31 percent of Celcom (then known as Technlogy Resourcs Industries Bhd or TRI), and later injected its unit TM Cellular into Celcom for RM1.68 billion for new Celcom shares, raising its stake in Celcom to 48 percent. Via a mandatory general offer at RM2.75 a share Telekom ended up wholly owning Celcom in 2003.

In 1994, the government sold 32 percent of Malaysia Airlines or MAS to Tajudin Ramli’s Naluri for RM1.79 billion or RM8 a share, and six years later, bought back Naluri’s 29 percent stake in MAS for RM8 a share, double the market price at that time, and removed Tajudin Ramli as the controlling shareholder.

During this tumultuous period Khazanah was run by Anwar Aji, who helmed the investment arm from 1994 to 2004.

Azman Mokhtar

Now under its second managing director Azman Mokhtar, Khazanah has blossomed, and has under its belt assets which are performing well such as IHH Healthcare Bhd, Apollo Hospitals in India, UEM Land Holdings Bhd which is developing Iskandar Malaysia, banking outfit CIMB group, utility player Tenaga Nasional Bhd, just to name a few.

“Many Khazanah companies are blue chips, by virtue of its strong parent,” the market watcher said.

While there have been issues—-such as the failed MAS-AirAsia share swap last year, and the investment arm’s wholly owned agriculture businesses losing some RM500 million over the past few years—as a whole Khazanah largely has its house in order.

There are regular briefings and the media have access to key people in Khazanah who are willing to come on record, and explain the on-goings at the company.

“It (Khazanah)’s portfolio is largely listed entities so there is a large amount of transparency,” a Singaporean fund manager said.

Nevertheless publicly traded or not— the level of secrecy at 1MDB is hardly seen in corporate Malaysia.

The opaque 1MDB

While 1MDB’s history is so much shorter than Khazanah’s— what is apparent is that it has started off on the wrong foot, and seems to be deeper and deeper mired in controversy.

“There are no briefings… company officials are not forthcoming with information. This creates much speculation,” a veteran journalist said.

In stark contrast to Khazanah, 1MDB has paid top dollar for all its assets, and seems to have been given some projects on a silver platter.

Funding for the assets has come via either two or three bond issues to the tune of as much as RM20 billion, which have not been made public.

To date the assets it has acquired include tycoon Tatparanandam Ananda Krishnan’s Tanjung plc’s power for RM8.5 billion, and that owned by the Lim family’s Genting Bhd’s power generation assets for RM2.3 billion.

It is still a question mark as to whether the acquisition of Tanjong assets will pay off, while Genting’s power assets have less than three years of its concession left. Then there is also speculation of 1MDB buying loss making Jimah Energy Ventures for RM1.7 billion.

Considering there is talk of a floatation exercise, the level of transparency may pick up at 1MDB, but that remains to be seen.

1MDB’s land deals meanwhile leave so many questions unanswered. Both the Tun Razak Exchange (TRX) and the Bandar Malaysia developments have a combined gross development value of RM47 billion.

1MDB paid RM1 billion for the prime TRX land and a third of the market price for Bandar Malaysia, but who knows for certain?

“In 1MDB’s case it seems to be creating its own problems, there is way too much secrecy…be it when bonds are issued, on the coupon rates offered, the take up of bonds… or even the on-goings in the company generally.

“Honestly it’s not often that Khazanah comes across looking so good,” the fund manager from Singapore quips.

With Khazanah already operating and doing good job, what need was there to set up 1MDB?

http://www.kinibiz.com/story/issues/12594/khazanah-nasional-vs-1mdb.html