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Wednesday, March 17, 2010

It’s not easy being EPF

Thestar: Wednesday March 17, 2010

Raison D'etre - By Risen Jayaseelan

THAT the Employees Provident Fund (EPF) had abstained from voting at the recent contentious EON Capital Bhd (EON Cap) EGM is not surprising. And why should it? Voting either way would have meant that the pension fund was in favour of one party and against another.
The EPF has no intention of getting embroiled in corporate tussles but it does strive to ensure that the value of its investments is protected.
So when the EPF discovered that there were many governance issues in KFC Holdings (M) Bhd (KFCH) in the past, it made the drastic decision of selling down its stake. At one time, EPF controlled about 17% of KFCH but in 2007, had ceased to be a substantial shareholder in the company.
To be sure, it takes a lot for the EPF to decide to sell out of a listed company. That is simply because the fund is “saddled” with more money than it can invest. To date its fund size is around RM380bil and growing at about 7% to 8% a year.
To preserve its capital, the EPF keeps most of that money in the low-risk fixed-income assets, the bulk of which are in loans, bonds and government securities.
It has about 25% of its funds invested in equities, mostly in blue chip companies listed on Bursa Malaysia.
That scenario makes the EPF a difficult animal to figure out. Consider this – while it is a shareholder in EON Cap (12.8%), it is also a shareholder in Hong Leong Bank Bhd (13%). Hence when considering the offer by Hong Leong Bank to buy the assets of EON Cap, EPF also had to look at it from the perspective of being a shareholder of Hong Leong Bank.
It can get even more complicated. In 2006, when MMC Corp Bhd made a bid to buy the assets of Malakoff Bhd, the EPF then not only held an 11% stake in Malakoff, it also had 5% in MMC.
EPF had voted in favour of MMC’s offer for Malakoff, which technically would have meant that the EPF would be cashing out of its interest in Malakoff, the country’s largest independent power producer.
But soon after, it emerged that the EPF subscribed to the bonds issued by MMC’s special purpose vehicle that was the offeror in the deal. The bonds were issued to finance the deal. Not only that, EPF also subsequently emerged as a 30% shareholder in Malakoff, which means that somehow EPF was invited back into the de-listed Malakoff. It should be noted that the bonds carried an attractive coupon rate.
The deal naturally irked other minority shareholders in Malakoff, who could not participate in the future growth of the company.
But it seems that the EPF had striven to ensure that it did not lose its exposure to a good asset, in the form of Malakoff’s power business, and the cashflows attached to it.
Hence, when trying to gauge the mindset of the EPF whenever one of its investee companies is involved in a corporate exercise, bear in mind one thing: The EPF would prefer to remain a shareholder, especially if the asset is either churning out good cashflows, or has the promise of achieving that.
That may very well be the thinking behind EPF’s position in EON Cap and KNM Group Bhd. Bear in mind that EPF is present as a shareholder in all listed banks in Malaysia, which means that banking remains one of its top sector picks.
As for KNM, EPF favours the company for its extensive product range and geographical diversification, among others. As such, would the EPF be keen to sell out at a price of 90 sen (which is the indicative price that the offerors have stated they would pay for the assets of KNM, subject to a due diligence on-going now)? Probably not.
And no wonder the pension fund was buying more shares in KNM recently, after the shares weakened on a poor quarterly result.
Now that deputy news editor Risen Jayaseelan has some clarity on how the EPF makes and manages its investment decisions, he is keen to know the same of other large funds, such as Lembaga Tabung Haji and Permodalan Nasional Bhd.


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