Friday, 25 May 2018

Bursa Malaysia: Who Controls?

In the wake of a new Government, many things need to be restored – institutions, legislation, judiciary, education and other processes.  In the midst of this, is the questions of the role of a stock market in a capitalist system.  If seven Government-linked investment institutions control 42% of the entire Bursa Malaysia in terms of market capitalisation and control 68,000 companies directly or indirectly, then we have a very significant concentration of power and control.  (This was the findings of Prof.  Edmund Terence Gomez of University Malaya).

Reforms therefore must include divestment/ dilution of MOF Inc. control over these companies with professional managers and Boards in place.  The other is to have an independent Oversight Commission to provide the necessary “checks and balances”.  MOF has no business to be in business.  It has to prioritise and effect government fiscal/ development policies rather than be involved directly in private sector initiatives.

There is a need to review affirmative action policies being used in business.  For example, State Economic Development Corporations (SEDCs) are in a plethora of businesses.  These are not listed and hence accountability and productivity are lax.  It is time for companies within these SEDCs be divested to management (or others) on a “deferred payment” basis.  SEDCs were useful in the 70s, 80s, and 90s but no longer.  They “crowd-out” small and medium scale businesses and depend on the largesse of Government contracts and funds.

There is a lot on the plate for the new Government and expectations are high.  But dynamism of the private sector must be harnessed or unleashed for the better progress of the Bursa and the economy.

Source: Ideas

Friday, 18 May 2018

Economic Impact of the Alliance of Hope

I was intrigued by the title. It gives hope. What then could we expect or hope for in the next 6-12 months?
  1. Restored Confidence in the economy because the “thieves” are out of power. And that means markets will improve – both the stock market and foreign exchange market;
  2. Fiscal deficit is potentially reduced through better management of resources;
  3. Inflation will abate with GST swept into a bin;
  4. Accelerated growth (7%) in the medium term with domestic consumption and investment leading the way;
  5. Foreign funds will move back in once they see locals are investing;
  6. Better focus on value infrastructure not grandiose projects for benefit of fat “cats” (who are now “dogs” – pardon my expression);
  7. Greater transparency and accountability by government machinery;
  8. Reforms for legislative, judicial and executive wings of government (including local elections for major cities, especially Kuala Lumpur);
  9. Greater autonomy for states and better management of their finances – may the states generate their own revenue and plans for spending – a re-drawing of Federal-state relations. Be like the U.S. or Australia!
  10. GLCs are selectively privatised – otherwise they “crowd out” private sector dynamism;
  11. Government remains focused on delivering quality services rather than being involved in business;
  12. More inclusive policies and a new model to replace the NEP – that will unleash private sector investment and entrepreneurship;
  13. Create new financial institutions for small and medium enterprises in every state. These are private sector driven and regulated by BNM or some similar agency;
  14. Focus on education, employment and entrepreneurship to drive growth.
    • Education of a high standard and access to it alleviates poverty;
    • Providing job opportunities for young people secures their future;
    • Creating an environment for entrepreneurship creates jobs – special incentives for those investing (including by foreigners) RM500,000 and creating 5 new jobs;
  15. Enforce policies / laws of the land. Enforcement is a weak link – because it is always “boleh dirundingkan”;
  16. Corruption is a “hidden” tax and bears down on the economy. No investor wants to find out that cost has escalated beyond any reasonable estimate. Have a new Corrupt Practices and Reconciliation Commission created to hear and resolve (with penalties) corrupt practices in public / private sectors;
  17. Provide research and development funds for targeted industries / technologies / services – A.I., blockchain; graphene and others. Private sector to work with universities to innovate and develop new applications;
  18. Focus on renewables – solar, biomass and others. Residents are subsidised in installing solar panels for their homes. Electric and hybrid cars are cheaper than gasoline-driven vehicles;
  19. Develop affordable housing in locations where public transport services are available; and
  20. Health costs are driven down with generic drugs and incentives for private hospitals to lower cost of operation and related fees.

That’s a 20-point manifesto! My hope overflows and may we have some concrete steps implemented in the next 180 days. God Bless Malaysia!

Friday, 11 May 2018

Distinguishing Enterprise Value (EV) From Equity Value

The distinction between a company’s EV, and equity value is an area of confusion. EV composed of a company’s permanent or long-term capital, which consists of a combination of debt and equity.

This invested equity and debt, comprises a company’s EV and represents funding to support a company’s growth and related assets. A company’s reasonable, proportional use of debt and equity to support its assets is a key indicator of balance sheet strength.

In a company’s capital structure, equity consists of a company’s common and preferred stock plus retained earnings which are reflected in the shareholders’ equity account.

Equity reflects the ownership held by the providers of equity capital, often referred to as ordinary shareholders. Ordinary shareholders generally have the right to elect directors to a company’s board, vote at the annual general meeting and approve the declaration of dividends.

EV, on the other hand, is the value of a business and reflects the value of its core operations to all providers of capital.

Various valuation techniques including discounted cash flow analysis or multiple based approaches (eg. EV/EBITDA, EV/EBIT) typically derive an estimate of EV. A challenge then arises in bridging from EV to equity value.

A potential buyer will normally estimate the EV of a target company and look to the most recent balance sheet to consider any required adjustment to arrive at the price to be paid for. Accounting book values are a good starting point to identify potential adjustments required.

Debt and other debt-like instruments are deducted from EV to arrive a equity value because equity holders have no claim on those sources of capital – these amounts reflect other stakeholders’ interest in the business.

As is the case for equity components that exhibit debt-like characteristics (ie, redeemable preferred stock), consideration should be given to the underlying nature of debt securities. For example, venture capital investors often fund portfolio companies using convertible debentures which are debt instruments convertible into equity if certain conditions are met.

Convertible debentures are legally defined as debt but are normally funded by shareholders and typically seek to protect investors from dilution. Thus practically, one often considers convertible debentures as equity and are not deducted from EV to arrive at equity value.

Other adjustments to bridge may include: working capital surplus or deficit; excess cash and surplus assets; minority interests; deferred tax assets / liabilities; long-term leases; and any pending lawsuits.
Value and final price paid is not only about DCF and multiples but also balance sheet acquired – an area addressed finally through negotiations. The journey to bridge EV to equity value could be long if information and data are not readily forthcoming.

It is, however, in the interest of both vendor and purchaser to arrive at mutually agreed price through an open, transparent process.

Reference: “Contemporary Valuation Issues in Deals”, ICAEW and KPMG (Best practice guideline 66).

Friday, 4 May 2018

Future State Of The Investment Profession

Securities Industry Development Corporation (SIDC), the learning and development arm of Securities Commission Malaysia (SC), co-hosted an event with Chartered Financial Analyst (CFA) Society Malaysia on 26 April 2018.  The topic of the event was “Future State of the Investment Profession”.

According to a survey done by CFA Institute, 84% of investment leaders expect consolidation of the industry in the next 5-10 years; 70% of the participants in the survey expect investors will increase their allocation to passive investment vehicles; 52% of CFA charterholders expect substantial or moderate contraction of profit margin at asset management firms; while 57% of the participants in the survey expect institutional investors will reduce cost by insourcing more investment management activities.

The survey on investment leaders revealed that 73% of them expect environmental, social and governance (ESG) factors will become more influential; 70% expect financial centers in Asia will become more influential; but only 11% believe that the investment industry’s impact on society is very positive; 55% expect globalization will offer new opportunities for investment professionals; 49% expect new technology will offer new opportunities for investment professionals.

The following diagram shows the megatrends and potential future development of the investment industry.

Source: CFA Asia Pacific Research Exchange (ARX)

Fintech Disruption will have high impact on the future state of the investment industry.  Technology such as robo-advisor and Blockchain will becoming more dominant in the future.  The Parallel Worlds indicates that product preferences for personalization, social engagement, speed and simplicity is very important.  Lower interest rate and returns for the next 5-10 years is due to slower global growth and political instability.  Purposeful Capitalism is about diversity, culture and sustainability, which will overtake conventional Capitalism that focuses only on profit.