The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk. CREDIT RATING RATIONALE PP8713/10/2007 STRUCTURED FINANCE RATINGS NOVEMBER 2009 RANTAU ABANG CAPITAL BERHAD – Rating Review Summary RAM Ratings has reaffirmed the long- and short- term ratings of Rantau Abang Capital Berhad’s (“RACB” or “the Company”) RM3 billion Islamic Commercial Papers/Medium-Term Notes Programme (“ICP/IMTN”) at AAA and P1 respectively. At the same time, the AAA rating of the Company’s RM7 billion Islamic Medium-Term Notes Programme (“IMTN”) has also been reaffirmed. Both long-term ratings have a stable outlook. The debt instruments will be collectively known as “the Sukuk Musharakah” or “the Islamic securities”. RACB, a wholly owned subsidiary of Khazanah Nasional Berhad (“Khazanah” or “the Obligor”) had been set up to undertake this RM10.0 billion Islamic ICP/IMTN and IMTN Programme. Under the transaction, a Musharakah partnership had been established between Khazanah and RACB (collectively known as “the Musharakah Partners”), under which the Company acts as the wakeel (“Trustee”) for the Sukuk investors vis-à-vis investing in a portfolio consisting of Shariah- approved shares and assets owned by Khazanah (“the Portfolio”). Throughout the tenures of the Islamic securities, the investment assets may be taken out from the Portfolio through a deferred-payment sale, or be exchanged with shares or assets of at least equivalent value endorsed by CIMB Bank Berhad’s Shariah Committee. Hence, the value of the portfolio (at cost) will always be at least equivalent to the nominal value of the outstanding Sukuk. Under the transaction, the capital returns and periodic profit payments from the Portfolio will ultimately be serviced by Khazanah, by virtue of the Purchase Undertaking; the Obligor will purchase the specific portfolio units from RACB at a pre-agreed price (“Exercise Price”) upon maturity or a Dissolution Event. Under the Musharakah venture, the Musharakah Partners are entitled to the income derived from the portfolio that is attributable to the respective portfolio units held. The Exercise Price for Sukuk Musharakah that yield no profit will be equivalent to the face value of the Sukuk Musharakah. In the case of the IMTN, the final Exercise Price payable by the Obligor upon a Dissolution Event or Event of Default, will be adjusted after taking into account the date of declaration of such Analysts: Ang Swee Ee (603) 7628 1713 [email protected]Elsie Tham (603) 7628 1032 [email protected]Principal Activity: To undertake the RM10 billion Islamic CP/IMTN and Islamic IMTN Programme Instruments: i) RM3 billion Islamic Commercial Papers/Medium-Term Notes Programme ii) RM7 billion Islamic Medium-Term Notes Programme Islamic Contract: Musharakah Ratings: (i) AAA/P1 [Reaffirmed] (ii) AAA [Reaffirmed] Rating Outlook: (i) Stable (ii) Stable Last Rating Action: 24 December 2008 Profit Margins: (i) and (ii) Determined at issuance Maturity Dates: (i) To be determined at issuance (ii) Varies between 15 March 2011 and 25 September 2015
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The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk.
CREDIT RATING RATIONALE PP8713/10/2007
STRUCTURED FINANCE RATINGS
NOVEMBER 2009
RANTAU ABANG CAPITAL BERHAD
– Rating Review
� Summary
RAM Ratings has reaffirmed the long- and short- term ratings of Rantau Abang
Capital Berhad’s (“RACB” or “the Company”) RM3 billion Islamic Commercial
Papers/Medium-Term Notes Programme (“ICP/IMTN”) at AAA and P1
respectively. At the same time, the AAA rating of the Company’s RM7 billion
Islamic Medium-Term Notes Programme (“IMTN”) has also been reaffirmed. Both
long-term ratings have a stable outlook. The debt instruments will be collectively
known as “the Sukuk Musharakah” or “the Islamic securities”.
RACB, a wholly owned subsidiary of Khazanah Nasional Berhad (“Khazanah” or
“the Obligor”) had been set up to undertake this RM10.0 billion Islamic ICP/IMTN
and IMTN Programme. Under the transaction, a Musharakah partnership had
been established between Khazanah and RACB (collectively known as “the
Musharakah Partners”), under which the Company acts as the wakeel (“Trustee”)
for the Sukuk investors vis-à-vis investing in a portfolio consisting of Shariah-
approved shares and assets owned by Khazanah (“the Portfolio”). Throughout
the tenures of the Islamic securities, the investment assets may be taken out
from the Portfolio through a deferred-payment sale, or be exchanged with shares
or assets of at least equivalent value endorsed by CIMB Bank Berhad’s Shariah
Committee. Hence, the value of the portfolio (at cost) will always be at least
equivalent to the nominal value of the outstanding Sukuk.
Under the transaction, the capital returns and periodic profit payments from the
Portfolio will ultimately be serviced by Khazanah, by virtue of the Purchase
Undertaking; the Obligor will purchase the specific portfolio units from RACB at a
pre-agreed price (“Exercise Price”) upon maturity or a Dissolution Event. Under
the Musharakah venture, the Musharakah Partners are entitled to the income
derived from the portfolio that is attributable to the respective portfolio units held.
The Exercise Price for Sukuk Musharakah that yield no profit will be equivalent to
the face value of the Sukuk Musharakah. In the case of the IMTN, the final
Exercise Price payable by the Obligor upon a Dissolution Event or Event of
Default, will be adjusted after taking into account the date of declaration of such
Analysts: Ang Swee Ee (603) 7628 1713 [email protected] Elsie Tham (603) 7628 1032 [email protected] Principal Activity: To undertake the RM10 billion Islamic CP/IMTN and Islamic IMTN Programme Instruments: i) RM3 billion Islamic
Islamic Contract: Musharakah Ratings: (i) AAA/P1 [Reaffirmed] (ii) AAA [Reaffirmed] Rating Outlook: (i) Stable (ii) Stable Last Rating Action: 24 December 2008 Profit Margins: (i) and (ii) Determined at issuance
Maturity Dates: (i) To be determined at
issuance (ii) Varies between 15
March 2011 and 25 September 2015
Rantau Abang Capital Berhad 2
an event. As such, the ratings of the Islamic securities reflect the credit strength
of Khazanah in its capacity as the Purchase Undertaking Obligor.
Khazanah’s credit strength is supported by the following:
• Diversified portfolio with key investments in strategic industries
Khazanah’s strength lies in the high degree of diversity in its investment
portfolio, with a Realisable Asset Value (“RAV”) of RM69.47 billion as at
the end of FYE 31 December 2008 (“FY Dec 2008”); this is fortified by its
dominant stakes in strategic assets in Malaysia’s key economic segments.
Despite the lacklustre economy in 2008, dividend income from Khazanah’s
subsidiaries and associates doubled to RM4.89 billion (FY Dec 2007:
RM2.33 billion), partly due to government-linked companies’ (“GLCs”)
better ability to weather the downturn as a result of efforts under the 10-
year GLC Transformation (“GLCT”) programme adopted in 2004.
• Implicit and implied support from Government
As the investing arm of the Malaysian Government, Khazanah has
received various forms of government support because of its relevance to
the national mandate of developing the domestic economy, further
substantiated by the Company’s stakes in key sectors. The Government’s
second stimulus package (announced in March 2009) had led to a planned
RM10 billion injection of funds into Khazanah for the latter to invest in key
sectors of the domestic economy; this demonstrates the Company’s
importance as one of the Government’s key growth engines for identified
segments.
• Substantial financial flexibility
Khazanah has a strong degree of financial flexibility as it is able to leverage
on its strong asset base and/or pledge collateral to tap capital markets for
refinancing and additional funding needs. Being at the helm of the
Government’s investment armada, Khazanah also has very good access to
capital funding; the Company can source cheaper financing given that it
has been allowed to issue Government-guaranteed papers, if needed.
The positives above are, however, moderated by the following factors:
• Short-to-medium-term focus on domestic and disadvantaged sectors
may detract from realising superior returns
With the slowdown of the Malaysian economy in 2008/2009, Khazanah’s
immediate focus is in catalytic and transformative sectors on the domestic
front, whilst remaining cautious on its international investments. In FY Dec
2008, Khazanah invested approximately RM3.2 billion in existing and new
foreign ventures against only a single RM87.5 million investment in the first
7 months of 2009. The Company’s short-to-medium-term focus will be on
Lead Arranger: CIMB Investment Bank Berhad Trustee: PB Trustee Services Berhad
Rantau Abang Capital Berhad 3
investing in segments that will have a “multiplier effect” on the domestic
Malaysian economy, with the intention of creating job opportunities,
reducing economic disparity and eliminating hardcore poverty among
others. While beneficial from a social and economic perspective to the
average person on the street, the returns from such ventures are only likely
to be realised over the longer term.
• Highly leveraged balance sheet
Khazanah’s balance sheet had a reasonably high level of borrowings with
a RM33.14 billion debt burden1 as at end-FY Dec 2008 (end-FY Dec 2007:
RM23.65 billion), including borrowings financed via special-purpose
vehicles, of which the Company is the ultimate obligor. Khazanah’s gearing
and net debt-to-asset ratios had augmented to 1.83 and 0.61 times at end-
FY Dec 2008 (end-FY Dec 2007: 1.40 and 0.56 times). At the same time,
the Company’s operating profit before depreciation interest and tax
(“OPBDIT”) debt coverage ratio had thinned to 0.17 times (end-FY Dec
2007: 0.29 times) – largely due to a doubling of the amounts due to related
companies vis-à-vis its financing vehicles. Nonetheless, Khazanah’s hefty
debt obligations are balanced by the stable cashflow from its diversified
dividend receipts, along with its ability to monetise its highly liquid
investments if need be.
� Transaction Summary
Figure 1: Transaction overview
Under this transaction, a Musharakah partnership has been formed at the
portfolio level between the Musharakah Partners, i.e. Khazanah and RACB. A
1 Includes amounts owed to related companies
Purchase
Undertaking
Issues Sukuk Musharakah
Proceeds from Sukuk investors
100% Subsidiary
Khazanah
RACB (Wakeel)
Sukuk Musharakah
PB Trustee (Sukuk Trustee)
Sale Undertaking
Portfolio Trustee
Payment for purchase of portfolio units from Khazanah
Portfolio - Divided into portfolio
units
Specific
portfolio units
1 special
portfolio unit
Musharakah at the portfolio level
Musharakah at the Sukuk investors level
Rantau Abang Capital Berhad 4
A Musharakah contract involves a partnership between various parties that
provide capital towards the financing of a business venture. In this instance,
RACB acts as the wakeel for the Sukuk investors vis-à-vis investing in the
respective portfolio units. The Musharakah Partners will contribute their
respective portions of capital to the venture; any profit derived from the venture
will be distributed based on a pre-agreed profit-sharing ratio. On the other hand,
losses will be shared according to each Musharakah Partner’s proportionate
holdings of the portfolio units, which represent the capital in the Musharakah
venture.
The investment portfolio will be represented by 1 special portfolio unit that is held
by Khazanah at all times, and specific portfolio units which will be sold to RACB
from time to time. Each portfolio unit will represent a proportionate undivided
interest in the Portfolio. The ratio of Khazanah’s and RACB’s holdings in the
portfolio units will represent their proportionate interests in the Musharakah at
portfolio level.
The Sukuk investors will, from time to time, subscribe to the Sukuk Musharakah
issued by RACB. In turn, the Company will use the proceeds to purchase specific
portfolio units, thereafter holding these in trust for the benefit of the Sukuk
investors. The Sukuk Musharakah will represent the Sukuk investors’ undivided
beneficial interests in the respective venture at the Sukuk investors’ level, to
purchase specific portfolio units through RACB. A new Musharakah contract at
the Sukuk investors’ level will be created for each Sukuk issuance. Each
Musharakah contract will be independent of the others, as the investors and the
proportions of their investments may differ.
Upon RACB’s purchase of the specific portfolio units, Khazanah will extend a
Purchase Undertaking to the Sukuk Trustee, to purchase the respective portfolio
units at the Exercise Price upon their respective maturity dates, or upon a
Dissolution Event for the relevant Sukuk Musharakah. The Exercise Price for
Sukuk Musharakah that yield no profit will be equivalent to the face value of the
Sukuk Musharakah. In the case of the IMTN, the Exercise Price payable by the
Obligor upon a Dissolution Event or Event of Default - as the case may be - will
be adjusted after taking into account the date of declaration of such an event.
The Exercise Price may be paid upon maturity, or at regular intervals as periodic
distributions (for profit-paying IMTN) in the form of partial payments of the
Exercise Price pursuant to each Purchase Undertaking. As a result of the
periodic distributions, the interests of the Sukuk investors in the Musharakah will
ultimately be reduced in proportion to the partial payments; Khazanah’s interests
in the Musharakah will increase by the same quantum.
Under the Musharakah venture, the Musharakah Partners will be entitled to
income derived from the Portfolio that is attributable to the respective portfolio
units held. From the outset of each Sukuk issuance, however, the Sukuk
Rantau Abang Capital Berhad 5
investors will waive their rights to any income from the portfolio units that exceed
the returns included in the Exercise Price, for the benefit of Khazanah.
Concurrent with the Purchase Undertaking, the Sukuk Trustee will extend a Sale
Undertaking to Khazanah to sell the portfolio units, together with any accrued
income generated from the portfolio units from the date of their purchase, to the
latter upon maturity or a Dissolution Event. In relation to this, the Sukuk investors
will waive their rights to receive any accrued income; there will therefore be no
distribution of income to the respective portfolio units. The Sukuk investors’
returns will thus be limited to the Exercise Price.
Events of Default under the Purchase Undertaking include Khazanah’s failure to
settle the Exercise Price when due, as well as a change in its shareholding
structure. Meanwhile, a Dissolution Event includes an Event of Default under the
Purchase Undertaking and RACB ceasing to be a 100%-owned subsidiary of
Khazanah. A Dissolution Event will trigger the Purchase Undertaking, upon which
Khazanah will be obligated to purchase the specific portfolio units from RACB. In
this instance, however, the Exercise Price may be adjusted to take into account
the earlier-than-expected redemption. Upon the full settlement of Khazanah’s
obligations, the entire facility will be cancelled and the Musharakah venture will
be dissolved
Under the transaction, the periodic distributions and capital returns are ultimately
serviced by Khazanah, by virtue of the Purchase Undertaking to acquire the
specific portfolio units from RACB at a pre-agreed price upon maturity or a
Dissolution Event, as well as the Obligor’s commitment to top up the shortfall in
the periodic returns should the returns from the underlying portfolio be less than
expected.
Since the last review in December 2008, another RM1 billion was issued on 16
September 2009; this instrument is due to mature on 16 September 2010
bringing the total amount outstanding under the Programme to RM8 billion.
Table 1: Maturity dates of ICP and IMTN issued by RACB
Instrument Nominal value (RM million) Maturity dates
IMTN 1,000 16 September 2010
IMTN 2,200 15 March 2011
IMTN 2,000 15 March 2012
IMTN 1,500 14 August 2013
IMTN 1,300 25 September 2015
8,000
Rantau Abang Capital Berhad 6
� Khazanah as Purchase Undertaking Obligor
The ratings of the Islamic securities reflect Khazanah’s credit strength vis-à-vis
the Purchase Undertaking; Khazanah is the ultimate obligor servicing the profit
and capital returns under this transaction. As such, RAM Ratings has reviewed
the credit strength of Khazanah in meeting the obligations due under the RM10
billion Islamic securities.
� Company Background
Khazanah was incorporated on 3 September 1993 under the Companies Act
1965, and commenced operations as the investment-holding arm of the
Government. Save for 1 share held by Pesuruhjaya Tanah Persekutuan (or the
Federal Land Commissioner), the entire equity of Khazanah is owned by MOF
Inc.
As the investment arm of the Government, Khazanah manages the former’s
commercial assets and invests in companies that are considered strategic to the
Government. Khazanah’s diversified portfolio of investee companies are involved
in various sectors such as utilities, financial institutions, transportation,
telecommunications, property and construction, healthcare, automotive,
manufacturing, infrastructure and technology.
Since the appointment of Tan Sri Dato’ Azman Mokhtar as its managing director
in May 2004, Khazanah has been transformed from a passive investment-holding
company to one that is more dynamic and forward looking. The Company has
created a framework for its transformation, focusing on 4 strategic pillars: the
restructuring of “legacy investments”; the transformation of GLCs; the acquisition
of new investments; and the development of human capital. This reflects
Khazanah’s early steps in balancing its role to ensure the achievement of its
commercial objectives vis-à-vis maximising shareholder returns, and its crucial
position in assisting the Government achieve its socio-economic goals.
By end-2008, the majority of the GLCs in Khazanah’s stable had completed their
restructuring i.e. TM Berhad (“TM”), the UEM Group, Malaysia Airports Holdings
Berhad (“MAHB”), with most of its legacy investments also having found a more
stable footing. This has allowed Khazanah to refocus its efforts in line with
diversifying its investment base from a geographical and sectoral perspective.
Between 2006 and 2008, Khazanah had intensified its efforts vis-à-vis foreign
investments in the financial-services sector and environmental sciences, with its
interests extending to the Middle East and China.
Rantau Abang Capital Berhad 7
� Industry and Business Assessment
RAM Ratings notes that local investments still dominate Khazanah’s investment
portfolio. As at end-June 2009, domestic investments accounted for about 90%
of Khazanah’s portfolio, with the majority of them being GLCs. The GLCT
programme, which is now about mid-way through its 10-year tenure (2005 to
2015), encompasses several strategic transactions, corporate restructurings,
regionalisation of investments and landmark financing transactions that were
concluded in 2008, i.e. the demerger of the TM Group, the restructuring of the
UEM Group and the divestment of several key associates such as Time dot Com
Berhad, Tradewinds Hotels and Resorts Sdn Bhd and DRB-Hicom Berhad.
Khazanah has also increased stakes in major foreign investments, e.g.
Singapore-based healthcare provider Parkway Holdings Ltd (“Parkway”) (up to
23.93%) and several ventures (worth up to USD215 million) into the Middle
Eastern financial-services markets.
Investments in defensive and stable industries, with dominant or virtually
monopolistic role
Khazanah’s domestic portfolio contains strategic investments in defensive
industries where it has a virtually monopolistic role, i.e. the power sector (via
Tenaga Nasional Berhad or “TNB”), communications (via TM and Pos Malaysia
or “POS”) and infrastructure (via PLUS Expressways Berhad or “PLUS” and the
UEM Group). The Company also enjoys a dominant position in the healthcare
and financial industries through stakes in dominant healthcare provider - Pantai
Holdings Berhad (“Pantai”) and one of Malaysia’s largest financial-services
groups – CIMB Group Holdings Berhad (“CIMB Group”).
Table 2: Khazanah’s strategic investments as at 30 June 2009
Source: Khazanah
Tough year in 2008
Khazanah’s investment portfolio had shrunk along with the meltdown of the
global and regional markets; its overall RAV had diminished by 70% to RM69.47
2 Includes Khazanah’s direct and indirect interests via UEM.
Company Sector Shareholding (%)
MAHB Transportation 72.74
POS Logistics 32.21
UEM Group Construction 100.00
Pantai Holdings Healthcare 60.00
TNB Utilities 37.81
Axiata Group Berhad Media and Communications 44.51
TM Media and Communications 41.78
Iskandar Investment Berhad Property 60.00
CIMB Group Financial 28.43
PLUS Infrastructure 63.872
Rantau Abang Capital Berhad 8
billion as at end-FY Dec 2008 (end-May 2008: RM88.2 billion) while its net worth3
had dwindled to RM35.61 billion (end-May 2008: RM53.1 billion)
4. Overall
shareholders’ returns from its listed portfolio contracted 35.7% in 2008, broadly in
line with the 36.2%5 plunge in the benchmark FTSE Bursa Malaysia Kuala
Lumpur Composite Index. Elsewhere, the performance of sovereign wealth funds
(“SWFs”) appeared to have rallied against general market movement -
registering a 4.9% growth in the first 7 months of 20086, However, Khazanah and
the SWFs are not directly comparable as the latter’s performance was buoyed by
substantial interests in oil-and-gas-based investments which had benefited from
escalating crude oil prices. Despite the challenging environment in 2008,
Khazanah still enjoyed dividends from its diversified base of subsidiaries and
associates.
Figure 1: Khazanah’s RAV between 2004 and 2008
Source: Khazanah
Table 3: Dividend payments from Khazanah’s key subsidiaries and associates
Company Dividend policy Khazanah's shareholding
(%)
Total dividends for FY Dec 2008 (RM million)
Khazanah’s portion
(RM million)
TM 90% of PATAMI 41.78 900 376
PLUS Min dividend growth of 12% y-o-y 63.87 825 527
TNB 60% of company’s free cashflow 37.80 646 244
MAHB 50% of profit after tax 72.74 153 111
CIMB 18.5 sen/share 28.44 619 176
Total 3,143 1,434
Source: Companies’ annual reports and official websites
*PATAMI = profit after tax and minority interest
3 Net worth consists of RAV less total liabilities 4 Source: Khazanah Media Statement, 19 January 2009 5 Source: Khazanah Media Statement, 19 January 2009 6 Source: Sovereign Wealth Fund Institute, www.swfinstitute.org. The assets of the SWFs incorporate official disclosure, fund creation, investment activity, capital injections and other variables.
Rantau Abang Capital Berhad 9
G20’s performance proxy for Khazanah’s K9
The G20 is a collection of 20 of the largest GLCs controlled by government-
linked investment-holding companies (including those held by Khazanah). In
spite of the more challenging economic environment in 2008, much progress has
been achieved since 2004 – thanks to the GLCT programme. Although less than
the RM19.3 billion achieved in 2007, the aggregate earnings of the G20 came in
at RM14.7 billion in 2008 – some 53% higher than the pre-GLCT number of RM9
billion in 20047. As Khazanah has interests in 9 (referred to as “K9”) of the 20
GLCs within the G20 cluster, the performance of the larger group would be
relatively reflective of the K9’s showing in 2008. Given the harsh operating
environment last year, only 54% of the G20’s key performance indicators (“KPIs”)
had been met (2007: 76%).
While revenue and earnings had waned in 2008, the key entities of the K9 had
achieved a greater part of their KPIs, as highlighted in Table 4 below. The K9
had been in a much better position to weather the crisis as a result of their more
robust balance sheets and stronger operating fundamentals given that the
strategies under the GLCT programme were already mid-way through their cycle
(2004 to 2014).
Table 4: GLCs’ KPI achievements in 2008
Description GLC*
Met all headline KPIs MAHB Met most headline KPIs MAS, POS Malaysia, TNB Missed all headline KPIs TMI (now Axiata), CIMB Group
*UEM did not make any announcement for 2008 due to its de-listing exercise for restructuring purposes. Neither did TM and Proton as a result of their respective demerger and restructuring exercises.
� Major Investments/Performance of Assets
Iskandar Malaysia project still on track; key focus on infrastructure and
education
Khazanah is one of the key drivers of Malaysia’s largest development project to
date, i.e. Iskandar Malaysia (“IM”), through UEM Land Holdings Berhad (“UEM
Land”) and Iskandar Investment Berhad (“IIB”); the latter had formerly been
known as South Johor Investment Corporation Berhad.
Investments in IM mainly stem from privately funded initiatives, with the
Government primarily involved via infrastructure investments.
Khazanah invests directly in IM through IIB - the entity set up to drive
development and investment in certain areas within this development corridor.
IIB is 60%-owned by Khazanah while the remaining equity is equally owned by
7 Source: G-20 Annual Report, Bloomberg and PCG Analysis
Rantau Abang Capital Berhad 10
the Employees Provident Fund and Kumpulan Prasarana Rakyat Johor, i.e. the
investment arm of the Johor State Government.
RAM Ratings understands that IIB may also form joint ventures with strategic
partners - both local and foreign - to invest in various IM projects. As a catalytic
developer within IM, IIB’s immediate focus is the education and tourism-related
sectors that are consistent with investments that have poured in to date.
The Government has earmarked RM6.83 billion8 under the Ninth Malaysia Plan
(“9MP”, 2006-2010) to ensure the continuous development of IM. Between 2006
and 2008, RM40.3 billion of investments had been secured, representing 85.6%
of the 5-year target of RM47 billion under the 9MP9. About RM4.7 billion has
been allocated for capital expenditure between 2009 and 2011. While there have
been reports that some investors have temporarily deferred their contributions
due to the global downturn, investments are expected to continue flowing in over
the medium term.
In the meantime, Khazanah will indirectly invest in IM projects via IIB, UEM Land
or its other GLCs, where appropriate. A portion of the RM10 billion allocated to
Khazanah under the second stimulus package will be pumped into IM, although
these projects will have long gestation periods.
Legacy investments continue turning around
Khazanah's biggest challenge has been in relation to its “legacy investments”
such as Silterra Malaysia Sdn Bhd, Malaysian Airline System Berhad (“MAS”)
and Proton Holdings Berhad (“Proton”). The restructuring and management
initiatives of MAS and Proton have led to much progress despite the generally
bleak investment landscape. In spite of the slowdown in the travel industry last
year, MAS posted a 2.7% growth in revenue and a 1.6% profit-after-tax margin
for fiscal 200810. While the numbers may seem meager, they are nonetheless
respectable given the national air carrier’s losses prior to 2008, and also in
comparison to the weak performance of the global airline industry; in October
2009, the International Air Transport Association (“IATA”) revised the industries’
(net income) loss estimates for 2008 from a loss of USD10.4 billion to a loss of
USD16.8 billion11. Despite this tumultuous environment, MAS managed to record
a RM246 million net income for the same period.
8 Source: “Iskandar Malaysia” official website at www.iskandar.com.my, “Iskandar maintains investment momentum despite slowdown”, dated 20 November 2008.
9 Source: Khazanah official website at www.khazanah.com.my, “Khazanah emphasizes crisis
preparedness measures and initiatives to catalyze economic growth”, media release dated 19 January 2009
10 Based on the financial performance of the company as shown on MAS official website, “5 years financial performance”, http://www.malaysiaairlines.com/my/en/corp/corp/relations/info/highlights/financial-highlights.aspx
11 Source IATA at official website at www.iata.org, “Deeper Losses Forecast - Falling Yields, Rising Fuel Costs”, dated 15 September 2009
Rantau Abang Capital Berhad 11
In the first quarter of FYE 31 March 2010, Proton’s revenue was lifted 8% to
RM1.85 billion despite a 2% drop in sales volume (the industry’s sales had
declined 11%). The national car maker’s performance can be attributed to the
launch of its new multi-purpose model, Exora in April 2009.
Khazanah to “stand by” its investments
The management had previously highlighted a “soft touch” approach to handling
its “legacy investments”, i.e. it will not directly participate in their daily operations.
However, Khazanah is clearly committed to supporting its associates amid the
present tumultuous climate. Axiata Group Berhad (“Axiata”), the international
telecommunications arm of Khazanah and a spin-off from TM, had faced margin
compression due to the competitive operating environment, which had increased
its funding costs and foreign-exchange losses in 2008. To strengthen the balance
sheet and capital base of this fledgling company, Khazanah had subscribed for
RM2 billion of Axiata’s right issue; the Company is committed to subscribing for its
entire entitlement of 20% of all of Axiata’s unsubscribed shares.
Mixed bag of results in 2009
While financials are not expected to recover in 2009, the K9 companies have
been “stress tested”, with emphasis on “crisis management”; the key focus will be
on cashflow preservation and balance-sheet management. Given the equity
market’s rebound, the RAV of Khazanah’s portfolio had augmented to RM85
billion as at end-June 2009 (end-December 2008: RM69.47 billion); its net worth
had appreciated 34% (or RM11.1 billion) to RM44 billion over the same period,
translating into a healthy 2.1 times cover of its assets over its liabilities (end-
December 2008: 1.1 times)12.
To date, some GLCs have reported promising results in 2009, after accounting for
the expected protracted slowdown:
• CIMB achieved a 14.5% net return on equity (“ROE”) exceeding its KPI target
of 12.5% for the first quarter of fiscal 2009.
• Axiata has announced that it will be able to meet the upper range of its KPI
targets. Its revenue for the first half of fiscal 2009 came in at RM 6.03 billion,
with RM 622 million of pre-tax profit.
Currently focused on domestic sectors with “multiplier effect”
With the deceleration of the domestic economy in 2009 and the expectation of a
protracted recovery in 2010, Khazanah’s immediate focus is in catalytic and
transformative sectors on the domestic front, whilst remaining cautious on its
international investments. In FY Dec 2008, Khazanah invested approximately
RM3.2 billion in existing and new foreign ventures, compared to only a single
RM87.5 million investment in the first 7 months of 2009. The Company’s short-to-
12 Source: Invest Malaysia 2009 Keynote Address: “Graduating to a Higher Class – Catalyzing a New Domestic Economy”, 1 July 2009
Rantau Abang Capital Berhad 12
medium-term focus will be on investing in local sectors that will have a “multiplier
effect” on the Malaysian economy; the intention is to create job opportunities,
reduce economic disparity, and eliminate hardcore poverty, among others. While
beneficial to the average person on the street from a social and economic
perspective, the fruits from such endeavours are only likely to be reaped over the
longer term.
Table 5: Foreign ventures between 2007 and July 2009
RM
million
Infrastructure
Development
Company (IDFC)
Mar-07 9.87% 630 Financial
Intermediary
for
Infrastructure
India
Parkway Holdings
Singapore
May-08 16.4% 1230 Healthcare Singapore
ACR Retakaful
Holdings
May-08 40% 1050 Insurance UAE
KCS Green
Energy
International
(Group)
Investments Co.
Ltd
Aug-08 JV 557 Waste-energy China
Khazanah India
Advisors Private
Limited
Sep-08 100% 2 Investment
Advisory
Services
India
Jadwa
Investment
Oct-08 10% 266 Fund
Management
Saudi Arabia
Small Bone
Innovations
Jul-09 23% 88 Medical USA
Business Country of
Operations
Company Date of
acquisition
Acquired
Interest
(%)
Source: Various Khazanah media releases and newspaper/magazine publications
Short-to-medium-term focus on domestic poverty and disadvantaged may
detract from realising superior returns
The Government’s current focus via the SEJAHTERA and PINTAR projects is
aimed at providing sustainable living conditions/infrastructure and adopting
schools, respectively. In line with this, RM10 billion (under the second stimulus
package) has been allocated to Khazanah and its stable of companies, to be
utilised for the implementation of investment plans in strategic, service-oriented
sectors that are deemed to have substantial multiplier effects, including
telecommunications, leisure and tourism, technology (including information and
communications technology (“ICT”), creative industries and sustainable
development or “green” technologies), healthcare and agriculture. The
investments in these sectors in 2009 and 2010 are aimed at creating an
estimated 70,000 jobs by 2011. Such sectors, with their emphasis on services
and intellectual property content, are generally in new areas; hence they are
more catalytic and should spur further participation over time.
* Include on-going, non-discretionary payments on hybrid securities, if any.
OPBDIT = Operating Profit Before Depreciation, Interest & Tax
OPBIT = Operating Profit Before Interest &Tax
FINANCIAL RATIOS Khazanah Nasional Berhad - Company
Rantau Abang Capital Berhad 22
CREDIT RATING DEFINITIONS
Issue Ratings - Partnership-Based Sukuk
Long-Term Ratings
AAA
AA
A
BBB
BB
B
C
D
Short-Term Ratings
P1
P2
P3
NP
D
A sukuk rated AAA has superior safety for payment of capital and expected returns. This is the highest long-termIssue Rating assigned by RAM Ratings to a partnership-based sukuk.
A sukuk rated AA has high safety for payment of capital and expected returns. The issuer is resilient againstadverse changes in circumstances, economic conditions and/or operating environments.
A sukuk rated A has adequate safety for payment of capital and expected returns. The issuer is more susceptible toadverse changes in circumstances, economic conditions and/or operating environments than those in higher-ratedcategories.
A sukuk rated BBB has moderate safety for payment of capital and expected returns. The issuer is more likely to beweakened by adverse changes in circumstances, economic conditions and/or operating environments than those inhigher-rated categories. This is the lowest investment-grade category.
A sukuk rated BB has low safety for payment of capital and expected returns. The issuer is highly vulnerable toadverse changes in circumstances, economic conditions and/or operating environments.
A sukuk rated B has very low safety for payment of capital and expected returns. The issuer has a limited ability towithstand adverse changes in circumstances, economic conditions and/or operating environments.
A sukuk rated C has a high likelihood of not meeting the payment of capital and expected returns. The issuer ishighly dependent on favourable changes in circumstances, economic conditions and/or operating environments, thelack of which would likely result in it not fulfilling the terms of the investment contract.
A sukuk rated D is either currently not meeting or will not meet the payment of capital and expected returns. The Drating may also reflect a distressed exchange, the filing of bankruptcy and/or other actions pertaining to the issuerthat could jeopardise the fulfilment of the investment contract's terms.
A sukuk rated P1 has high safety for payment of capital and expected returns in the short term. This is the highestshort-term Issue Rating assigned by RAM Ratings a partnership-based sukuk.
A sukuk rated P2 has adequate safety for payment of capital and expected returns in the short term. The issuer ismore susceptible to the effects of deteriorating circumstances than those in the highest-rated category.
A sukuk rated P3 has moderate safety for payment of capital and expected returns in the short term. The issuer ismore likely to be weakened by the effects of deteriorating circumstances than those in higher-rated categories. Thisis the lowest investment-grade category.
A sukuk rated NP has doubtful safety for payment of capital and expected returns in the short term. The issuer facesmajor uncertainties that could compromise its capacity for fulfiling the terms of the investment contract.
A sukuk rated D is either currently not meeting or will not meet the payment of capital and expected returns. The Drating may also reflect a distressed exchange, the filing of bankruptcy and/or other actions pertaining to the issuerthat could jeopardise the fulfilment of the investment contract's terms.
For long-term ratings, RAM Ratings applies subscripts 1, 2 or 3 in each rating category from AA to C. The subscript 1 indicates thatthe issue ranks at the higher end of its generic rating category; the subscript 2 indicates a mid-ranking; and the subscript 3 indicatesthat the issue ranks at the lower end of its generic rating category. In addition, RAM Ratings applies the suffixes (bg) or (s) to ratingswhich have been enhanced by a bank guarantee or other supports, respectively.
An Issue Rating for a partnership-based sukuk is RAM Ratings' current opinion on the creditworthiness of a particularpartnership-based sukuk. It reflects the overall capacity and willingness of an issuer to meet the payment of capital andexpected returns on a full and timely basis, taking into account the expressed terms and conditions of the investmentcontract. RAM Ratings’ sukuk ratings are, however, not a measure of compliance with Shariah principles or the role,formation, practices, legitimacy and soundness of the Shariah advisors’ recommendations and decisions.
Rantau Abang Capital Berhad 23
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