As a long-term investor the Employees Provident Fund (EPF) should reject Petroliam Nasional Bhd’s (Petronas) offer to buy the shares it does not own in listed shipper MISC Bhd for RM5.30 per share because it considerably undervalues MISC.
Otherwise, EPF, the retirement savings repository for over 12 million Malaysian workers and which manages close to RM500 billion of funds, could well lose a golden opportunity to stay invested in what may be one of the most undervalued blue chips on the Malaysian market.
Further, if EPF does not accept Petronas’ offer for its 10.3% stake in the shipper, it can by itself thwart the offer, an express condition of which is that Petronas must obtain acceptances which will give it control of at least 90 per cent of MISC.
For Petronas, it seems strange that it wants to take a RM20 billion company, among the largest listed companies, off the stock market when it has been listing many of its assets systematically on Bursa Malaysia over the years.
Petronas has merely said that taking full control of the company will provide Petronas with “greater flexibility in deciding MISC’s strategic direction”. In effect, further restructuring of MISC will be done behind closed doors.
The national oil corporation’ may be frustrated with low market valuations for MISC despite its strong underlying fundamentals but that is hardly something that it should be worried about, especially since most of MISC’s other shareholders are strong institutional shareholders who have a very long term view.
Shareholders besides EPF include Skim Amanah Saham Bhd, other Amanah Saham (national unit trust) funds and other pension funds (see table). Their combined stakes come up to 27.6 per cent. If the government-linked funds accept the offer, or are instructed to accept the offer, then Petronas has a pretty good chance of succeeding.
But that would be a travesty because there is a strong fundamental value in MISC. Without going into too much detail, MISC’s primary business is in LNG transport ships which have long-term contracts and therefore are utility-like in terms of the steadiness and low risk of returns.
This earns MISC around RM1.3-1.5 billion annually and is by far its largest income source. The offshore business which involves renting out offshore platforms is similarly long-term in nature and utility like. It brings in some RM300 million in net earnings a year. These two form the mainstay of MISC’s income.
And then there is contribution still from listed subsidiary Malaysian Marine and Heavy Engineering and the tank terminals business with net earnings of around RM100-150 million each. These are more cyclical in nature and depend on industry ups and downs.
The big problem is the non-LNG shipping area which collectively lost over RM1.5 billion in 2011 and is expected to have lost some RM1.25 billion last year! That is basically the crux of MISC’s migraines – its investments in the risky non-LNG shipping business.
With the sale of the container and logistics business completed last year some RM500 million in losses will no longer be repeated. But there are still heavy losses in petroleum shipping (estimated at RM450 million last year by analysts) and chemical shipping losses (RM250 million).
The mistake MISC made was moving out of its primarily LNG shipping business into other areas of shipping which were much more risky. While some moves such as the acquisition of American Eagle Tankers in 2003 paid initial dividends, they bit back in a very big way when the downturn came. Regular shipping is not for the uninitiated.
But once these businesses are cleared out or turned around MISC will be in ship-shape and will start re-exerting its underlying fundamentals. Analysts estimate current fundamental value as high RM8 per share, with most analysts putting it around RM6 ringgit.
At RM8 a share, Petronas total value will be over a third more than the offer value and EPF’s 10.3 per cent stake will be worth some RM3.668 billion or RM1.25 billion more than that under the Petronas offer.
The share price should go up in time. Right now, despite Petronas’ RM5.30 per share offer which gave a near 20% premium over the last traded price of RM4.45, the share price is trading near a 10-year low (see chart).
For Petronas if MISC does the right things, eventually value will come back. And let those funds which have invested in MISC for years and have been there through thick and thin benefit from the efforts MISC and Petronas would no doubt make to improve MISC’s value.
Keeping MISC listed will continue to ensure that it is under public scrutiny and therefore the pressure will be on the company to do things with good corporate governance, take competent steps to sell loss-making units or turn them around, and get approval for shareholders for these steps.
If MISC takes measures that add value to the company, it can be pretty sure that it will get shareholder support.
For those funds, which include EPF, you have a duty to your members to obtain the best possible deal for them. And that certainly does not mean selling off the company at its low point. Get together and stave off the takeover and use your power to ensure that MISC and its controlling shareholder Petronas do all possible to put value back into the shipping company.
There is no need to take MISC private, not for Petronas not for EPF, not for the other funds and not for the minority shareholders. Dropping the takeover will be in everyone’s interest.
P Gunasegaram is publisher and founding editor of KiniBiz. He believes companies should mostly stick to their core business. Otherwise, set up another company with separate funding to do that.