By Khairie Hisyam
Cahya Mata’s buy into Sacofa, a Sarawak state-controlled telco infrastructure company, raises many alarming questions. Most pressing is whether Sarawakians are losing out on a lucrative public asset with the deal price seemingly far on the low side.
Imagine if you partially own a business and hire a professional manager to run it. The manager then signs a deal and tells you he cannot discuss the exact terms of the deal with you, a vested shareholder, until the transaction is completed.
Does that scenario sound preposterous to you? Ah, but that is exactly what transpired with regards to Cahya Mata Sarawak Bhd’s proposed shares acquisition in Sarawak-based telecommunications infrastructure and services provider Sacofa Sdn Bhd, announced last week.
The deal will see Cahya Mata acquire 50% of Sacofa’s shares from the Sarawak State Financial Secretary Inc for RM186.79 million following the satisfaction of a number of conditions precedent.
Richard Curtis
“While Cahya Mata understands that our major stakeholders will have many questions about this acquisition, we have no further comment to make until the sale and purchase is concluded, at which time we will make a further statement,” said group managing director Richard Curtis in announcing the deal last week.
Now this is absurd. We’re not even talking about random strangers asking about the details (more on that later). Curtis is saying that Cahya Mata’s own shareholders cannot find out more about this deal until after it is done and dusted, which simply defeats the whole purpose of asking questions about the deal.
To take it further, Sacofa is majority controlled by the Sarawak state government. This deal essentially means the state government is divesting its stake in a highly profitable operation to a private sector entity.
Yes, make no mistake: public records show Sacofa is operating at a 33% net profit margin, a fantastic return, and it has no competitors in Sarawak. Its concession, while expiring in seven years, can be renewed for however many years the state government wishes to as provided in the concession agreement, according to a regulatory filing.
Therefore the Sacofa deal is a public interest matter. Which is why Cahya Mata simply should not be allowed to say it is keeping silent about the deal until the transaction concludes. For that matter, the state government should be talking to the public about this too.
Fortunately for the public Bursa Malaysia did issue a query on the deal, which was faxed to Cahya Mata after the announcement last week. The stock exchange regulator asked eight questions ranging from the pricing of the shares being acquired to Curtis’ statement above and the company responded to seven so far.
The one question that Cahya Mata has not responded to is about the pricing of the shares being acquired – this is arguably one of the more important questions to the public.
As highlighted in a Kinibiz article yesterday, the purchase price of 42.43 million Sacofa shares at RM186.79 million values the company at RM373.58 million. Public records show Sacofa posting a revenue of RM153.41 million in the 2013 financial year ended Dec 31, 2013 (FY13), which gave a net profit of RM51.64 million.
This means Cahya Mata is getting 50% of Sacofa at a price-earnings ratio of 7.23 times, a strangely low figure for a concessionaire with a monopoly in Sarawak. Briefly, price-earnings ratio is an indicator of investor expectations in terms of the company’s future earnings growth.
What of other telco infrastructure companies? On Bursa Malaysia there are several and they are trading at vastly higher price-earning ratios.
Take OCK Group Bhd. On Monday the counter closed at 90 sen per share, putting its market value at RM475.34 million. For the 2014 financial year ended Dec 31, 2014 (FY14), OCK Group posted RM16.36 million in net profit – that translates into a price-earnings ratio of 29 times.
Here’s another public-listed telco infrastructure company: Instacom Group Bhd, which closed at 12.5 sen yesterday. That places its market value at RM126.46. For FY14 Instacom posted RM3.6 million net profit – it is trading at a price-earnings ratio of 35 times.
And what margins do OCK Group and Instacom Group boast that they are trading at such far higher price-earnings ratios? Their net profits come to 8.7% and 5.4% each of their respective full-year revenues. Now remember that Sacofa’s net profit margin for FY13 is 33%.
In light of this comparison, are we now to take the 7.23 times price-earnings ratio valuation for Sacofa at face value? The deal may be fantastic for Cahya Mata and its shareholders but terrible for Sarawakians who are vested in Sacofa through public ownership of the company’s equity.
Of course there will be questions and Cahya Mata should be required to answer all of them. Below are three to begin with, all concerning whether the 50% equity block in Sacofa is being divested too cheaply by the state government.
For one, is Sacofa being undervalued in light of the price-earnings comparison above? In other words, is Cahya Mata buying a stake in the company at bargain price? It shouldn’t be as the Sarawak state’s stake in Sacofa is technically a public asset. If it is to be sold, it should be sold at market price, which brings us to the second question.
Second, when were Sacofa’s land and other assets last valued? The market had seen many times how a privatisation deal banks on outdated valuation figures, underpricing lucrative assets in a company being taken private to justify ridiculously low offer prices to the minority shareholders.
Third, what exactly are Sacofa’s assets in terms of land and when were these last valued? Public records show Sacofa’s net assets to be RM344.17 million as of FY13 but, being a state-controlled concessionaire, one has to wonder if along the way the state government has compulsorily acquired land for Sacofa to build telco towers and other facilities on.
Eyes are now on Cahya Mata for its response to the first question which was also posed by Bursa Malaysia. The Sarawak state government should also disclose information to the second and third questions, and even more beyond that for the sake of public interest.
It is imperative that the state government clear the air on whether Sacofa is being sold on the cheap or not before the deal is done.
GRRRR!!!!
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