Increasing Free Float For Tenaga Nasional - Not Quite Sufficient

Khazanah sold 703 million ringgit ($207 million) of shares in Malaysian power utility Tenaga Nasional, part of a government push to trim stakes in state-linked companies to boost liquidity.

Malaysia’s state investment arm sold 86.75 million shares, or a 2 percent stake, at 8.10 ringgit each, Maybank Investment Bank Bhd., which managed the placement, said in a statement. That’s a 3.6 percent discount to the Dec. 10 closing price.

Khazanah, which owns stakes in some of the biggest Malaysian companies, has cut holdings in firms including PLUS Expressway and Malaysia Airports Holdings Bhd. as Prime Minister Najib Razak prodded state-linked investment agencies to partially divest to increase the number of shares available in the open market, and lure more investors.

A source with direct knowledge of the share placement said the shares were sold to local institutional funds and the Employees Provident Fund (EPF), the largest pension fund in the country, has taken up 50 million shares in the placement.

Question #1: If you want to increase free float, why place out to local funds only. Its not local funds that are complaining about the free float but rather the foreign funds.

Question #2: EPF gets 50m shares of the placement. That may count as free float but I doubt very much EPF is a short term holder of Tenaga shares. If the presumed improved liquidity is to be evident, wouldn't it be more relevant to break it up into smaller parcels and to more foreign funds?

Question #3: If EPF holds for 5-10 years, how is that improving the effective real free float?

Malaysia is studying a request by national power utility Tenaga to raise the price of electricity, a local newspaper reported on Thursday. New electricity tariffs may take effect from January if it is approved by the cabinet, Energy Minister Peter Chin was quoted by the Star newspaper as saying. Chin said his ministry will study the issue first before submitting to the cabinet for approval.

"The electricity tariff is reviewed every six months due to fuel price adjustments but whether there will be a new tariff or not will depend on the cabinet," he said.

The cabinet reviewed proposals for 4.9 percent electricity price hike in July this year and turned down the plan, fearing that it would an unpopular move.

Question #4: Khazanah and the government seem to be not entirely aware why foreign funds are shying away from Tenaga. Free float is but one MINOR issue. It is very difficult to justify buying Tenaga because there is no transparent tariff formula. To international fund managers, when considering a power utility, tariff hikes and the ability to pass on jumps in cost needs to be clear. It affects the net margins predictability. Just look at the past experience cited above by the government. Each time Tenaga will have to literally "beg" the government for the tariff hike, even when the price of oil/coal has surged significantly. Plus there is absolutely no guarantee. How do you expect international funds to properly assessed the prospects of holding Tenaga? There must be a transparent tariff formula, taking into account all related cost in producing, generating and distributing electricity. There must be a fixed interval for tariff reviews , e.g. twice a year or annually.

Question #5: I can fully appreciate that there are burdens on the consumers, and there are the political considerations as well. If you wish to take into account these two factors, then for goodness sake, do not list it, take it as fully government owned. When you decide to list Tenaga, a utility company, earnings are supposed to be relatively highly predictable, not a guessing game. That my friend, is the main obstacle why international funds are frowning on owning Tenaga. Increasing the free float does not address the problem here. Increasing the free float for most of the rest of GLCs is by large a very good development, but it falls flat here.



p/s photo: Yuriko Shiratori

What The Experts Are Saying About Emerging Markets Part 1

As of mid-October, the MSCI Emerging Market Index had gained 68% YTD, while MSCI global equities had increased 24%. Overall, emerging market asset classes have been supported by high global liquidity, improvements in risk appetite, falling core markets volatility (VIX), rebounding commodity prices and relatively stable fundamentals in comparison with past episodes of crisis. Moreover, emerging market countries' policy responses to the crisis has been relatively aggressive, planting the seeds for positive domestic demand. Plus, corporate earnings have been better than expected. Since reaching bottom in November 2008, emerging market equity markets have jumped 105%.

Downside risks remain in place due to uncertainties about the shape of the global recovery (V, U, W, V+U or inverted square root), the strong U.S. dollar (USD), higher U.S. Treasury yields, profit-taking and revival of global risk aversion. Moreover, miscalculations on the implementation of exit strategies around the globe post a significant risk. In September, emerging market equities jumped 12.7%, after declining 0.8% in August (+14.6% in July), lead by Latin America (20%) and Asia ex-Japan (10.8%). Equity markets in Europe, the Middle East and Africa increased 8% as positive news about the global economy continued supporting risk appetite. In the same month, world markets increased 6.6% versus 8.8% in July.

Outlook:

• Mark Mobius, chairman of Templeton Asset Management Ltd., reckons that emerging-market economic growth will be about zero this year, compared to a contraction of almost 4% in developed economies. He also said stocks in the BRIC nations--Brazil, Russia, India and China--are likely to rise by 30-40% in the next three to four years. (Bloomberg, 11/18/09)


• WSJ Columnist Jason Zweig: "Vinicius Silva, an analyst at Morgan Stanley, calculates that emerging markets are trading at 12.9 times their expected earnings over the next year. Since 1993, that average has been 12.8 times earnings. Emerging markets as a whole are neither a bubble nor a bargain." (11/10/09)


• According to Morgan Stanley (MS), the MSCI Emerging Markets Index might gain 25% by the end of 2010 and finish at 1,200, the highest two-year rally since 1989. Also, they have increased the forecast for 2010 profit growth in emerging markets to 40% (from an initial 28%). (Bloomberg, 11/10/2009)


• Dr. Nouriel Roubini said on October 4 that the current "party" on emerging markets and markets in general could continue for another six months but will eventually end ugly, as much of the rise in asset prices since March is another bubble created by a huge pool of global liquidity. "I'd argue that rally has been too much, too fast," Roubini said at the Inside Commodities conference at the NYSE. "If we have a V-shaped recovery, then it's justified and assets can rise further. But I believe we'll have U-shaped recovery, in which case those assets could move sideways or they could correct." (WSJ, 11/04/09)
• Dr. Nouriel Roubini said on October 4 that the current "party" on emerging markets and markets in general could continue for another six months but will eventually end ugly, as much of the rise in asset prices since March is another bubble created by a huge pool of global liquidity. "I'd argue that rally has been too much, too fast," Roubini said at the Inside Commodities conference at the NYSE. "If we have a V-shaped recovery, then it's justified and assets can rise further. But I believe we'll have U-shaped recovery, in which case those assets could move sideways or they could correct." (WSJ, 11/04/09)


• According to Arnab Das of Roubini Global Economics, emerging markets will extend their biggest rally in a decade as investors borrow dollars to buy stocks, bonds and currencies in the world’s fastest growing economies. Investors should take “overweight” positions in developing-nation assets, said Das, the London-based head of market research and strategy at RGE. The flow of U.S. dollars in emerging markets “is based on better fundamentals for the near term than the G10” through “better growth prospects because of structural reforms and ongoing integration into the world economy,” Das said. (Bloomberg, 11/04/09)


• According to Allan Conway, head of emerging market equities at Schroder Investment Management, there is room for further gains in emerging-market stocks in the next 1-2 years. Emerging nations will represent 70 to 75% of global growth for the “foreseeable future.” The BRIC countries are at an “early stage” of development that will accelerate, creating demand with rising disposable income for 2.9 billion population. (Bloomberg, 10/13/09)


• According to Michael Wang, emerging markets strategist at Morgan Stanley: “Previously, emerging markets were seen as a geared play on developed markets because of their dependence on exports. But this is different. Asia and Latin America haven’t had the fundamental problems in the banking sector that the developed world has had, so lending and credit growth has resumed rapidly and this is helping drive growth.” However, Mr Wang pointed out that “There is the possibility of an incipient asset bubble, particularly with regard to China, but that is not our base case scenario, which is still for them to go higher”. (FT, 08/03/09)
• "Research by Société Générale's cross asset team argues it is time to sell because the price-to-book value of emerging-market stocks is now higher than those in the developed world. The only other time this valuation measure was at a premium to that of the developed world was from mid-2006 to mid-2007. Emerging-market equities fell by two-thirds in the 12 months to the start of November 2008. (WSJ, 07/27/09)
• According to Citi equity strategists Geoffrey Dennis and Jason Press, “The correction in regional equity markets has reached the expected 10-15% range...Although the mood has turned sour on worries over the timing of economic recovery, there is little more downside from here and we expect regional markets to break out to the upside again later this summer.” (06/24/09)
• Jonathan Garner, the chief Asian and emerging market stategist for MS, wrote in a research note that "the MSCI Emerging Markets Index may climb to 985 by June 2010 from its closing price of 743.72 on June 18....Profits will rebound 28% next year after a 15% slide in 2009." Earlier, Garner forecast a 20% gain in 2010 and a 25% drop this year. (Shiyin and Paterson)

p/s photo: Yuriko Shiratori