Frankly Speaking : (Sep 6-12, 2010)

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Investors await SC’s viewMudajaya Group Bhd has gone to great lengths to explain the power plant project it is undertaking with its partner in India. Not often does a company reveal such details. But Mudajaya was forced to disclose to Bursa Malaysia inside information on the Indian IPP project after a complaint was filed with the Securities Commission Malaysia (SC).

In the information on the Indian project it gave Bursa, Mudajaya quantified the profits that its 80%-owned subsidiary MIPP International Ltd has accrued from the undertaking, a RM3.4 billion contract to supply equipment to the power plant, and the identity of the remaining 20% shareholder in MIPP.

Last Friday, Mudajaya’s share price saw a 53 sen increase to RM4.48.Some may attribute the rebound to Mudajaya’s clarification. But would these events have any meaning to shareholders, especially the minorities, who probably do not have any idea of the nature of the complaint filed with the SC?

More importantly, does Mudajaya’s clarification mean the authorities have accepted its explanation of the Indian project and that there is no reason for further concern?

The SC, which has undertaken a review of Mudajaya’s business, is still awaiting a report on the Indian project it requested from the company’s auditors.

But how long will this special report take to prepare? And how long will the SC deliberate on the report before it comes up with an assessment? 

To be fair to both shareholders and the company’s management, the SC should make public the outcome of the review as soon as possible. This will go a long way towards helping Mudajaya. In the meantime, Mudajaya should continue with its investor relations programme.

Extracting full valueThe reported sale of an 8ha parcel of railway land in Jalan Bangsar, Kuala Lumpur, raises key issues relating to the management of public assets.

A basic point is that railway land is given in trust to Keretapi Tanah Melayu Bhd (KTMB) for railway use and not for trading away. Land not used for the railways should revert to the Federal Lands Commissioner, who is the legal custodian of all movable and immovable properties that are meant for public use.

Secondly, the business of KTMB is to operate a railway service, and it should therefore maximise the resources available to it, including real estate, to generate revenue for running this public amenity. Income from property development, such as rental income, can be used to subsidise its operations for the public good. An efficient public transport system, to which the railways are integral, pays dividends for the economy at large.

KTMB is said to be getting about RM50 million for the land. The question is, is KTMB being fairly compensated considering the land’s prime location. The Valuation and Property Services Department had valued the land at about RM300 million or RM350 psf in 2006.

Since the asset remains within the public account, how its value can be maximised and shared among all parties should be the top priority of the government.

By KTMB selling the land to Pelaburan Hartanah Bumiputra Bhd (PHBB), there really is no added value to the government as both are sponsored by the federal government.

If PHBB were to develop the land with other parties, KTMB would lose out. Perhaps what can be done is for both parties to jointly develop the land and share the cake. As far as KTMB is concerned, recurring returns should be carved out of the property project to help subsidise its huge operating bill.

This is how MRT services in Hong Kong and Singapore are efficiently maintained for public benefit.

In fact, that is exactly what KTMB should have done with its railway yard in Brickfields, which has gone to Malaysian Resources Corp Bhd, and another in Sentul which went to YTL Corp. It should not lose the other parcels of land in Bangsar, Brickfields, Woodlands and elsewhere in the same fashion.

Split personalities KNM is coming full circle. Since its listing in August 2003, the company has undertaken two share split exercises, a number of bonus issues and private placements. The share split exercises effectively reduced KNM’s par value from RM1 to its present valuation of 25 sen.

Now the company has proposed a share consolidation of four 25 sen shares into one, effectively reducing the number of shares in circulation from four billion to a quarter of that. KNM says the proposal is to enhance its capital structure as part of the company’s proactive capital management.

The company rightly points out that it is easier to manage a smaller number of shares and that the exercise will not have any impact on the valuation of the company.

Since this exercise does not add any value to the company, why did it bother to undertake a share split in the first place? And just three years after its last share split, it is proposing a share consolidation.

It seems strange that companies that ought to have an active capital management policy do not embark on such an exercise. Those that fall into this category include Oriental Holdings Bhd and Genting Malaysia Bhd.

Both these companies are cash rich and have strong businesses with steady cash flow. But there are no clear guidelines on what they plan to do with the cash, which is a dampener on the stock price.

These companies would do well to have an active capital management policy, especially with their growing cash piles.
This article appeared in Corporate page, The Edge Malaysia, Issue 822, Sep 6-12, 2010