MBI to restructure cash cows this year

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Media : The Edge, Malaysia

Date    : 15 May 2017

It is crunch time for Selangor’s Menteri Besar Inc (MBI).Two years after a change at the top, the state investment vehicle is in a self-imposed delivery year with a strategic plan that aims to reverse the

well-publicised under-performance of its group assets.

Essentially, the plan is to maximise the profitability of what MBI calls its cash-generating units (CGUs) by closely reviewing their financial and operational performance. The CGUs are now subject to a strategic review at MBI level.

The company has engaged one of the Big Four accounting firms to look into the possible restructuring of the CGUs. The study, which mostly centres on taxation matters, is due for completion this quarter, after which it will be presented to the stakeholders for evaluation.

“We’ve got a team of four analysts looking at the [performance of the] companies. The restructuring will be concluded this year,” says MBI CEO Raja Shahreen Raja Othman, who adds that the company expects to see tangible results from the plan from 2018 up to 2020.

As at 2015, the CGUs’ average return on equity was 17%.

Conservatively, the assets across MBI’s group of companies were worth a total of RM21 billion as at June last year. According to MBI, these assets contributed RM116.7 million in total dividends to the state last year, down from RM125.9 million in 2015. But most of the said dividends were not cash payments.

Rather, MBI includes in the dividend calculation the funds spent on supporting state development programmes and initiatives. For example, the state only received RM3.35 million in cash dividends from MBI’s subsidiaries in 2015, according to information disclosed in the state legislative assembly.

“The number is big. So, where are the returns? That is the challenge we are facing,” says Raja Shahreen, who had come on board in 2015. “In the past, there were only trickling dividends, not much.”

Without elaborating on the milestones that MBI is working towards, he says he expects most of the subsidiaries to see improved performance by 2019. MBI is looking to raise funds for some troubled subsidiaries and is weighing the possible listing of some units, he states but declines to discuss the details.

According to the Selangor state assembly’s transcripts, for the nine-month period as at Sept 30, 2016, MBI incurred a pre-tax loss of RM52.98 million on revenue of RM34.13 million. In the same period, it contributed RM62.47 million to state programmes and corporate social responsibility.

This underlines how the MBI management has to strike a balance between making the group assets sweat more and ensuring the returns benefit the state through social responsibility programmes and other public initiatives.

“Our focus now is maximising our potential. There are so many (MBI) companies out there but only a few of them make money,” Raja Shahreen tells The Edge.

On the loss-making subsidiaries, he says an assessment is ongoing to determine whether they are viable. Of 118 companies in MBI’s stable, 15 are being liquidated.

That said, not all loss-making units will suffer a similar fate. MBI says the acid test is whether there is strategic purpose being fulfilled by each subsidiary. “Our non-CGUs were not incepted with the objective to generate profit. However, to term them as loss-making is misconstrued as we emphasise operational efficiency across all our subsidiaries,” says the company. “Every non-commercial entity serves a state building agenda to empower Selangor.” Legacy issues It is worth noting that the strategic plan apparently took two years to formulate since the CEO took over.

When asked about the ponderous pace, Raja Shahreen points to the complexity of various legacy issues inherited by the management as the main hurdle, which can only be overcome by involving various stakeholders and draining substantial resources.

For perspective, MBI traces its history back to State Secretary Selangor Inc that was established in 1955. The current entity was set up in 1994.

“We need to ensure every stakeholder’s concern is addressed and we must conduct ourselves in a manner that is transparent. Most of our legacy issues require a middie-term timeline to be solved,” says Raja Shahreen.

He says when he took over, a couple of core problems quickly became clear — an entrenched workforce culture and legacy issues from decades ago. “When I first came in, I saw some people who were coming to work just for the sake of coming to work; there was no drive. So we needed to change that.”

There were also numerous “ghosts from the past” to deal with in the present, he adds. “These are things from the 1990s, 1980s, which happened when some of us were still in school.”

A combination of the problems presents a situation in which the management could easily get bogged down, trying to put out old fires instead of moving forward. To avoid the pitfall, Raja Shahreen says he tries to separate the legacy issues and find ways to move forward. “For example, the Klang river — when I look at the reports, we’ve been talking about cleaning up the river since the 1990s. But nothing has been done.

“When I came in, I looked at it and said, okay guys, simple. Let’s clean up the river. Just get the ball rolling.”

Raja Shahreen adds that to date, the effort has resulted in 28,000 tonnes of rubbish being fished out of the river over the past year on a RM15 million budget.

Such initiatives and their non-financial goals mean that the end-result of the larger streamlining of MBI’s group of companies may be difficult to fully assess. “The biggest benchmark for me is in terms of the public, for example, hearing fewer complaints as well as looking into the delivery of all these initiatives we have,” says Raja Shahreen.

“Sometimes, I’m a money-centric person, I look at returns. But at the same time, I look at how much MBI has been contributing to the state through these initiatives.”

Adding to the complexity is the disorganised nature of MBI’s group of companies, which Selangor Menteri Besar Datuk Seri Mohamed Azmin Ali previously described as being in “disarray”.

A simple example is the overlap between multiple property development companies owned through different subsidiaries, such as Kumpulan Hartanah Selangor Bhd and PNSB Properties Sdn Bhd, a unit of Permodalan Negeri Selangor Bhd.

Raja Shahreen opines that it is not as simple as reorganising the subsidiaries into distinct groups by individual sectors. While it had been studied before and can be executed quickly, he argues that there are also costs involved.

“There are always two sides to a coin. Yes, [it] may be good in terms of transparency and all that. But then again, if you want to structure them altogether into one, all property companies into one group, what will be the tax impact? It’ll be expensive.”

When asked whether the fragmented structure makes it harder to efficiently strategise at MBI level, he says no, citing further specialisation of each unit despite potential overlap.

As for improving transparency by tabling accounts to the state legislative assembly, the CEO reiterates that MBI is not currently required to do so. Any change has to come from the state, he adds.

Raja Shahreen says the numbers of its subsidiaries are already open to the public via the Companies Commission of Malaysia. “MBI was created by the state, so let the state decide what they want to do with it. It’s not for us to tell the state to change the requirements.”

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