Khamis, 30 April 2015

Is Edra Energy’s IPO the best way forward for 1MDB?




Is Edra Energy’s IPO the best way forward for 1MDB?

by 
Wan Ahmad Fayhsal


Previously the writer has argued that the criticality of saving the strategic assets of 1MDB – land and power plants – is akin to saving some of the companies that were hugely impacted by the 1997 Asian financial crisis. Although the actors are different, the systemic risk posed by 1MDB’s debt is not much different the one confronted by Malaysian government under, then (Tun) Dr. Mahathir’s leadership.

How exactly the government especially Ministry of Finance (MOFC) could save 1MDB’s assets?

Earlier MOF appointed CIMB Group Holdings Bhd as an advisor to sell power assets of Edra Energy Bhd, a subsidiary of 1MDB Group but in an official press statement released by MOF on 1st April, the appointment was terminated.

Rumors on the involvement of MOF’s in-house restructuring outfit Prokhas Sdn Bhd to help restructure 1MDB debt was denied by MOF.

At present as per stated in the earlier press release, the only way forward for 1MDB to manage its debt is by listing (IPO) Edra Energy in Bursa. 

But IPO issuance is normally done by company that possess great potentials, and strong balance sheet that could provide assurance to potential subscribers for a stable return; not company that is weak and laggard with unserviceable debt.

No doubt once the debt can be managed properly, 1MDB has great potentials to excel as a strategic development company but at present that seems to be very bleak.

Risky IPO

If the IPO is meant to generate extra cash to service the debt, as pointed by many critiques, still it would not able solve all of the problem. It could only act as a stop-gap measure as the real valuation of Edra Energy is still vague to many.

Furthermore who are the potential subscribers?

Normally there are three types of subscribers:

First group: public fund institutions like Tabung Haji, EPF, KWAP, LTAT and sovereign wealth fund like Khazanah. All of them are rich in cash.

Second group: international fund institutions like Temasek of Singapore, employees provident fund from UK, the US, hedge funds and gigantic insurance companies. They too are rich in cash.

Third group: the retail investors and “men in the streets” (MITS) who will only able to subscribe very limited amount of shares.

1MDB’s IPO will be facing hurdles from rulings set by Securities Commission (SC) as well as stipulated guidelines set by investment panels of the public fund institutions. The investment decision is guided by:


(1) Sectoral Limit

Each of the public fund institutions normally has a vast range and spread of investment portfolios from different sectors. This is a normal practice as part of managing investment risk exposure or in the English adage: ‘don’t put all your eggs in one basket’. This is to avoid systemic risk that could wipe out the overall investment if few invested sectors experienced losses.

For example: if KWAP already have an investment or shares in energy sector (which they currently have – in Malakoff Corporation Berhad) and the investment already reached the stipulated ceiling, then KWAP could no longer invest or subscribe to any IPOs that are issued by other energy companies.

(2) Single investee limit.

Local public fund institutions also are being ‘capped’ by government – for governance purposes – for not to invest beyond the stipulated limit.

For example: Let’s say EPF has an investment in our national oil and gas company PETRONAS which is capped to the amount of RM200 million, therefore EPF can no longer invest beyond that amount. Reason being government placed such restriction is to allow a fair competition for all existing public fund institutions to invest in such blue-chip companies that could provide reliable returns. By doing so not only EPF, but Tabung Haji, LTAT, and KWAP could also have a slice of the cake.

This is where the regulators like Ministry of Finance, SC and Bank Negara must make thorough due diligence with proper strategies (including exit strategy) clearly laid out before deciding to take Edra Energy public.

Edra as low-hanging fruit

The hard fact is that the IPO is already well-known by the public to be a ‘unique’ one. The real intent of going for IPO is to help 1MDB generate more cash in order to service the large debt that was incurred earlier in both of its principals and interests. This is very important for 1MDB in order to avoid foreclosure, not really about the prospect of future growth that is normally and clearly visible in ordinary prospectus.

The rate that 1MDB incurs its debt must not exceed the rate of its revenue generation in order to maintain a well-balanced debt management. The question is can this IPO for Edra Energy able to generate returns in short span of time as well as able to ensure its business operation i.e. concession period runs long enough. We have to keep in mind that the Tun Razak Exchange (TRX) realty is a long-gestation development. It means 1MDB as a group could only depend on Edra as its immediate savior.

Judging from market sentiment, going for IPO seems an insurmountable task and will not be that impactful in resolving 1MDB’s cash flow. People already speculated the writing on the wall for the proposed IPO. Prospective investors are afraid that the IPO will end up like Felda Global Venture’s (FGV) IPO which received an euphoric response during the listing but now its shares are languishing in value. The horizon is indeed bleak for 1MDB.

The author is a fellow at Putra Business School. The article first appeared in The Malaysian Reserve, 30th April 2015.

 


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