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Monday, January 26, 2015

Which GLCs can give more dividends?

KUALA LUMPUR: Prime Minister Datuk Seri Najib Razak’s call for government-linked corporations (GLC) and government-linked investment companies (GLIC) to pay out more dividends may help warm investors’ interest in selected blue-chips.

Under the revised Budget 2015 announced by Najib last Tuesday, the government is seeking an additional RM400 million in dividends from GLCs and GLICs to help supplement its revenue amid falling crude oil prices.

On the macro front, the government’s urge for more dividends from such institutions would help shore up investors’ interests, said Areca Capital Sdn Bhd chief executive officer Danny Wong.

“With the government calling for more dividends, this could also hopefully attract foreign funds and indirectly help ease the burden of the weaker ringgit,” Wong told The Edge Financial Daily.

However, JF Apex Securities Bhd senior analyst Lee Cherng Wee said whether GLCs could pay more dividends would ultimately depend on their ability to grow earnings substantially amid a tougher economic climate.

Already, many research houses are forecasting a mere single-digit corporate earnings growth this year.

CIMB Research, for one, is projecting 8% growth in Malaysia’s corporate earnings in 2015, a figure that is nothing to shout about given the projected inflation rate as high as 4% this year, with the impending implementation of the goods and services tax.

“If earnings don’t grow as much, GLCs would then have to increase their payout ratios in response to the government’s needs,” said a head of research.

While the national oil firm’s management had expressed its reservations on raising dividends, the government has repeatedly “reminded” the former that it makes the ultimate decision on the level of dividends that the national oil firm has to pay.

Looking at the list of selected GLCs (see table), most have retained earnings that are multifold of their 12-month trailing net profit.

An analyst pointed out that S P Setia Bhd, in which Permodalan Nasional Bhd (PNB) is the major shareholder, is capable of paying a bigger dividend, as there is no major land banking exercise in store in its financial year ending Oct 31, 2015 (FY15).

“S P Setia has no big plans so far,” said the analyst.

The property developer (fundamental: 1.4; valuation: 1.2) has a dividend policy of distributing at least 50% of its net profit, with its dividend of 9.7 sen per share in FY14 accounting for about 60% of its earnings per share.

With retained earnings that were four times its FY14 net profit of RM405.68 million and no major land acquisitions announced, the group looks to be able to distribute more dividends, some said.

Meanwhile, another of PNB’s listed conglomerates, Sime Darby Bhd (fundamental: 1.3; valuation: 1.3), has retained earnings of RM28.9 billion, which is 8.59 times its trailing 12-month net profit of RM3.36 billion. In addition, its net gearing level is also low at 0.23 times.

Sime Darby has a pending deal to acquire New Britain Palm Oil Ltd for some RM5.63 billion. But after this, analysts don’t expect a major acquisition by the group, at least in the short term.

Nevertheless, weak palm oil prices and the slowdown in its China vehicle distribution business may dent Sime Darby’s profitability and crimp its dividends, some said.

AllianceDBS Research, in a note last Friday, said companies owned by Khazanah Nasional Bhd are more likely to be the ones asked to pay more dividends, compared with other GLCs that are largely owned by trust funds managed by PNB or the Employees Provident Fund.

“In 2013, Khazanah contributed RM650 million in dividends to the government. This suggests that dividends from Khazanah will need to be ramped up significantly in order to achieve the [additional] RM400 million target,” said the research house in the note.

AllianceDBS believes the four GLCs that could give out more dividends are Axiata Group Bhd (fundamental: 0.85; valuation: 0.9), Time DotCom Bhd (fundamental: 2.7; valuation: 0.6), Petronas Gas Bhd (PetGas) (fundamental: 2.7; valuation: 0.9), and MISC Bhd (fundamental: 1.6; valuation: 1.8).

Axiata and Time are majority owned by Khazanah, while PetGas and MISC are majority owned by Petronas.

“Based on our analysis, Axiata is likely to be the major contributor as it has the capacity to raise its payout ratio from 80% (our current estimate) to 100%, given its strong free cash flow from Malaysian operations. If this happens, this will raise RM205 million in additional dividends for Khazanah,” AllianceDBS explained.

JF Apex’s Lee, who tracks telecommunications stocks, said telcos will have to balance between dividend payout and allocation for their capex.

“Telcos have high capex commitments because they have to build infrastructure. For Telekom Malaysia Bhd (TM), should it get the government’s go-ahead to start its second phase of high-speed broadband this year, its cash might be constrained by the huge capex,” he said.

Like Axiata, TM is majority owned by Khazanah.

Telcos are seen as dividend-seekers’ favourites due to their stable earnings and generous payout ratios, although currently their yields are in the range of just 4%. Khazanah owns 28.73% of TM (fundamental: 1.1; valuation: 0.9) and 37.89% of Axiata.

In the past four financial quarters, TM paid out a dividend of 25.8 sen per share, which is nearly 97% of its earnings per share of 26.61 sen in the same period.

Currently, TM has a policy of paying out either RM700 million or a maximum of 90% of its net profit, whichever is higher. Either way, TM’s dividend payout has a limit and is constrained by its performance.

Back to Petronas-owned listed companies, while they might be facing earnings headwinds given the depressed crude oil prices, they are lowly geared.

Two of them, PetGas and Petronas Chemicals Group Bhd (PChem), are in net cash positions. However, AllianceDBS said that both PetGas and PChem (fundamental: 2.7; valuation: 1.2) might be constrained by capex requirements for the Pengerang regasification terminal project and the Refinery And Petrochemical Integrated Development.

While no GLC has come out since to declare bumper dividends or bigger payouts, many of the blue-chips have seen their share prices move up.

Between last Tuesday and Friday, Axiata rose 22 sen or 3.15% to RM7.21; Sime Darby gained 27 sen or 2.91% to RM9.56; Petronas Dagangan Bhd jumped 86 sen or 5.27% to RM17.18; and PetGas, meanwhile, rose 96 sen or 4.49% to RM22.36.

Tenaga Nasional Bhd (TNB), majority owned by Khazanah, was also instrumental in lifting the benchmark index back to the 1,800 level last week.

Save for last Tuesday, the utility giant was consistently in the top gainers rank and it closed the week 60 sen or 4.14% higher to record a fresh high of RM15.10.

While TNB (fundamental: 1.3; valuation: 1) has reported a 34% jump in its net profit for the first quarter ended Nov 30, 2014 and is expected to deliver record earnings due to lower coal cost and a tariff hike last year, analysts said it might be needing cash for its new power plants, hence potentially capping its dividend payout. GLC_26Jan2015_theedgemarkets
The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on January 26, 2015.

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