Malaysian REITs in 2010

This piece from the EdgeDaily is a good analysis of the position of Malaysian REITs in 2010:

Despite the hype about real estate investment trusts (REITs) and the listing of two mega REITs this month alone — Sunway Real Estate Investment Trust (SunREIT) and CapitaMalls Malaysia Trust (CMMT) — their performance on Bursa Malaysia so far has been unexciting.

SunREIT was priced at 88 sen for retail investors and 90 sen for institutions. The REIT, which debuted on July 8, ended last Friday at 89 sen. CMMT had fixed its retail price at 98 sen and RM1 for institutional investors. It ended at 99.5 sen last Friday after making its debut on July 16.

Should investors be worried about their relatively weak price performance?

In all fairness, the REITs are not alone. Half of the 16 initial public offerings (IPOs) this year closed below their offer prices on the first day of trading, and all but a handful are below water. This reflects the market’s lethargic performance and the lack of track record of the new listings.

In that respect, the REITs have fared much better than many IPOs. While there may not be capital gains, the short- and medium-term yields are relatively assured due to the secured leases for their buildings. Thus, yield-motivated investors need not be unduly concerned, as long as the yields remain intact.

Indeed, The Edge Financial Daily’s study of all Malaysian REITs listed since 2005 suggest all investors are still making positive returns after including distributions or dividends.

REITs making a comeback, but is the timing ‘right’?

A real estate or property trust fund is an investment vehicle that invests or proposes to invest at least 50% of its total assets in real estate.

Axis REIT was the first REIT to be launched in August 2005, after the government introduced regulations to promote the establishment of REITs. Since then, Malaysia has seen an influx of REITs, with three to four listings a year until 2007. There are now 13 listed REITs, including SunREIT and CMMT.

Prior to the latest two listings, the largest was Starhill REIT, with a current market capitalisation of about RM1 billion, compared with an average market capitalisation of RM466 million for the 11 players.

With the onset of the 2007-2008 global crisis, all was quiet on the REIT front until this year, when the Malaysian public saw a renewed appetite for REITs as SunREIT and CMMT burst onto the scene on July 8 and July 16, respectively.

SunREIT was the biggest REIT in Malaysian history and the largest IPO this year, with a current market capitalisation of RM2.47 billion.

Despite the size, publicity and strong branding of its underlying assets, SunREIT closed at 88.5 sen on the first day of trading, down 1.5 sen from the IPO price of 90 sen for institutional investors, but with still a mere 0.5 sen profit for retail investors who purchased the units at 88 sen. It last traded at 89 sen.

Records show that SunREIT’s stabilising manager, RHB Investment Bank, has initiated stabilising action. It is unclear if this was to absorb selling pressure from investors, particularly retailers looking for quick gains.

RHB has purchased SunREIT units on eight occasions between July 8 and July 20, with total purchases of 40.6 million units or 47% of the total units oversubscribed. Stabilising action can only be carried out up to the total number of oversubscribed units of 87.3 million.

Despite SunREIT’s popularity among institutional investors, analysts and the public alike for its well-branded assets, yield and defensive nature, plus the presence of three cornerstone investors, the issue was only oversubscribed 1.01 times.

Furthermore, SunREIT’s listing was delayed twice while the management was awaiting the “right time”.

The “right time” horizon for a REIT originator and investor is very different. A property owner will ideally want to list a REIT with the best possible prices for its assets. Often, this also means near the peak of a property cycle. But conversely, this also means limited upside for potential investors.

So, this begs the question: What is a “right time” for investors? Or are REITs not the “right” investment?

Short-term underperformance, but decent longer-term returns

From our study of Malaysian REITs, it is generally found that REITs often offer poorer capital returns to the short-term investor, but returns for medium- and longer-term investors, including dividends, are still very decent.

The average first-day capital gain upon selling newly-listed REITs from 2005 to 2007 is merely 6.1%, based on the average of all 11 REITS listed then. The average falls to 4.8% if we include SunREIT and CMMT.

Of the 13 REITs currently trading, seven closed above their IPO price on the first day of trading and six closed below.

Of the lot, Axis REIT was the best performer, rising 34.4% on its debut. It was followed by Quill Capita Trust (16.7%) and Al-Hadharah Boustead REIT (13.1%).

At the other end of the spectrum, AmFirst REIT was the worst performer, falling 11% on its first day of trading, followed by Atrium REIT (down 6.5%) and CMMT (down 2.5%).

Based on a study published in the Malaysian Institute of Accountants’ (MIA) January 2010 publication, the average initial returns of non-REIT first-day IPO listings during the same period was 28%. The sample included 134 companies.

Interestingly, industry observers also said it was perhaps the scarcity of REIT IPOs that led to them being overvalued by underwriters and the investing public.

Dividends boost overall returns

REIT investors should not just look at capital gains, as the high yields are their main attraction. Malaysian REITs generally offer yields of 7%-9%. By comparison, the KLCI’s dividend yield as well as bank deposit rates are below 3%.

“REITs are more likely to appeal to certain classes of investors. Those with a defensive investment strategy will be partial to REITs, which are generally more resilient in the face of an economic downturn,” said an analyst.

For the 11 REITs listed between 2005 and 2007, the total capital gains to-date averaged 18.1%, based on the difference between their IPO and Friday’s closing prices.

The top gainer was Axis REIT with 68.8%, followed by Al-Hadharah Boustead REIT (35.4%) and UOA REIT (24.3%). Three REITs are still trading below their IPO prices — Starhill REIT, Atrium REIT and Amanahraya REIT.

When the distribution or dividend for these REITs over the years is included, the total return to shareholders are significantly higher (see table).

For example, Axis REIT, the best-performing REIT gave a total to-date return to shareholders, including capital gains and dividends received, of 118.7% versus a capital gain of just 68.8%.

This is because shareholders have received dividends totalling 62 sen through the years. Al-Hadharah Boustead REIT, the next best performer, has total return to shareholders of 66.9%, as compared with a capital gain of 35.4%. UOA REIT gave total returns of 57.9% versus a capital gain of 24.3%.

Indeed, even though three REITs are still trading below their IPO prices, their total returns are positive, at 17%-19% each. Thus, a long-term investor in any Malaysian REIT would still be in the black, once dividends are imputed.

Tomorrow, we will take a look at how REITs can grow their capital values.

Capital Markets: The Uses and Abuses of Economic Ideology

Adair Turner, Chairman of the United Kingdom's Financial Services Authority (FSA), has written a cogent piece that points to the dangers of unimaginative conventional thinking that unwittingly led global capital markets into a disastrous tailspin in the last quarter of 2008. Turner provides an essential perspective for capital market regulators and players:

John Maynard Keynes famously wrote that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

But I suspect that a greater danger lies elsewhere, with the practical men and women employed in the policymaking functions of central banks, regulatory agencies, governments, and financial institutions’ risk-management departments tending to gravitate to simplified versions of the dominant beliefs of economists who are, in fact, very much alive.

Indeed, at least in the arena of financial economics, a vulgar version of equilibrium theory rose to dominance in the years before the financial crisis, portraying market completion as the cure to all problems, and mathematical sophistication decoupled from philosophical understanding as the key to effective risk management. Institutions such as the International Monetary Fund, in its Global Financial Stability Reviews (GFSR), set out a confident story of a self-equilibrating system.

Thus, only 18 months before the crisis erupted, the April 2006 GFSR approvingly recorded “a growing recognition that the dispersion of credit risks to a broader and more diverse group of investors… has helped make the banking and wider financial system more resilient. The improved resilience may be seen in fewer bank failures and more consistent credit provision.” Market completion, in other words, was the key to a safer system.

So risk managers in banks applied the techniques of probability analysis to “value at risk” calculations, without asking whether samples of recent events really carried strong inferences for the probable distribution of future events. And at regulatory agencies like Britain’s Financial Services Authority (which I lead), the belief that financial innovation and increased market liquidity were valuable because they complete markets and improve price discovery was not just accepted; it was part of the institutional DNA.

This belief system did not, of course, exclude the possibility of market intervention. But it did determine assumptions about the appropriate nature and limits of intervention.

For example, regulation to protect retail customers could, sometimes, be appropriate: requirements for information disclosure could help overcome asymmetries of information between businesses and consumers. Similarly, regulation and enforcement to prevent market abuse was justifiable, because rational agents can also be greedy, corrupt, or even criminal. And regulation to increase market transparency was not only acceptable, but a central tenet of the doctrine, since transparency, like financial innovation, was believed to complete markets and help generate increased liquidity and price discovery.

But the belief system of regulators and policymakers in the most financially advanced centers tended to exclude the possibility that rational profit-seeking by professional market participants might generate rent-seeking behavior and financial instability rather than social benefit – even though several economists had clearly shown why that could happen.

Policymakers’ conventional wisdom reflected, therefore, a belief that only interventions aimed at identifying and correcting the very specific imperfections blocking attainment of the nirvana of market equilibrium were legitimate. Transparency was essential in order to reduce information costs, but it was beyond the ideology to recognize that information imperfections might be so deep as to be unfixable, and that some forms of trading activity, however transparent, might be socially useless.

Indeed, the Columbia University economist Jagdish Bhagwati, in a famous essay in Foreign Affairs entitled “Capital Myth,” talked of a “Wall Street/Treasury” complex that fused interests and ideologies. Bhagwati argued that this fusion played a role in turning liberalization of short-term capital flows into an article of faith, despite sound theoretical reasons for caution and slim empirical evidence of benefits. And, in the wider triumph of the precepts of financial deregulation and market completion, both interests and ideology have clearly played a role.

Pure interests – expressed through lobbying power – were undoubtedly important to several key deregulation measures in the US, whose political system and campaign-finance rules are peculiarly conducive to the power of specific lobbies.

Interests and ideology often interact in ways so subtle that is difficult to disentangle them, the influence of interests being achieved through an unconsciously accepted ideology. The financial sector dominates non-academic employment of professional economists. Because they are only human, they will tend implicitly to support – or at least not aggressively challenge – the conventional wisdom that serves the industry’s interests, however rigorously independent they are in their judgments concerning specific issues.

Market efficiency and market completion theories can help reassure major financial institutions’ top executives that they must in some subtle way be doing God’s work, even when it looks at first sight as if some of their trading is simply speculation. Regulators need to hire industry experts to regulate effectively; but industry experts are almost bound to share the industry’s implicit assumptions. Understanding these social and cultural processes could itself be an important focus of new research.

But we should not underplay the importance of ideology. Sophisticated human institutions – such as those that form the policymaking and regulatory system – are impossible to manage without a set of ideas that are sufficiently complex and internally consistent to be intellectually credible, but simple enough to provide a workable basis for day-to-day decision-making.

Such guiding philosophies are most compelling when they provide clear answers. And a philosophy that asserts that financial innovation, market completion, and increased market liquidity are always and axiomatically beneficial provides a clear basis for regulatory decentralization.

Here, I suspect, is where the greatest challenge for the future lies. For, while the simplified pre-crisis conventional wisdom appeared to provide a complete set of answers resting on a unified intellectual system and methodology, really good economic thinking must provide multiple partial insights, based on varied analytical approaches. Let us hope that practical men and women will learn that lesson.

Private debt securities: Adviser and arranger just as liable as issuer

Source: Biz Star

Court decision will impact future private debt security issues

PETALING JAYA: In a judgement that will likely send ripples in the private debt securities (PDS) market, the High Court ruled that the adviser and arranger of such issues were just as liable as the issuer for losses suffered by bondholders.

The Singapore Business Times in a recent report said the judgement by Justice Mary Lim, based on an RM149mil lawsuit filed by 10 local financial institutions against bond issuer Pesaka Astana (M) Sdn Bhd, would “radically raise the bar on standards governing private debt issues in Malaysia.”

Although Pesaka Astana and related companies, which were associated with Rafie Sain, had entered into a consent judgement in favour of the financial institutions back in 2008, the lawsuit was unprecedented because it also named the deal’s independent advisers as defendants.

Others named in the suit included Mayban Trustees Bhd and KAF Discounts Bhd, the arranger of the deal, both of whom have opted to go to trial.

Malaysian Rating Corp Bhd chief executive officer Razlan Mohamed said the case underscored the importance of corporate governance.

“I think this case goes to show that the parties advising the bond issues, including the rating agencies, have to emphasise the importance of governance,” he told StarBiz.

According to the newspaper, the plaintiffs’ core argument was that they had gone into the deal on the basis of an information memorandum by KAF Discounts that was “false and misleading” while Mayban failed to exercise the necessary care and due diligence expected of a trustee.

Lim said in a verbal judgement that the plaintiffs had depended on the information memorandum to make informed investment decisions.

She said the information was in the memorandum and “therefore it is KAF’s liability in the event of any misstatement therein.”

In a statement to StarBiz, Mayban said it was reviewing the decision made by the High Court on June 30 in awarding judgement against it and another defendant in a suit filed in 2005 by holders of the bonds issued by Pesaka Astana, and “is actively considering the appropriate course of action.”

Mayban said the judgment delivered by the High Court “has no impact to the business operations of the company and that it has in place a strong team of professionals with priority chiefly on protecting the interest of all stakeholders and upholding best standards of service and management practice.”

Meanwhile, Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose said it looked like a clear case of a misallignment of the advisers’ and investors’ objectives.

“The judgement is a landmark because the traditional rule of ‘caveat emptor’ has been overruled as the adviser and arranger of the issue were also held culpable. The judge has ruled that the original issue documents were misleading and that the trustees were irresponsible,” he noted.

The local financial institutions had filed the suit in late 2005 against Pesaka Astana, a company that supplied fire-fighting and military vehicles to the Defence Ministry.

The company had defaulted in September 2005 on RM140mil worth of Islamic debt securities issued in April 2004.

According to the newspaper, despite the consent judgement, nothing had been paid and the decision by the court took as long as it did due to claims and counterclaims by various parties.

The 10 plaintiffs included Malaysia Discounts Bhd, CIMB Bank Bhd, Abrar Discounts Bhd, Avenue Invest Bhd, Bank Muamalat Malaysia Bhd, Commerce Life Assurance Bhd, Malaysian Assurance Alliance Bhd, Southern Investment Bank Bhd, Universal Trustee (M) Bhd and BHLB Trustee Bhd.

The Singapore Business Times said the suit underscored a newly-found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit were government-linked companies.

“Malayan Banking Bhd and CIMB are both majority state-owned and might have resorted to quiet, and state-brokered, mediation in less competitive times,” the newspaper said.

Gaming sector takes hits

Source: Star Biz

Not only is there no sports betting licence, NFOs also slapped with duty hike

PETALING JAYA: There is never a dull moment in the gaming sector over the past couple of weeks. Within that period, the Government has decided to abort sports betting while number forecast operators (NFOs) were served with a letter informing them that the pool betting duty has been increased.

To recap, the Government announced that no sports betting licence would be issued owing to a public outcry.

Berjaya Corp Bhd (BCorp) had earlier announced that it had entered a sales and purchase agreement to buy 70% stake in Ascot Sports Sdn Bhd, which is jointly owned by Tan Sri Vincent Tan and his son, Datuk Robin Tan. The Government, however, later said that it had yet to award the licence.

Subsequently, BCorp has aborted its proposed acquisition of a 70% stake in Ascot Sports from Tan after the Government decided not to re-issue the sports betting licence to Ascot.

BCorp shares reacted immediately and fell to an almost five-month low after it confirmed that its sports betting deal was off.

In an unprecedented move, the Government surprised the NFOs with a tax hike last week following its decision not to issue the sports betting licence.

According to filings with Bursa Malaysia, Berjaya Sports Toto Bhd (BToto), Tanjong Plc, Multi-Purpose Holdings Bhd (MPHB), Olympia Industries Bhd and Berjaya Assets Bhd received a letter from the Finance Ministry informing them that effective June 1, the pool betting duty has been increased to 8% of net revenue (gross revenues less 8% gaming tax) from 6% previously.

Most NFOs had issued statements on Bursa Malaysia saying that they would not be significantly affected by the tax hike.

MPHB, which operates Magnum, said the group’s performance would not be materially affected by the increase in pool betting duty while Tanjong, which operates Pan Malaysian Pools Sdn Bhd, said the revision was not expected to have any material impact on its results.

Berjaya Assets, which owns 65% of Natural Avenue Sdn Bhd, said the new betting duty was not expected to have any material impact on the group’s results for the financial year ended June 30.

On the other hand, Olympia whose subsidiary Lotteries Corp Sdn Bhd is a NFO in Sabah said the increase was expected to have an adverse financial impact on the operating performance of the group for the financial year ending June 30, 2011.

According to analysts, the demand for gaming was unlikely to be significantly affected by the recent Government’s move to increase betting duty but the effect was more on individual companies having to deal with higher taxes.

Industry sources said three NFO operators (BToto, Magnum and Tanjong) would lobby the Finance Ministry to reduce the 4D first prize payout by RM200 to RM2,300 (4D Big) and RM3,300 (4D Small).

“We do not discount the possibility of more tax or duty increases in the 2011 budget in October,” ECM Libra Investment Research said. It has downgraded the gaming sector to underweight from neutral.

The last time the pool betting duty saw an increase was in November 1998 at the height of the Asian financial crisis (from 7% to 10%). In December 2002, it was decreased to 6%.

ECM Libra said one option for NFOs to preserve their margins was to lower their prize payout ratios.

“In April 1999, the NFOs reduced the first prize on 4D Big and 4D Small by RM200 each to RM2,000 and RM3,000 respectively, in response to the November 1998 pool betting duty increase,” it said.

It said the alternative was to absorb the increase and suffer margin compression in order to maintain revenue growth.

“Of the two companies with NFO businesses under our coverage, Tanjong is the least affected as only 20% of earnings are derived from the NFO business,” ECM Libra said, adding that BToto would be more badly hit.

CIMB Research said a 2% tax increase on an estimated legal market of RM8.5bil would add some RM160mil in tax. The research house said the Government appeared to be signalling that the sin sectors – and gaming in particular – could be in for a round of unfavourable reforms.

Kenanga Research viewed the hike as negative as the man in the street was not expecting any such measures especially when the trend was seemingly for liberalisation with football betting being allowed initially. It agrees with ECM Libra that the impact (of pool betting duty hike) would be felt mostly by pure gaming operators such as BToto.

The research house said a possible RM200mil would be added to government coffers from this exercise.

Should the payout be reduced as a corollary, topline growth could slow as punters switch their preference towards the illegals, it added.

CIMB said the spotlight may later turn to the country’s sole casino operator Genting Malaysia Bhd, whose 25% gaming tax rate had been unchanged since 1999.

However, an analyst said Genting seems to have hedged its position as a regional casino player well.

While the hike has no impact on Genting, the casino operator may have irked some investors with yet another related-party transaction on its plan to acquire the group’s gaming operations in Britain (Genting UK) from Genting Singapore Plc for £340mil, which analysts said was at the higher end of peers’ valuation.

Previously, Genting Malaysia (then known as Resorts World Bhd) has paid Genting group chairman Tan Sri Lim Kok Thay US$69mil for a 10% stake in US gaming patent company Walker Digital Gaming.

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See also the ECMLibra analyst summary HERE.

SC going after directors under new powers

It can now prosecute those who intentionally cause ‘wrongful loss’

Source: Star Biz

KUALA LUMPUR: The Securities Commission (SC) is investigating cases involving breaches of fiduciary duties of directors under new powers given to the regulator under Section 317A of the Capital Markets and Services Act (CMSA).

Section 317A, which came into force only on April 1, 2010, states that the SC can prosecute a director or an officer of a listed company that has done something with the intention of causing wrongful loss to his company.

SC chairman Tan Sri Zarinah Anwar told StarBiz that while no charge had been made yet under this new section, investigations were ongoing and it would “depend very much on the outcome of the investigations.”

“We have to get all the facts of the case before we take appropriate action.

“In the past, we only had power to deal with offences that were related to securities, now we can deal with offences related to dishonest conduct of directors,” Zarinah said.

She added that as an example, cases involving questionable related-party transactions where assets were injected into the company at inflated prices or sold to directors at depressed prices, would fall under Section 317A.

The section carries a punishment of a fine of up to RM10mil and imprisonment of up to 10 years.

According to a corporate lawyer, Section 317A covers instances, which are similar to directors’ fiduciary duties that come under Section 132 of the Companies Act.

The enforcement of the Companies Act, however, comes under the powers of the Companies Commission of Malaysia (SSM).

However there have not been any prosecutions of directors by the SSM under this section. And no director has been sentenced to imprisonment under the Companies Act.

“The new amendment to the CMSA gives the SC new teeth,” said the corporate lawyer, who pointed out that sentencing was ultimately in the hands of the courts.

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The new section 317A of the Capital Markets and Services Act reads as follows:

Prohibited conduct of director or officer of a listed corporation

317A. (1) A director or an officer of a listed corporation or any of its related corporations shall not do or cause anyone to do anything with the intention of causing wrongful loss to the listed corporation or any of its related corporations irrespective of whether the conduct causes actual wrongful loss.

(2) This section is in addition to and not in derogation of any law relating to the duties or liabilities of directors or officers of a listed corporation.

(3) A person who contravenes subsection (1) commits an offence and shall, on conviction, be punished with imprisonment for a term not exceeding ten years and be liable to a fine not exceeding ten million ringgit.

(4) For the purpose of this section—

―"director" includes a person who is a director, chief executive officer, chief operating officer, chief financial controller or any other person primarily responsible for the operations or financial management of a company, by whatever name called;

―"property" has the same meaning as in section 138;

―"wrongful loss" means loss of property by unlawful means to which the person losing is legally entitled.

Amended by Act A1370 P.U. (B) 142/2010 w.e.f. 1/4/2010

Gaming firms slapped with higher duties

But impact depends on how operators manage marketing strategies

Source: Star Biz

PETALING JAYA: Gaming companies have been hit with higher betting duties which will apply to draws held from June 2010.

In separate filings with Bursa Malaysia yesterday, Multi-Purpose Holdings Bhd (MPHB), Tanjong plc and Berjaya Sports Toto Bhd (BToto) said their subsidiaries had been notified by the Finance Ministry on June 29 that betting duties had been raised to 8% from 6% previously.

The respective subsidiaries are Magnum Corp Sdn Bhd, Pan Malaysian Pools Sdn Bhd and Sports Toto Malaysia Sdn Bhd.

Betting duties are based on gross sales proceeds after deducting gaming tax of 8%.

Tanjong said with the revision, the effective rate of betting duties would be increased to 7.36% from 5.52% previously.

A file picture shows a Tanjong plc’s gaming business outlet. Multi-Purpose Holdings, Tanjong and BToto say the Government has notified their subsidiaries that betting duties have been rai sed to 8% from 6%.

“This revision is not expected to have any material impact on the results of Tanjong group.”

Despite the duty hike, BToto said it was optimistic that the group’s operating performance for the financial year ending April 30, 2011 would be good.

This is barring any other unforeseen circumstances and taking into account the launch of its new game, Supreme Toto 6/58, in March.

Nevertheless, a research head with a local stockbroking firm said the rise in betting duties would have an initial impact on gaming companies’ earnings.

“To compensate for the hike, these companies will have to improve revenue and bottomline by attracting more people to gamble. It all depends on how they manage their marketing strategies,” he said.

An analyst with a bank-backed research house remains positive about the gaming sector.

He believes more people will continue to be attracted to numbers-forecast activities and casino games in the hope of winning high money prizes, especially when times are bad.

This bodes well for gaming companies, as they can expect better ticket sales.

“Hence, earnings of these gaming companies are expected to remain intact despite the hike,” the analyst said.

However, shares of MPHB, Tanjong and BToto were in the red yesterday prior to the announcement.

MPHB lost 8 sen to close at RM1.96 with 3.78 million shares traded, Tanjong fell 14 sen to RM17.30 with 1.3 million shares changing hands and BToto slipped 5 sen to RM4.22 with 16.6 million shares transacted.