Sep 1, 2012
As the time draws nearer for the next round of elections to occur in Malaysia, which have to take place by June 30th, 2013 and the current Barisan Nasional ruling coalition in its weakest position in over 40 years, the level of potential mayhem in the economy is very likely to rise. Sitting Prime Minister Najib Tun Razak has been steadily making sweeping changes to the structure of Malaysia’s economy, equitizing state owned enterprises in highly valuable IPO’s such as the $2.1 billion USD one for IHH Healthcare Berhad, and repealing /updating sedition and internal security laws in an effort to win votes.
The latest twist is playing out in the state of Selangor, the largest state in Malaysia by population and whose defection to the opposition in 2008 caused a complete upheaval in the country’s political landscape. A recent report by Reuters holds that a political battle is in process over the state’s water supply in an effort to discredit the sitting government. With reservoirs filled to overflowing but water-treatment facilities not processing water to create water rationing allegations of manufacturing a crisis are flying back and forth between the national and state governments.
Meanwhile in Singapore, the former state of Malaysia that seceded in 1965, has been diligently working to free itself from Malaysian water politics, investing billions in desalinization plants and technology. Singapore is home to some of the most interesting new water treatment technologies, having recently hosted a weeklong conference on the subject. The island nation now produces 40% of its water needs from desalinization and reclamation plants and is well ahead of its plan to be water independent before the expiration of their water lease with Malaysia 49 years from now.
Both of these countries are at the heart of the ASEAN growth story, and while their political landscapes are similar in that their reigning parties are both struggling with opposition gaining ground in the minds of the citizenry. With that in mind I thought it worthwhile to look at a handful of companies in the iShares MSCI Malaysia Index ETF (AMEX:$EWM) who will be affected by whatever shakes out of their 13th general election. For while some of the political machinations may be unsavory, politics usually is, it is the possibility of defeat for Barisan Nasional that is having new positive effects for Malaysians and their investors.
Tenaga Nasional Berhad(MK:TNB): TNB is Malaysia’s primary state-run electricity company that provides more than 50% of the nation’s power and enjoys a monopoly on transmission and distribution of power. 2nd quarter 2012 results saw TNB return to profitability after multiple quarters of losses due to high input costs stemming from having to source alternative fuels due to national shortages from supply reductions. Malaysia’s government had to reimburse TNB to the tune of RM2 billion (~$650 million USD) for having to use much more expensive oil to generate electricity as opposed to natural gas or LNG. TNB’s usage profile will increase the amount of coal and LNG used; returning Oil and distillate usage back to nearly insignificant amounts. TNB recently entered into agreements with Exxon-Mobil (NYSE:$XOM) and Royal Dutch Shell (NYSE:$RDS) to supply them with LNG for future production.
Through the first half of 2012 electricity usage in Malaysia rose a very healthy 4.9% and is projected to rise at that rate for the foreseeable future. TNB’s research subsidiary will be creating a smart-grid network to manage the growth of the electrical grid and hold the line on costs. TNB is 4.7% of EWM’s total assets under management.
Sime Darby Bhd. (MK:SIME): Comprising 6.8% of EWM’s AUM Sime Darby is one of Malaysia’s biggest companies, a conglomerate cutting across a handful of important industries. But it is their palm oil plantations division that provides the bulk of their revenues, 57%. They had an excellent 2011 with FFB rates rising 4.6% and crude palm oil (CPO) on 6.7% higher average prices. Palm oil prices have attenuated after spiking to more than RM3,600 per tonne earlier in the year and have steadied near RM2950 per tonne.
Their plantations in eastern Malaysia are young and entering their prime production years and they have begun operations in a massive expansion in Liberia as well as beginning construction on a loading station there for distribution around the world. Palm Oil will be one of the most important growing industries of the next 25-50 years as it will help solve caloric needs both from a nutrition and combustion perspective. iShares MCSI Singapore Index ETF (AMEX:$EWS) is weighted heavily towards palm oil along with the Malaysian fund as well as the banks who are underwriting their expansion. Malaysia’s move to lower export tariffs in response to Indonesia doing so will be good for the industry to better allocate production and should provide a boost to palm oil producers across Malaysia. FY Q3 results (Q ending 31 March 2012) were poor QoQ due to poor harvest but YoY saw an increase of 6.8%. Sime Darby is trading at a forward multiple of 14% and pays a 3.2% dividend.