1MDB: Lodin Fails To Convince

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Initially, I had no intention of adding anything more to what was already widely reported, commented and analysed by the mass media concerning the Nov 18 press conference by the Chairman of 1Malaysia Development Bhd Tan Sri Lodin Wok Kamaruddin.

I had said enough about the company and I thought I should give Lodin the benefit of the doubt. Personally, I hold him in high esteem for his impeccable reputation as a business executive.

In the nutshell, Lodin assured the public that all 1MDB’s investments were prudently made and professionally managed, and there is no danger of it defaulting on its RM42 billion debts.

He said, some of the loans taken were long-term and all obligations relating to them could be met. Also, the company is in the process of adding new assets while making efforts to unlock the value of the existing ones.

He dispelled “misconceptions” about 1MDB’s ability to repay its debts, saying that the company is looking at restructuring them in order to address the “mismatch” between long-term investment projects and short-term borrowings.

But after reading the New Straits Times’ editorial on the matter the following day, I feel compelled to touch on the subject once again.

In the editorial headlined “1MDB Managed Competently”, the newspaper started by acknowledging that the company is overly leveraged but praised its business model. It concluded by reprimanding opposition politician for what it called their stupidity in criticising the company.

“Shame on those opposition politicians whose disparagements reflect nothing but stupidity,” it said.

It was a curious piece of wordsmith. While reprimanding the opposition for doubting the company’s soundness, the paper acknowledged that 1MDB is “overly leveraged” and considered the call for transparency as fair.

In part it says: “Other accusations include the issue of the company’s lack of transparency, a fair demand on a stateowned investment arm.”

The NST sees Lodin’s appearance before the press as a sign that the company is responding to calls for greater transparency.

According to reports, Lodin met the press to set the record straight and address issues raised.

LAST LINE OF DEFENCE

MY own feeling is this. The real reason for the company rolling out Lodin and other board members is because it has run out of options. All previous attempts by the management to allay fears and put an end to speculations had clearly failed.

With each press statement the managers issued and the repeated parliamentary replies the government made, the 1MDB stories became less and less believable.

Lodin is its last line of defence. He is no doubt the most well-known, respected and trusted member of 1MDB’s board.

As Chief Executive Officer of the Armed Forces Fund Board (LTAT), Lodin’s capability and integrity are impeccable. He has been at the helm of the multi-billion ringgit LTAT since 1982 and is seen as a very loyal civil servant.

If he is unable to convince the public about the soundness of 1MDB’s business nobody else can. So rolling out this publicity shy grade one executive has to be seen as the company’s last-ditch effort to burnish its image.

Sadly, 1MDB’s public image is so bad that even Lodin failed to embellish it. On the contrary he has now become the object of ridicule and his assurances have been torn to shred.

A further sign of desperation is when the Prime Minister and 1MDB’s mentor, Datuk Seri Mohd Najib Abdul Razak, initiated a legal action against the Democratic Action Party Member of Parliament, Tony Pua Kiam Wee, for allegedly defaming him in a Youtube posting entitled “Tony Pua: Najib is creating the biggest scandal ever in the history of Malaysia” in reference to 1MDB.

Secondly, Lodin’s appearance before the press was also meant to address the recently held Umno General Assembly. There is a growing concern among government members and Umno supporters about the goings-on in the company.

If it boils over, Mohd Najib’s image would be further dented. 1MBD is his baby and his biggest corporate gamble.

The press briefing became even more urgent because the company had just suffered a reversal of fortune. It reported a group loss of RM665.3 million for the financial year ended March 31, 2014 against a profit of RM778.2 million the previous year.

Admittedly, 1MDB does have some good assets although they might have been purchased at inflated prices. To show some semblance of balance between its assets and liabilities, it had resorted to revaluing its assets yearly, which is not done by other developers.

A case in point is its Tun Abdul Razak Exchange (TRX), now under development in Kuala Lumpur. The 70-acre prime land was bought cheaply from the government and re-valued several times to produce what some call “paper profits.”

As some analysts put it, many of the things Lodin revealed at the press conference are different from what is in 1MDB’s book.

For instance, its highly controversial RM7.7-billion “investment” with a Segregated Portfolio Company (SPC) in the Caribbean tax haven of Cayman Islands and managed by Hong Kong-based Bridge Partners.

One analyst said, for all the controversies the fund transfer generated, the company earned only RM437 million in dividends, which represents a paltry return of 3.26%. A further question is, how does this rate of return compares with its cost of funds?

Deputy Finance Minister, Datuk Ahmad Maslan, in his gallant attempts to defend the company in the Dewan Rakyat had been found to have given misleading information while his efforts to cast 1MDB in a kinder light by revealing that it had spent RM382 million on corporate social responsibility (CSR) activities is debatable because the company’s principal responsibility is to its shareholders. A loss-making company is not expected to be generous with shareholders’ funds.

It is an open secret that 1MDB spent lavishly, particularly in Penang, during the last general elections, feasting and entertaining the people of the DAP-led state.

It also paid close to RM2 billion for several pieces of land in the state days before last year’s GE, leading to the Penang Chief Minister, Lim Guan Eng, to wonder why the company paid almost 100% higher than what the land in the state was valued just two years earlier in December 2011.

KHAZANAH

BUT not all government businesses are bleak and blighted. Admittedly there are many good news and heart-warming developments among the government-linked companies. The Khazanah Nasional Bhd’s stable of companies appears to be doing well.

Earlier last month, the sovereign wealth fund announced that its top 20 subsidiaries had tripled their market capitalisation from RM140 billion in May 2004 to RM435 billion as at the end of October this year.

It said its 20 top companies (G20) saw their net profit growing at a compound annual rate of 11.1% from FY2004 to FY2013, enabling it to declare RM93 billion in dividends and pay RM57 billion in taxes during that period, which directly and indirectly benefited the Malaysian public.

Congratulations to Tan Sri Azman Mokhtar aka Amok, Khazanah’s Managing Director, and his boys and girls for the highly commendable performance.

In recent times, the Khazanah’s image is blighted only by the bankruptcy (theoretically) of the Malaysia Airlines Bhd. It is now restructuring the luckless carrier.

The 10-year results, incidentally, coincided with Azman’s tenure as MD. He was appointed to the post in 2004. Khazanah was incorporated in 1993 when Tun Dr Mahathir Mohamad was Prime Minister.

With the domestic and global business environment getting more difficult and the local stock market losing its shine, the road ahead for Khazanah is a challenging one. Pushing up market capitalisation of its portfolios would be much harder. So is making profits.

Khazanah attributed the success of its investments to the GLC Transformation Programme launched during the Tun Abdullah Ahmad Badawi’s era in 2005.

It said, next year would mark the 10th and final year of the programme, which was initiated with the aim of transforming GLCs into high performing business entities. The final target is to have several of these companies emerging as regional champions by next year.

The net asset value of Khazanah’s investments rose 19.1% to RM103.5 billion at the end of 2013 from RM86.9 billion a year earlier, outperforming the benchmark FTSE Bursa Malaysia KLCI Index.

Another bright spark is the state-backed private equity firm, Ekuiti Nasional Bhd (Ekuinas). It has done well enough so as to enable it to transfer RM500 million of its profit to the Yayasan Pelaburan Bumiputera (YPB), the parent company of Permodalan Nasional Bhd (PNB).

According to media reports, as of Dec 31, 2013 Ekuinas posted a gross portfolio return of RM655.9 million, translating into a gross annualised internal rate of return (IRR) of 25.5% and a net annualised IRR of 20.4%. It exceeded the fund’s long-term minimum annualised target of 12% and “aspirational” target of 20%.

Ekuinas CEO Datuk Abdul Rahman Ahmad was reported as saying that the company is on track to become self-funded within three years.

It has so far received RM3 billion out of RM5 billion promised by the Government at a rate of some RM600 million a year. Government’s commitment is expected to end in two years.

Kudos to Abdul Rahman and his team at Ekuinas for a job well done.