By Khairie Hisyam
For Malaysia’s strategic investment fund 1Malaysia Development Bhd (1MDB), paper profits from revaluing its properties were not enough to offset higher expenses and borrowing costs in the financial year ended March 2014 (FY14), marking its first full-year loss in four years.
According to 1MDB’s audited annual financial statements, the fund posted RM669.5 million in pre-tax losses in FY14 from RM4.26 billion in revenue compared to pre-tax profits of RM877.6 million in FY13 from RM2.59 billion revenue.
However its FY13 pre-tax profits were propped up by fair value gains of investment property revaluation that amounted to RM2.73 billion, meaning 1MDB actually saw RM1.85 billion in actual losses that financial year.
In comparison, 1MDB’s fair value gains in FY14 only came to RM896.7 million. This means the fund saw some RM1.56 billion in actual losses for FY14, which was also due to higher expenses and borrowing costs that rose sharply over the past year.
The fund’s general and administrative expenses in FY14 rose 58.2% year-on-year to hit RM1.36 billion in this financial year compared to RM859.1 million in FY13 while 1MDB’s finance costs rose 48.5% over the same period to hit RM2.39 billion from RM1.61 billion previously.
These increases were a stark contrast to marginal improvements in operating income, which rose to RM751.5 million from RM741.9 million in FY13, and 1MDB’s share of income from joint ventures and associates, which improved from RM43.23 million in FY13 to RM44.23 million this financial year.
‘Losses expected’
Mohd Hazem Abdul Rahman
However the losses in FY14 were no surprise, said 1MDB managing director and chief executive officer Mohd Hazem Abdul Rahman in a separate statement today, as this is part of the fund’s strategy to grow its assets base.
“We have maintained our focus on growing the company’s asset base and investment capacity … driven by significant capital expenditure in the short-term which has resulted in an expected loss this financial year due to an increase in borrowings,” said Mohd Hazem.
“But we are confident that the high-quality nature of the assets acquired and projects secured will drive the business forward and ensure its growth in the long-term,” said Mohd Hazem further.
These acquisitions had driven 1MDB’s assets base to grow to RM51.4 billion in FY14, said Mohd Hazem, from RM44.6 billion in the previous financial year. Consequently debts rose 15.7% from RM36.2 billion to RM41.9 billion over the same period.
“Total revenue increased by 64%, from RM2.6 billion to RM4.3 billion, reflecting the quality of the portfolio of assets that is being built and the strength of revenue generation,” said Mohd Hazem today.
Going forward 1MDB is well-positioned to fund significant capital expenditure over the next 12 to 24 months, said Mohd Hazem further, as the fund has a strong cash and cash equivalents position of RM16.7 billion that provides a significant headroom for future funding needs.
“Major areas of focus for capital expenditure in the next financial year include projects secured within the energy division and the continued development of TRX, Kuala Lumpur’s first dedicated financial district, within the group’s real estate division,” said Mohd Hazem.
Bringing money home
The fund also said it had been repatriating over RM4 billion from its investments in Cayman Islands since the end of FY14, expecting to fully redeem the rest by this month.
“A dividend of RM435 million, from these investments, has also been received subsequent to the financial year end March 2014 and will be accounted for in the next financial year ending March 2015,” said 1MDB in a statement today.
To recap 1MDB had some RM7.18 billion worth of investments in Segregated Portfolio Companies in the Cayman Islands, in which it participated in September 2012. In the FY13 annual audited accounts, 1MDB admitted that it is “unable to exercise control or significant influence” over its investments there.
However the identity of the fund manager in charge of the investments were not disclosed and remains a mystery to the larger public. The only clue given by 1MDB was that the fund manager is “licensed financial institution with good credit ratings”.
Land titles transferred
This financial year also saw the remaining three land titles to 1MDB’s investment properties transferred to its wholly owned unit 1MDB Real Estate Sdn Bhd (1MDBRE).
To recap, in 2012 1MDBRE acquired 34 plots of freehold land in Tun Razak Exchange (TRX) from 1MDB to develop the TRX project. In addition the subsidiary also acquired 15 plots of freehold land in Sungai Besi from 1MDB for the purpose of developing the Bandar Malaysia project.
In the previous financial year, three plots of land in Sungai Besi were pending transfer to 1MDBRE and this transfer was completed in FY14, said the state investment fund.
Overall, 1MDB’s investment properties in FY14 amounted to RM7.08 billion, a 14.4% increase from RM6.18 billion in FY13.
1MDB’s valuer for the investment properties was CH Williams Talhar & Wong (WTW), which looked at current prices in the property market for smaller parcels in comparable condition within the Kuala Lumpur city centre.
The valuation process was on a vacant possession basis, said 1MDB.
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