Could the EPF have done more?

By Jose Barrock

The Employees Provident Fund (EPF) is not a small koperasi in some shop house in an obscure, run-down part of town, but a behemoth with about RM525 billion in its coffers.

Hence when the pension fund does deals, or in this case when its 40 per cent unit Malaysian Resources Corp Bhd (MRCB) takes over a private company—Nusa Gapurna Development Sdn Bhd— many questions will crop up, and the deal will be in the crosshairs.

While this deal with Nusa Gapurna does have its merits, the nagging question is — could EPF have done more?

The issue centres around whether EPF should settle for an entrepreneur as the managing director of MRCB, one who while he heads a property company has less of a track record in property development than MRCB itself. What can such a person add to MRCB? And what makes EPF think he can do better than a professional manager?

To recap, privately held Nusa Gapurna, (in which the pension fund has a 40 per cent equity interest acquired in 2011), and related companies, which collectively own almost 33 acres of land— are being acquired for a mix of cash and shares for RM729 million by MRCB. Other salient features of the proposal include Mohamad Salim Fateh Din, who controls Nusa Gapurna with 60 per cent shareholding, being appointed the managing director of MRCB.

Businessman Salim will end up with a 16.8 per cent in stake in MRCB, making him the second largest shareholder after the EPF, and MRCB which has been professionally run since 2001, is now going to be entrepreneur driven.

Entrepreneur driven vs professionally managed

A head of research from a local bank backed brokerage says that he prefers entrepreneur driven property players.

“Professionally run property companies generally do not fare as well when compared to entrepreneur driven concerns… it’s a predicament limited to property players. I also prefer the continuity with entrepreneur driven companies. They usually stay around to see a company’s vision through,” he said.

A merchant banker added that professional managers tended to be more risk averse, as opposed to entrepreneurs.

“MRCB did not buy any significant land bank during its professionally managed days,” she said.

Nevertheless with its deep pockets, questions on why EPF doesn’t just get the best brains available to run MRCB is likely to persist. Similarly how MRCB will fare after the merger is also a point of interest.

Differing views

Most analysts in contrast to other developers are positive on the takeover, as if the deal goes through, MRCB will get a good land bank of 33 acres—-meaning the company’s future earnings may be secure.

A head of research said, “It looks like a good deal for MRCB. The land valuations are all right, and it addresses MRCB’s lack of development land.”

He added, “They (EPF and Gapurna) say it’s a good match, but (only) time will tell. It all depends on how the new management executes the development of the land. PJ Sentral is not part of the CBD (central business district) but a new development. They will have to find buyers for these buildings… it is their litmus test,” he said.

A merchant banker summed it up, “It’s a question of whether he (Salim) is the right candidate (to run MRCB).”

The EPF said in a statement, “With regard to the EPF, it benefits by having a strategic entrepreneur partner to drive MRCB’s property and construction business. The model is similar to that of SP Setia or Mah Sing, where an entrepreneur holds a significant stake and works on behalf of all the institutional and minority shareholders.

“The EPF plans for the long term and believes that this partnership between MRCB and Gapurna will be an excellent combination of MRCB’s expertise in urban regeneration and Gapurna’s entrepreneurial drive,” the pension fund said.

Is Salim the man for the job?

Some developers say the comparisons made between SP Setia’s Liew and Mah Sing’s Leongon one hand and Salim on the other are unfair, as the two have a much longer track record in property development, while Salim is a relatively new entrant.

“You cannot compare them (Liew and Leong) with Salim…it’s not a fair comparison,” a developer said to Kinibiz.

Liew and Leong have been in the property business since the 90’s. Also Salim is a niche developer, while both Liew and Leong are mass market, large developers.

But how astute is Salim as a developer?

His flagship is his RM1.1 billion 348 Sentral which will be up at the tail end of the year. In this development he roped in Shell, to a 15-year lease on an office tower. Other jobs he has won include a RM200 million contract, to build a building for Scope International which is a unit of UK based Standard Chartered Bank in Technology Park. His other developments were mostly smaller.

While his track record may not be long, it is noteworthy that the two jobs mentioned were won in open tenders internationally.

“He (Salim) is a niche developer… But (to his credit) he managed to relocate Shell to Kuala Lumpur from Singapore, and in the Scope job— KL pipped the Philippines for the location…in about three years he has these two large jobs to show,” an executive familiar with Salim explained.

His ties abroad are also said to be relatively strong, evidenced by him being the chairman of British American Tobacco (M) Bhd and Giant Hypermarkets in Malaysia, both UK based outfits.

The financial executive added, “He gave a personal guarantee when building 348 Sentral. Via a club deal—think it was CIMB and RHB largely, he secured funding for the project, which is no mean feat. International companies—Shell and Standard Chartered gave him jobs, entrusting him with their projects,” the executive added.

Property players caution that PJ Sentral with its RM2.93 billion development price tag could face difficulty finding buyers.

“KL Sentral is a transportation hub, PJ Sentral is different. There are existing development projects there, other commercial developments are also sprouting up, it is going to be very competitive. PJ Sentral may be difficult to market…. MRCB should not just be dependent on one development, the risk should be spread. You can have a large GDV (gross development value), but you may not be able to realise the value immediately,” the developer cautioned.

Salim’s style however is that he builds only after having secured long-term tenancies. This mitigates risks. He has already signed up Malaysia Building Society Bhd or MBSB on a RM240 million 30-storey building. According to property players there are at least two to three other buyers lined up already with talks on-going.

The executive added, “Salim has about 16 per cent in the company; he has to perform, majority control is still with EPF. If he doesn’t perform they will remove him…simple as that.”
What is clear is that Salim is likely to have his work cut out for him.

A long standing problem for EPF

The EPF, it seems, has been trying to get things in order at MRCB for some time now.
A head of research from a brokerage said, “From an EPF perspective it is not so simple… Initially the proposed merger in 2010 with IJM Land and MRCB was touted as the answer…but that fell through. The EPF has been trying for a few years to find someone to steer, to run MRCB, but it hasn’t been successful.

“It is not for want of trying,” he said.

IJM Land’s and MRCB’s merger was aborted at the tail end of 2010. EPF is also the largest shareholder in IJM Corp Bhd with 14 per cent. IJM Corp meanwhile has 66 per cent of IJM Land.

The merger of MRCB and IJM Land would potentially have created the second largest property player in the country. According to executives familiar with the matter, after IJM Land, the EPF also had meetings with up to three other developers, hoping to find a suitable partner for MRCB, but could not find a right fit.

MRCB’s takeover of Nusa Gapurna tends to be compared to other corporate exercises done by  GLC-linked companies. These have received substantial flak.

Sime Darby Bhd which is controlled by Permodalan Nasional Bhd (PNB) still gets flak for its acquisition of 30 per cent of Eastern & Oriental Bhd at prices which were much higher than the market.

When Khazanah Nasional Bhd’s unit UEM Land Holdings Bhd took over Sunrise Bhd, and when PNB made a general offer for SP Setia Bhd’s shares it did not own— the talk was that the government was muscling out the Chinese entrepreneurs. Felda’s acquisition of billionaire Robert Kuok Hock Nien’s 20 per cent in Tradewinds (M) Bhd was also put into this category.

In comparison to these corporate deals, the MRCB-Nusa Gapurna deal stands better because MRCB’s major shareholder is still EPF, and it still controls Gapurna and its land banks through MRCB.

Salim with his minority 16% stake becomes managing director of MRCB but EPF can of course kick him out if he does not perform. Provided Salim delivers the goods, everyone should be happy.