Goldman’s missing month …

Floyd Norris of the New York Times has an astute observation:

“Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.

How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it had stuck to its old calendar, and had to include December and exclude March?”

When competition is bad ...

Watch out! Your weekly dose of English Premier League (EPL) could get a lot more expensive next year.

The rights to broadcast EPL are auctioned off every few years. Right now Astro holds the Malaysian broadcast rights until 2010. Bidding for the 2010-2013 EPL rights will commence later this year.

The Edge last week reported that Telekom Malaysia may decide to bid for these rights. Telekom is looking to launch broadband tv. Securing the hugely popular EPL franchise will almost certainly mean a few hundred thousand new subscribers, giving its service a substantial boost.

Conversely, Telekom's gain would be Astro's loss. Astro without EPL would not be very attractive to many.

Which means we could see a very intense bidding war between Astro and Telekom.

Competition is usually good. It is normally the best way to better products and services and lower prices for consumers. But in this case, the winner of any Astro-Telekom competition is not the Malaysian consumer. It is the multi-millionaire EPL footballers, managers and hangers-on. They will enjoy the benefits of whatever expensive price that Astro or Telekom pays. Malaysian consumers will foot the ultimate bill.

Regular readers will know I am all for free markets, competition and transparency. However, sometimes, markets do fail. This is a clear case of market failure, when a few hundred EPL magnates make more millions, paid for by millions of Malaysians who earn just a few hundred ringgit a week.

We have already experienced one round. Astro subscribers may remember sports became a lot more costly in 2007. Prior to that, Astro had a comfortable lock on the rights to televise EPL in Malaysia. That changed in 2007, when Astro suddenly found competition while it was bidding for the EPL rights for 2007-2010. It bid very high to secure the rights, and then raised subscription fees to cover its costs.

When markets fail, higher authorities must step in. Khazanah could play a role, as it is a shareholder in both Telekom and Astro. Could it prevail on the two companies to cooperate instead of compete? In the first place, I don't see how Telekom is going to deliver broadband tv on its decrepit Streamyx platform. Rather than pay so much and giving WAGS even more to splurge on frivolous luxuries, it should use the money to improve its services.

Or if it is too much to ask for Khazanah to arbitrate between two competing companies, the government should set up one umbrella organisation to bid for EPL rights for Malaysia. Since there will be only one bidder from Malaysia, the price should be much lower. This organisation can then sell the rights to Telekom, Astro and any other interested party. Any profits can be deployed to good use – whether charity, public transport, sports development ...

Lower toll rates can boost the economy

The MCA has jumped on the bandwagon for a toll-free PLUS.

Their proposal is in many ways similar to the DAP’s proposal - I noticed they even used the same KL-Penang toll rate example ☺. But there is a crucial difference – the DAP proposes that the government/Khazanah general offer extends to all minority shareholders of PLUS, including Employees Provident Fund (EPF). The MCA, on the other hand, considers EPF as part of the government. I completely disagree with that. EPF is the custodian of the rakyat’s hard-earned retirement money. It MUST NOT be treated as yet another source of funds for the government to fritter away.

Still, I am glad there is more support for bringing toll rates down. Cheap and efficient transport can do wonders for the local economy. The most recent proof – Japan’s dramatic toll rate cuts last month. Japanese expressway users now pay just ¥1,000 for unlimited travel on weekends and holidays.

It had a tremendous positive impact on the local economies. Weekend traffic on local highways soared 18% yoy! The boost is even more pronounced when compared to two weeks before – traffic was up 40%! All these means more income for local hotels, shops, restaurants and services – a key ingredient in keeping the domestic economy afloat as exports plunge.

Dare we hope for the same in Malaysia? Y1000 just ¥1,000 is equivalent to RM38. That’s incredibly cheap for the average Japanese who earns far more than the average Malaysian. So how about, say, RM20 for unlimited travel in Malaysia? I’ll bet that will encourage more Malaysians to take their families away for a weekend in Port Dickson, Melaka, Ipoh, Pangkor, Penang, Kuantan, Cherating …… boosting sales of everything from keropok lekor to assam laksa ☺

Khir Toyo and family spent RM1.7m meeting Prince Charming and Cinderella

The Selangor Select Committee on Competency, Accountability and Transparency (Selcat) concluded its public inquiry into the expenses of the now-defunct Balkis on Wednesday, March 31.

Balkis was the welfare and charity organization set up by the wives of Selangor’s elected representatives during Barisan Nasional (BN) rule. It was hurriedly dissolved after March 8, and RM10m was transferred to Bakti, the charity organization for wives of federal government ministers. The legality of that dissolution and cash transfer is also being questioned, but that’s another issue.

Right now, I am disheartened by the absence of public outrage and mainstream media coverage on the abuse of power and privilege unearthed by the Committee. Consider just a few of the revelations:

1) State investment agency Permodalan Negeri Selangor Bhd (PNSB) spent almost RM1m on a Dec 2004 Eurodisney trip for then Selangor menteri besar Datuk Seri Dr Mohd Khir Toyo, his wife, their three children AND maid;
2) Khir must have hankered for the real thing after seeing the European copy, so off he went to Disneyland in Orlando, Florida, in Jan 2008, just 2 months before historic March 8. Again, his wife, their three children and maid went along. Cost – about RM650,000 for their entire US jaunt.

PNSB CEO Datin Khairiyah Abu Hassan told the Committee that the trips were in preparation for setting up an 8 hectare theme park in Bagan Lalang. A very flimsy reason indeed which collapsed under further questioning when it transpired that Khir and entourage visited Disney as ordinary public guests, there were no meetings with Disney senior executives or technical personnel and no reports were submitted after the trips!

But where is the public outrage, and where is the disciplinary action by UMNO? The very senior UMNO politician has not denied spending RM1.7m of public money on a private family jaunt. RM1.7m is 68 low-cost houses; it can keep nearly 300 families out of hard-core poverty for a year. And that RM1.7m is just one of numerous other infractions. If UMNO is serious about reform, it needs to send a clear message. Abuse of power will not be tolerated. Transgressors will be expelled.

It doesn’t seem to be happening.

Also, what about the other Barisan Nasional coalition members? Silence implies consent, or at the very least, acquiescence.

Ask what politics can do for you and your family, not what you can do for the people sounds like an appropriate BN slogan.

EPF – please exercise better governance

Shareholders of MMC Corporation Berhad (MMC) recently approved its proposal to acquire Senai Airport Terminal Services Sdn Bhd (SATS). MMC will pay RM1,700,000,000 CASH to parties related to its substantial shareholder. This deal had attracted substantial criticism from the start. Here are some facts and figures from a very unhappy fund manager with a large chunk of retirement money under EPF’s stewardship:

1) SATS’ main asset is Senai Airport and 2,718 acres of land held under Enigma Harmoni Sdn Bhd (EHSB).
2) The airport operations, which have made losses for the past 5 years, are being bought for RM580m CASH, based on discounted cash flow. Of course, I agree that discounted cash flow is a relevant metric, but the RM420-620m discounted cash flow valuation by Ernst & Young (EY) beggars belief:
a. The airport operations have been loss-making for the past five years. To arrive at its very high discounted cash flow valuation, EY makes some heroic assumptions, including forecasting passenger traffic growth more than 30 years away – up to 2053!
b. By that time, it assumes Senai Airport will handle almost 22 flights per hour, or one flight every 3 minutes and 21m passengers! Do you consider that achievable?
3) MMC is paying RM1.12bn CASH for 2,718 acres of land valued at RM2.0-2.2bn by valuers Knight Frank Ooi & Zaharin Sdn Bhd and IPC Island Property Consultants Sdn Bhd (IPC). A bargain? Hmmm … For a start, consider that EHSB itself acquired the land for just RM332m in December 2007.
a. Now, barely two years later, Knight Frank and IPC say the land value has gone up 6-7x! Again, discounted cash flow (in the guise of potential development value) is brought in to justify the valuation.
b. Note that SATS, as of June 2008, had already booked in a RM264m revaluation surplus, and its total net book value (including the airport) was RM185m. The assumptions Knight Frank and IPC used to come up with such a massive gain over SATS previous valuation is a very good question.
c. Using this RM2.0-2.2bn valuation, MMC claims the land is being bought at 0.83-0.95x net asset value. This is utter rubbish. The standard method when evaluating listed companies is based on the net asset value of the land bank as it is today, not on prospective profits from the future development of that landbank.
d. Using SATS own RM185m book value, MMC is paying 9x the book value based on normal valuation methodology. Over on Bursa Malaysia, the listed companies are in fact trading at 0.4-1.6x book. MMC is paying well over the range.
4) Finally, MMC is advancing RM417m to EHSB to repay advances made by its outgoing shareholders. No mention here is made of when and how MMC will get back that RM417m, nor the interest rate that MMC is charging. Is MMC offering an interest-free loan?

EPF owns about 7% of MMC, and while EPF has not disclosed whether it voted for or against the deal, I also note it has not taken a public stance either way. In the meantime, MMC’s share price tanked as investors hated the deal. Its share price fell 61 sen on 5 Aug 2008 when the deal was first announced, wiping out RM2.6bn of market capitalization in one day. Since then, the share price has collapsed further to about RM1.40, wiping out RM4.05bn of market capitalization – our EPFs share of that loss is RM0.3bn! True, markets overall have fallen – the KLCI itself was down 26% in that period, but MMC’s share price collapsed by nearly half (49%)!

Let’s see what happens with the new, incoming CIO (Chief Investment Officer), now that no-nonsense Johari Muid has been moved to other duties. Dare we hope for a more activist EPF that will protect our retirement money?

Keep a close eye on your EPF money

So, after months of waiting and speculation, including the tantalizing prospect of getting our dividend in cash, EPF (Employees’ Provident Fund) has finally declared a 4.5% dividend for 2008, to be credited into our accounts as usual. The small amount will disappoint many while others will suggest it is fair given the horrendous equity market performance last year. What is an appropriate benchmark for EPF can be the subject of a long piece at another time.

There are more pressing immediate issues. I was in Penang last week, with a contingent of fund managers and analysts there to see for themselves what the economic situation is like. For me, it was a good opportunity to catch up on goings on in the investment world, and the news on stewardship of my retirement money was extremely disconcerting:
1) EPF now has no Chief Investment Officer (CIO);
2) The RM10bn for Khazanah to deploy under the 2nd stimulus plan will come from EPF.

I am told Mr Johari Muid, CIO, has been redeployed to other duties within EPF. I have met Johari during my investment analyst days. I am sure his brusque, abrupt manner has made him many enemies, but I believe he is intelligent, competent and capable. The personality aspects are immaterial – what is important is I felt my retirement money was in good hands under Johari’s stewardship. Now, just month before his contract expires, he has been moved to other duties.

Why the rush? And why now when there is no immediate successor? Surely these turbulent times call for a smooth transition, if one is necessary in the first place. We contributors are owed an explanation.

Correlation is not causation is a principle drummed into me by my statistics teacher. But coinciding with Johari’s removal is widespread speculation that EPF will be lending RM10bn to Khazanah to fund investments under the 2nd stimulus package. This comes on top of EPF lending RM5bn to Valuecap to invest in stocks.

I’ve already blogged on how irrational it is for EPF to lend money to a competitor, Valuecap. Now we find EPF potentially lending money to another competitor with a chequered record, Khazanah.

Watch the news flow!

Trouble for SMEs in mini-budget

Overshadowed by the crowing RM60bn headlines surrounding the mini-budget announced last Tuesday is a measure imposing double levies on foreign workers. This applies to both new and existing foreign workers.

The intentions behind this move are good - to raise employment opportunities for Malaysians, but the timing is terrible. Implementing this could actually lead to even greater unemployment for Malaysians and fewer job opportunities as our businesses, including small-and-medium enterprises (SMEs) have become addicted to cheap labour.

The Barisan Nasional government has for too long now pandered to the business community's lobby for cheap labour and paid too little attention to productivity. Businesses kept asking for cheap labour, which the government obligingly delivered by freely granting work permits for lowly skilled Indonesians, Bangladeshis, Myanmese ...As many as 2,000 approvals PER DAY were granted at the peak, according to Sunday Star report (Mar 15)! The result: no incentive for Malaysian employers and employees to invest in productivity-enhancing measures and low incomes and low standards of living for working-class Malaysians.

The right time to move up the value-added curve is when times are good and companies have extra profits to invest. The worst time is now when businesses are struggling with collapsing revenues. It is a business fact - costs are stickier than revenues. Customers can stop buying your product overnight. But you can't turn around and reduce your capacity overnight. It also works in reverse - if sales go up 10%, your costs don't go up by 10% immediately. So in good times, profit grows quickly; but in bad times, profits can quickly turn into losses as revenues plunge faster than costs.

This double-levy initiative serves to increase business costs at a time when businesses are struggling. It could well tip barely-afloat enterprises into bankruptcy. And that would mean Malaysians would also be thrown out of work, along with the cheap foreign labour. Of course there would be far more cheap foreign workers affected than Malaysians, but this is akin to throwing the baby out along with the bath water. We need to keep whatever employment opportunities we have.

Here's a better idea. Khazanah, despite its miserable execution record, has been given RM10bn to spend under the latest stimulus package. Instead of giving it to Khazanah to fritter away on various projects of 'long-term' benefit (by which time we are all dead, as Keynes astutely observed), let's help small and medium enterprises (SMEs) support Malaysians by offering them a cash payment for each Malaysian employed instead.

It could work this way: For each Malaysian employed, who earns less than RM2,500/month, the government will pay RM1,000 of the wages. This will narrow the gap between the cheap foreign labour and Malaysians, encouraging SMEs to employ locals while still keeping their costs competitive. RM10bn will be enough to cover 420,000 Malaysians for 2 years! After that, the government can slowly reduce this support, say to RM800 per year, then RM500, then zero. This will give both employers and employees time to reinvest in productivity enhancements which result in higher wages AND higher profits.

Before anyone accuses me of plagiarism - let me say here that Singapore is implementing a similar move.