Debt fuelling growth of Corporate Malaysia

CORPORATE Malaysia took on more debt in 2023 as market activities regained their footing post-pandemic and local interest rates stayed below the 2019 level.

In an analysis by StarBizWeek, the total net debt of listed companies crossed RM350bil, yet interestingly, government-linked companies (GLCs) managed to pare down their aggregate net debt levels compared to the year 2022.

Notably, the Khazanah Nasional group saw a drop in total net debt year-on-year (y-o-y). Meanwhile, the Permodalan Nasional Bhd (PNB) and Petroliam Nasional Bhd (PETRONAS) group of companies recorded an increase.

The country’s sole electricity supplier, Tenaga Nasional Bhd (TNB), retained its throne as the most indebted GLC, while the Yeoh family’s YTL Corp Bhd remained at the top in the non-GLC segment.

Investors, however, seem unperturbed by their huge debt pile, considering that TNB and YTL Corp stocks have rallied this year by over 41% and 89%, respectively.

That said, rising indebtedness is a clear indicator that Malaysian corporate growth, just like the country’s RM1.8 trillion economy, continues to be fuelled by borrowings.

An analyst says that some companies may have taken on debt to pay dividends, judging from the trend.

It also shows that many companies lack adequate cash holdings as buffers and that they may need to turn to shareholders’ support in case of the next crisis or a sudden spike in interest rates.

Malaysia is not the only country to see a rise in corporate indebtedness.

In July 2023, London-based asset management group Janus Henderson reported that companies around the globe took on a record US$456bil of net new debt in 2022-2023.

The net new debt taken on in 2022-2023 pushed outstanding net debt up by 6.2% on a constant currency basis to US$7.8 trillion, surpassing a previous peak in 2020-2021, at the height of the Covid-19 pandemic.

However, the firm also pointed out the higher corporate debts were backed by record profits in the observation period.

The net debt analysis by StarBizWeek covered 619 public listed companies (PLCs) with a market value of RM1.8 trillion or 97.6% of total Bursa Malaysia’s market value as at Feb 29, 2024.

Of this, 24 financial institutions (FIs) with a market value of RM415.6bil have been excluded in the analysis, as their debts and cash are not owned by the FIs and thus do not represent the companies’ liquidity position.

The analysis covered a three-month financial period that ended on Dec 31, 2023, or in the case of unavailable data, the prior available quarter.

Of the 595 PLCs analysed, 302 companies carried a total net debt of RM350.8bil, while 293 companies had a far smaller net cash level of RM54.1bil.

The total net debt as at Dec 31, 2023 increased marginally by 0.4% as compared to the quarter ended Sept 30, 2023.

On a y-o-y basis, corporate Malaysia’s total net debt rose by 1.5% from RM345.7bil as at Dec 31, 2022.

GLCs, accounting for 33 companies under eight parent groups, contributed 35% or RM123.6bil out of the RM350.8bil total net debt as at Dec 31, 2023.

Non-GLCs – or private PLCs – represented by 269 companies in the analysis, contributed the remaining RM227.2bil net debt.

Kevin Khaw Khai Sheng, research analyst at iFAST Capital, tells StarBizWeek that most of the companies in FBM KLCI – excluding banks – show healthy net debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio.

Khaw notes that the healthy ratio indicates a company’s ability to pay back its debt with the current Ebitda.

“Applying a rule of thumb where net debt-to-Ebitda is smaller than three times, only six out of 26 companies fall in this category, and most of these companies are capital intensive such as TNB, YTL Corp and Kuala Lumpur Kepong Bhd.

“In fact, high gearing ratio (or high debt) is not necessarily a bad thing for a company, as it might be able to leverage on the cheaper funding without diluting the ownership of the company (relatively to equity).

“Generally, we advocate investors need not to be over-worried about the massive net position as long as the company’s earnings is still registering healthy inflow and fundamental maintains resilient,” he says.

Meanwhile, an analyst with a local investment bank says the relatively low interest-rate environment post-Covid-19 in Malaysia “encourages” companies to undertake borrowings for expansion.

The overnight policy rate currently stands at 3%, still lower than the 3.25% rate prior to May 2019.

“The positive growth outlook as evident from the massive investments reported in the media motivates companies to expand, and coupled with the favourable loan rates and healthy corporate bond and sukuk financing in Malaysia, companies have more reasons to leverage.”

Of GLCs and PLCs

In this segment, the Khazanah Nasional group remained as the most indebted, carrying a total net debt of RM83.5bil as at Dec 31, 2023, although it has reduced from RM85.5bil at end-September 2023.

There are nine GLCs under the sovereign wealth fund’s stable, and TNB continued to be the largest indebted company with a net debt of RM40.4bil.

However, one should note that Khazanah Nasional group’s debts declined in the three-month period, due mainly to TNB’s declining net debts of RM1.8bil, supported by higher revenue and better cash flows position.

PNB group’s debts were higher by RM1bil or 3.2% quarter-on-quarter (q-o-q) to RM32.3bil due mainly to Sime Darby Bhd’s increase in debts of RM2.6bil to RM5.8bil, due to balance payments for the acquisition of Cavpower Group and UMW Group in December 2023.

Cavpower is the official Caterpillar dealer in Australia. Caterpillar is an American construction, mining and other engineering equipment manufacturer.

Meanwhile, PETRONAS group’s debts were higher by RM700mil q-o-q at RM2.9bil mainly due to lower cash flow in PETRONAS Dagangan Bhd, with the retail arm’s net cash falling by RM1.2bil from RM2.6bil to RM1.4bil.

Interestingly, PETRONAS’ 64.35%-owned subsidiary PETRONAS Chemicals Group Bhd was the largest net cash company in the quarter ended Dec 31, 2023, with RM6.3bil.

PNB and PETRONAS groups each have seven companies under their stable.

Financial standing

In this segment, YTL Corp remained as the largest indebted company with a net debt of RM28.9bil, while Oriental Holdings Bhd had the largest net cash position of RM3.2bil.

Founded by the late Tan Sri Loh Boon Siew in 1963, Oriental is well-known for introducing Honda motorcycles into the Malaysian market.

Oriental recently made headlines as the Loh family undertook an “internal restructuring” that removed certain family members from ownership.

In the quarter ended Dec 31, 2023, the top three companies that saw the biggest debt increases were Lotte Chemical Titan Holding Bhd (LC Titan), Yinson Holdings Bhd and the IOI Group.

LC Titan’s net debts increased by RM2.4bil or 86% q-o-q to RM5.2bil.

The Main Market-listed petrochemicals producer continued to see its financial position deteriorate further, having registered losses for the past seven consecutive financial quarters.

This was amid a continued tough market situation, operating at a negative margin environment due to abundant supply stemming from the weak demand in China.

Under such circumstances, it is no secret that South Korean chemical company Lotte Chemical Corp (LC Corp) is mulling disposing of its stakes in its Malaysian unit, LC Titan.

In April, an LC Titan spokesperson told StarBizWeek that no decisions have been made yet on the disposal.

It is noteworthy that LC Titan was taken private in 2010 at a total value of US$1.25bil (RM4bil using the average exchange rate in 2010) before being listed at RM6.50 per share or RM14.8bil valuation (2.5 times more than the acquisition price) in 2017.

LC Titan was the biggest initial public offering on Bursa Malaysia in 2017.

Second to LC Titan, Yinson saw its net debt rise by RM1.5bil or 12.8% q-o-q to RM13.2bil in the quarter ended Dec 31, 2023.

Yinson builds floating production, storage and offloading (FPSO) vessels. Its higher net debt was due to higher debts taken to fund its two new FPSO projects, namely the MQ and Agogo vessels.

At RM13.2bil, Yinson’s net debt significantly dwarfs its current market capitalisation of RM7.5bil.

Yinson’s debt level has ballooned massively in the last five financial years, up from a total debt of RM3.9bil in the financial year ended March 31, 2020.

The fact that the group sits on negative operating cash flow and that nearly 90% of its debt is US dollar-denominated have also added further concern.

Meanwhile, IOI Group’s net debt rose by RM600mil or 3.5% q-o-q to RM17.8bil due to IOI Properties Group Bhd’s increased holdings of foreign debts, which upon conversion account for higher ringgit debt equivalent.

To note, Singapore dollar-denominated debts comprise 80% of IOI Properties’ total debts.

At RM17.8bil, IOI Group also took the second spot on the most indebted list.

IOI Group was followed by the Ananda Krishnan group, consisting of Maxis Bhd, Bumi Armada Bhd and Astro Malaysia Holdings Bhd.

All three were in net debt as at end-December 2023 – Maxis (RM9.2bil), Bumi Armada (RM3.65bil) and Astro (RM2.5bil). Cumulatively, the net debt of the Ananda Krishnan group was RM15.4bil.

Interestingly, the group of companies under Tan Sri Syed Mokhtar Al-Bukhary was also in a total net debt of RM12.5bil.

Independent power producer Malakoff Corp Bhd alone contributed RM6.6bil in net debt, followed by conglomerate DRB-Hicom Bhd (RM5.9bil).

Overall, there are five PLCs under the Syed Mokhtar group including Zelan Bhd, Pos Malaysia Bhd and Gas Malaysia Bhd.

On another note, the Genting group emerged with the largest drop in net debt position in the quarter ended Dec 31, 2023.

Its net debt declined by RM1.6bil or 11.3% q-o-q to RM12.5bil, thanks to a better operating environment as its business operations continue to improve.

Next to Genting is Hengyuan Refining Co Bhd, which despite continued losses, saw an improvement in its cash position.

Hengyuan’s net debt in the quarter under review halved to RM700mil due to higher collection from its customers.

Formerly known as Shell Refining Co (Federation of Malaya) Bhd, Hengyuan is also involved in the manufacturing of petroleum products.