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Economics & Strategy

Monetary growth slackens, political and corporate developments are benign

 


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ECONOMICS & STRATEGY
(for the week of 2-6 March 1998)


Monetary growth slackens, political and corporate developments are benign

Economic and corporate developments this week remain benign and positive for the market to continue its uptrend in the short term. The equity market was resilient in defiant of unexciting results from blue-chips Genting, Resorts and Telekom and bailout accusations. Monetary growth continues to slacken, interest rates stabilised and the ringgit is on the mend.

Delicate political and economic management: We view Friday's liberalisation for the telecommunication industry as strategic, with a tad of political deftness to it. By lifting the ceiling from 30% to 49% on foreign participation, Malaysia reinforces its commitments to the WTO pact and the investment community in fast-forward economic liberalisation. We would certainly welcome any concession to big insurers like Aetna and the AIG Group to sell down their interests in their respective local unit to 51% beyond the stipulated deadline. We view such initiatives as positive signals to the market that was undecided about its direction. More significantly, however, the news camouflaged a potential debacle and deflected controversies in two other major issues: (1) confusion over its policy to "temporarily" allow non-bumiputra's participation in bumiputra-controlled businesses and (2) accusations of corporate bailouts and political resentments within the ruling party.

Let's not be presumptous on corporate bailouts: Parties implicated in corporate bailouts last week - Genting, Resorts World, Konsortium Perkapalan and PNSL Holdings - have had their say over the state of affairs. But the accusations didn't come unstuck over the non-committal statements over the weekend. The implications are:
- both Genting and its subsidiary Resorts have not unequivocally denied any possible involvement in Konsortium or PNSL Holdings
- PNSL Holdings is not involved in any negotiations with Genting or Resorts World. We would not discount any involvement by the Lim Goh Tong family privately at this stage.
- Konsortium has received offers for wholly-owned PNSL Bhd's (not to be confused with listed PNSL Holdings) shipping business and discussions are still on-going. Offers, we speculate, could come from MISC or private parties.

We would not be presumptous as to brush off any deal as "negative" for the market. Both Genting and Resorts have indicated that their investment evaluations are based on commercial criteria. In our conserva-tive view, we would allow for such deals, if at all they materialise, to be judged on their financial merits.

The Tanjong-Powertek deal: All in, Tanjong plc has spent RM481m to acquire two blocks of Powertek shares - a 22.3% stake from Arab-Malaysian Development Bhd for RM230.3m and 24.3% from Cergas Unggul for RM250.6m. The deal allows Tanjong to eventually consolidate Powertek as a subsidiary, should it buy further from the open market or acceptance from the general offer. While we cannot fault the company for acquiring control of a cash-generative power business, the other side of the coin perhaps indicates liquidity problem at shareholders' level. This lends credence to market belief that Ananda Krishnan may be strapped fro cash to finance some of its other personal ventures, including Binariang. At this stage, there is nothing to suggest that cash-starved business (e.g. Binariang) may not be pushed to Tanjong.

Results of Resorts and Telekom are not discouraging: Casino operator Resorts World released its FY97 results this week that was flattish in essence. Although earnings advanced by 52% to RM867.3m from RM569.7m a year ago, they were augmented by RM329.3m of exceptional profits realised from the sale of investments. No details were released on this but we believe (but cannot confirm) these investments to be related to its shareholdings in several listed groups in London e.g. Lonrho and London International Group. Excluding exceptional gains, the group operating profit rose marginally from RM785.8m to RM789.3m, despite falling patronage from Singapore, Hong Kong and Taiwan by as much as 25%.

Telekom produced a 7.4% fall in net operating profit in its FY97 results, after taking a RM225m hit in forex losses as well as steeper finance charges of RM123m vs RM16m previously. Despite worrying signs of in-creased debt and industry competition, Telekom still produced strong above-line numbers, with revenue growing by 12% to RM7.2b. That should assuage any immediate fear of it falling behind its rivals in ever competitive marketplace.

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