SOMETHING is amiss in the current portfolio-restructuring exercise within Urusharta Jamaah Sdn Bhd, the Finance Ministry’s wholly owned special-purpose vehicle.

Divesting shares of Boustead Heavy Industries Bhd (BHIC) and investing in TH Heavy Engineering Bhd – both involved in shipbuilding and ship repairs – is akin to cutting off a good arm to save a bad one. The manner in which BHIC shares are being disposed of is strange and unprofessional.

The portfolio restructuring, according to Urusharta CEO Izad Sallehuddin in an interview with The Star on May 2, involves investing in stocks with attractive valuations and selling off underperforming stocks that provide zero to low yields to less than 5% holding, including “illiquid, small-cap counters that had no analyst coverage, making it difficult to make a proper assessment”. One of the companies retained is TH Heavy, a PN 17 firm (the Practice Note 17/2005 status is issued by Bursa Malaysia for a company in financial distress). Urusharta owns 29.8% of TH Heavy, of which Izad has been group chairman since September 2019. With 1.121 billion shares, its share price closed at 8.5 sen (May 18), turning it into a penny stock, in addition to its PN17 status.

To be fair to TH Heavy, its business involving the fabrication of offshore oil and gas facilities, offshore crane manufacturing, and shipbuilding and ship repairs is an envy of others in the same line, especially when one is a GLC and could comfortably secure contracts from Petronas. Under suspension for four years due to non-performance, it was only in January that TH Heavy was given a licence to bid for Petronas projects.

Needless to say, a company has to be managed and run by people well-versed in the industry. A fund manager who knows little to nothing of the industry will imminently run the business aground, however promising it is. The time-tested maxim of putting one’s money where one’s mouth is applies not just to TH Heavy, but all others, too, especially GLCs.

In comparison, BHIC is primarily a shipbuilding company, building and maintaining military and commercial vessels. It is also in the manufacturing of aerospace components and propellants, and the maintenance, repair and overhaul (MRO) of ships, electronics, communications equipment and weaponry, helicopters and submarines. Majority-owned by the Armed Forces Fund Board (LTAT) and Boustead Holdings Bhd, its parent company, BHIC has secured contracts with the Royal Malaysian Navy (RMN) to build and supply naval ships, and long-term MRO contracts. Additionally, in RMN’s 15 to 5 Transformation Programme to streamline vessels in its fleet to just five types, four are locally designed with blueprints by BHIC.

Budget 2020 saw the Defence Ministry allocated RM15.6 billion, an increase from RM13.9 billion the previous year. Of the RM15.6 billion, operating expenditure was RM12.5 billion, while development expenditure was RM3.1 billion. As a maritime nation with the need to build a strong fleet, RMN received the lion’s share of the three services for development expenditure.

BHIC is in the envious position to reap whatever government and defence spending for many years to come. It has book orders to supply RMN with littoral combat ships and littoral mission ships. RMN has also expressed interest in ordering Multi-Role Support Ships and Fast Interceptor Crafts. With all these orders, plus future ones, along with secured MRO contracts, BHIC is a gem of a small-cap company that any corporate entity would be lucky to own.

Furthermore, the Defence White Paper tabled in December 2019 envisaged developing and enhancing local defence industrial capabilities to achieve self-reliance in defence technology. Where RMN and defence procurement is concerned, BHIC’s monopolistic and front-runner role ensures itself a secured business almost in perpetuity. Perhaps, the absent analyst coverage is what Izad and company rely on.

The question ‘why sell off the goose that lays the golden eggs’ arises. In the case of BHIC, Urusharta appears to have the intention to sell off clean, and not just keep it to below 5%. On February 12, Urusharta transferred its entire holding of 18,646,300 BHIC shares to Citigroup Nominees Sdn Bhd, the custodian and fund administrator for Urusharta’s equity portfolio holdings. Three fund managers were appointed; two of them foreign – Aberdeen and Nomura – along with Maybank, with equal portions to dispose of the BHIC shares. Thus, the selling spree began, and in a manner not one would expect as the norm in a depressive market, but viewed with aghast by keen watchers.

BHIC share transactions had been rather illiquid over the past three years, trading about three million shares a year. In the 12 months up to March, the monthly average was barely above 237,000 shares. On March 20, the price fell from RM1 the previous day to a historic low of 86.5 sen. The day’s catastrophic 13.5% decline was due to a hurried closing-time sale of only 2,600 shares at 86.5 sen. It took a total of another 57,700 shares in six trading days to press down the price to 83.5 sen on March 31. From then on began a relentless effort in price manipulation that provoked questions of unwitting abetment and facilitation. Urusharta, through its appointed fund managers, participated in a big way from April 3 that saw the share price dropping to 65 sen. Urusharta continued to participate in sales that saw the price dipping further to 57 sen around April 25 – a plunge of 43 sen from the par value of RM1.

There were a number of tactics used to press down the share price. Top among them was selling low when there were already offers in the BuyQ at higher prices, making obvious the price manipulation in violation of trading regulations. Here are examples with specific dates and time:

1. April 13 at 4.48pm – BuyQ 10,000 shares at 72.5 sen, SellQ 14,600 shares at 65.5 sen.

2. April 14 at 4.47pm – BuyQ 3,300 shares at 72.5 sen, SellQ 7,000 shares at 64.5 sen. 

3. April 15 at 4.47pm – BuyQ 4,000 shares at 73 sen, SellQ 3,100 shares at 64.5 sen.

4. April 16 at 4.46pm – BuyQ 2,000 shares at 71 sen, SellQ 1,600 shares at 70 sen.

5. April 17 at 4.47pm – BuyQ 3,200 shares at 69 sen, SellQ 3,300 shares at 68 sen.  

6. April 21 at 4.48pm – BuyQ 13,900 shares at 66 sen, SellQ 2,500 shares also at 66 sen.

7. May 13 at 4.49pm – BuyQ 2,900 shares at 64 sen, SellQ 3,000 shares at 61 sen. 

8. May 14 at 4.47pm – BuyQ 20,500 shares at 62.5 sen, SellQ 1,000 shares at 60 sen.

9. May 15 at 4.47pm – BuyQ 2,800 shares at 61.5 sen, SellQ 900 shares at 60.5 sen.

The abovementioned dates were randomly selected. Price-manipulation activities using the same tactic was observed in March, too. Another tactic used was the employment of very small quantities of shares, in the hundreds, in the SellQ. Once a trade was done at a certain price, the manipulators would throw down a very small quantity at a lower price, often within seconds of the higher trade. The intention was to prevent buyers from chasing up the price by breaking the price-climb momentum.  

The other price-manipulation practice that featured frequently was to close down the day’s price, usually from 4.46pm to 5pm. Sell orders would appear at a far lower price than the BuyQ price, but in a larger quantity. A huge and sudden drop in price, artificially created, could cause a margin call or force sell to be triggered, or at least set a psychological barrier for trading the next day to be done at lower prices.

From April 3 to 13, Urusharta disposed of 2,742,833 BHIC shares. The two foreign fund managers sold off the most – Aberdeen at 1,448,800 shares and Nomura at 1,191,233 shares. Maybank sold off the least, at 102,800 shares. These are records from required reporting made by Urusharta and disclosed by BHIC. Of the three, it seems Maybank conducted the sales with restraint and caution, whereas the two foreign fund managers were reckless, and their selling spree accentuated the price decline. After all, from April 3, when a never-before-seen high volume traded and despite considerable buying interest, the sellers, including the two foreign fund managers, chose to be only too willing to adjust their SellQ prices to accommodate buyers. The foreign fund managers did not seem to have a minimum price below which they would not sell, given BHIC’s prospects. Their eagerness to sell had a psychological, depressing effect on the market price.

Why did the manipulators need to press prices down, assisted by Urusharta’s foreign fund managers’ selling, to cause panic among and elbow out genuine small investors? Given BHIC’s prospects, it is more logical to allow exceptional turnover, predicated on a belief in BHIC’s business, to buoy prices naturally, without interference. This would be a win-win for all. Of course, those committed to riding with BHIC over a longer time would benefit more from this share investment.

Izad and company need to take a look at their own portfolio restructuring, as a goose that lays the golden eggs might have been sold. Officials in the Securities Commission and Bursa Malaysia should not continue their functions with blinkers. Board members of LTAT and Boustead should not continue to play the three wise monkeys, and instead, should have spoken out months ago. Those with responsibilities, but do nothing, give the impression that a sinister arrangement is in the making to exploit BHIC.

At best, it is seen as the unprofessional dumping of shares. Thousands of individual investors rely on honest income, and on executives in GLCs to be honest. Also at stake are hundreds of thousands soldiers who rely on LTAT as a source of pension security. – May 19, 2020.

* Capt (rtd) Dr Wong Ang Peng is director of public communications at Patriot.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.