Scomi the money

Will the new government of Prime Minister Abdullah Badawi continue the policy of favouring certain businessmen? The Prime Minister says no, but the market is not so sure.

As Mahathir Mohamad leaves power in Malaysia, connected capitalism is meant to be following him out of the door. His anointed successor, Datuk Seri Abdullah Badawi, is known as Mr Clean, an honest politician who has said that it is time to stop the favoured treatment of certain businessmen with government contracts and lucrative concessions, a one time hallmark of the corporate landscape under Dr M.

All well and good, but then why is the local market in Malaysia ramping up one stock more than 1,000% on the back of its, frankly, political connections. That stock is Scomi Group Bhd, a provider of drilling fluids, mud engineering services and industrial chemicals to the oil and gas sector in Malaysia and around the world. It is also involved in the transport and engineering business. It is controlled and run by its CEO Shah Hakim Zain but its major shareholder is Kamaluddin bin Abdullah, the son of Prime Minister Abdullah.

The company listed in May this year at a price of M$1.38. The stock price has since soared by nearly 1,100% to M$14.70 yesterday (Wednesday) after hitting a high of M$16.80 in early November. While there is no doubt that the company is very good at what it does and has been earning good money, it is also doubtful that its business has octupled in little over six months. If that is the case, then why are investors pouring so much money in?

Mainly they like the potential links between Scomi and Malaysian state oil company Petronas. As Petronas expands around the world so it will need to hire companies such as Scomi for the attendant operational services. Moreover, Petronas is moving into countries such as Sudan and Myanmar, where international oil service companies such as Halliburton are not allowed to go.

Even at home business looks good. In a recent research report by UOB Kay Hian, the brokerage estimated that there would be nearly M$50 billion of industry contracts up for grabs in the next five years in Malaysia. Recent news reports have also reported that Murphy Oil of the US has found 4.5 billion barrels of offshore oil in eastern Sabah state. This is the equivalent of 22% of Malaysia's current reserves. So the business fundamentals look good for Scomi.

But eight times as good in six months? There is at the moment absolutely no suggestion that the company is winning contracts at inflated prices or without proper contractual procedures. So the real issue becomes that investors perceive Scomi to be well connected and thus are piling into the stock. This is in spite of evidence to the contrary and indeed against the prevailing view that political connections are being taken out of business in Malaysia.

But the old views of political business are still prevalent and are slow to fade. A recent research report by Yew Chee Yoon at Kim Eng Securities shows how investors are still valuing stocks based on their connections. "Scomi is still a trading buy although its share price has doubled since our last note on 29th August 2003," wrote Yew on October 10th. "Admittedly [price earnings ratio] valuations are extremely rich, but it is still our preferred stock for investors wishing to find a political stock in Malaysia. Scomi is perhaps the stock with the biggest political scents listed on the KLSE We believe [Kamaluddin bin Abdullah's] involvement lends the stock a strong political flavour."

Thus even though Prime Minister Abdullah has promised to end the practice of favouring certain businessmen, the market does not believe him. As Mahathir and his business friends lose their favoured status, so the market is on the look out for the new class of connected businessmen, who are attached, rightly or wrongly in the eyes of investors, to the new administration. Kamaluddin Bin Abdullah is not the only one to be recognised.

In a recent research report by ING the bank has produced a list of politicians and businessmen that it thinks will be prominent under the new administration. "The old guard in several previously prominent listed companies has changed with a new breed of younger and more investor-oriented professional managers taking over we name selected corporate figures that we expect will continue to gain prominence over the next five years."

Kamaluddin bin Abdullah understandably heads this list. It is a list that also features the sons of other prominent Malaysians. Number three on the list is Nazir Razak, the pioneering head of CIMB, Malaysia's largest domestic investment bank. At 37 he is the son of the country's second prime minister Tun Razak and the brother of incoming Deputy Prime Minister Datuk Najib Razak.

At number 10 is Dato' Sulaiman Abdul Rahman Taib, son of the chief minister of Sarawak and Chairman of Cahya Mata Sarawak, which owns Utama Banking Group and RHB Capital. At number 15 is Datuk Robin Tan, the 29 year old son of Tan Sri Vincent Tan, owner of the Berjaya group, of which Robin Tan is an executive director. At 19 on the list is Tan Sri Lim Kok Thay, who took over from his father as president and CEO of Genting and Resorts World in 2002.

But other than the well born, the list also includes men (there are no women on this list) such as Tony Fernandes (number four), a one man PR machine who has founded Asia's first budget airline, Air Asia. Another interesting man to watch is Datuk Azman Yahya, number two on the list. He rose to fame as the chairman of Danaharta, the national debt restructuring agency set up after the crisis to sort out the corporate debt crisis. He is widely credited with being very successful at this job and his new role as head of Symphony House, an IT consultancy of which he owns 49%, might be a gap before he moves onto higher positions within the government.

The real test of whether the connections between politics and business are severed will be the willingness with which the new Prime Minister forces them to be. So far he has been understandably reluctant to come out openly and say that such connections are wrong. After all, that would be an implied criticism of his former boss. But in a speech Abdullah made in June this year to the Oxbridge Society of Malaysia under the title of 'Competing for Tomorrow', he gave perhaps the clearest indication of where his true feelings lie.

"When the government is seen, not as a facilitator of business, but a provider of contracts and concessions, genuine entrepreneurs will be crowded out by commission agents with 'know-who' abilities and no 'know-how' talents," he said. "As we endeavour to create a competitive economy, we must reassess the manner in which re-distributive justice is carried out. We may have to admit that in certain cases the simple transfer of wealth from the government to certain private companies has not yielded the results that were hoped for. A more competitive economy cannot afford to continue to absorb unproductive economic rents. Hence, we must now make sure that re-distributive justice is carried out on the basis of identifying genuine need and that opportunities are given to those with value-added potential."

If that is going to be the true policy of Abdullah's administration, then it will be a good time to be in business in the country. Unfortunately for those businessmen who happen to be related to those in power, the markets still assume that they might get favoured treatment, whatever Abdullah might say.

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