Malaysia Dateline

Unprofessional dumping of BHIC shares

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 (TH Heavy), where both are involved in shipbuilding and ship repair, is akin to cutting off a good arm to save a bad one. The manner BHIC shares are being disposed is strange and unprofessional.

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

To be fair to TH Heavy, its business involving fabrication of offshore oil and gas facilities, offshore crane manufacturing, and shipbuilding and ship repair; 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 is only in January this year that TH Heavy is given license to bid for Petronas projects. Needless to say a company has to be managed, run by people well versed with the industry. A fund manager who knows little to nothing of the industry taking charge will imminently runs it aground, however promising the business is. Time tested maxim of putting one’s own money in the mouth applies for not just TH Heavy, but all others, especially the GLCs.

In comparison, BHIC is primarily a shipbuilding company, building and maintenance of military and commercial vessels. Besides, it is also into manufacturing of aerospace components and propellants; maintain, repair and overhaul (MRO) ships, electronics, communication equipment and weaponry, helicopters and submarines. Majority owned by LTAT (Armed Forces Fund Board) 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 the RMN’s 15 to 5 Transformation Programme, which is to streamline naval vessels to just five types in its fleet, four are locally designed with blueprints by BHIC.

Budget 2020 saw Mindef allocated RM15.6 billion, an increase from RM 13.9 billion the previous year. Out of the RM15.6 billion, operating expenditure was RM12.5 billion, while development expenditure was RM3.1 billion. As a maritime nation and the need to build a strong fleet, RMN received the lion’s share out 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. BHIC has in book orders to supply RMN the littoral combat ships and the littoral mission ships. The RMN has also expressed interest to order Multi Role Support Ships and Fast Interceptor Crafts. All these orders plus future orders, along with secured MRO contracts, BHIC is a gem of a small cap company that any corporate entity is lucky to own.

Furthermore the Defence White Paper tabled in December 2019 has envisaged developing and enhancing the 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 secured business almost in perpetuity. Perhaps these are absent analyst coverage that Izad and company relies.

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

BHIC shares transactions had been rather illiquid the past three years; traded about 3 million shares a year. In the twelve months up to March 2020 the monthly average was barely above 237,000 shares. On 20 March, the price fell from RM1 the previous day to a historic low of 86.5 sen. The day’s catastrophic 13.5% price decline was due to a hurried closing time sale of only 2,600 shares at 86.5 cents. It took a total of another 57,700 shares in 6 trading days to press down the price to 83.5 sen on 31 March. From then onwards began a relentless effort in price manipulation that provoked question of unwitting abetment and facilitation. Urusharta, through its appointed fund managers, participated in a big way from 3 April that saw the shares price dropped to 65 sen. Urusharta continued to participate in sales that saw the price dropped further to 57 sen around 25 April, a plunge of 43 sen from par value of RM1.

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

1. 13 April, at 4.48pm – BuyQ 10,000 shares at 72.5 sen, SellQ 14,600 shares at 65.5 sen.
2. 14 April, at 4.47pm – BuyQ 3,300 shares at 72.5 sen, SellQ 7,000 shares at 64.5 sen.
3. 15 April, at 4.47pm – BuyQ 4,000 shares at 73 sen, SellQ 3,100 shares at 64.5 sen.
4. 16 April, at 4.46pm – BuyQ 2,000 shares at 71 sen, SellQ 1,600 shares at 70 sen.
5. 17 April, at 4.47pm – BuyQ 3,200 shares at 69 sen, SellQ 3,300 shares at 68 sen.
6. 21 April, at 4,48pm – BuyQ 13,900 shares at 66 sen, SellQ 2,500 shares also at 66 sen.
7. 13 May, at 4.49pm – BuyQ 2,900 shares at 64 sen, SellQ 3,000 shares at 61 sen.
8. 14 May, at 4.47pm – BuyQ 20,500 shares at 62.5 sen, SellQ 1,000 shares at 60 sen.
9. 15 May, at 4.47pm – BuyQ 2,800 shares at 61.5 sen, SellQ 900 shares at 60.5 sen.

The above-mentioned 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 quantity 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 dampen buyers from chasing up the price by breaking up the price climb momentum.

The other price manipulation practice that featured frequently was to close down the day’s price usually from 4.46 pm 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, thus artificially created, could cause Margin Call or Force Sell to be triggered, or at least set a psychological barrier for trading on the next day to be done at lower prices.

From 3 to 13 April, Urusharta disposed of 2,742,833 BHIC shares. The two foreign fund managers sold off the most, with Aberdeen 1,448,800 shares and Nomura 1,191,233 shares. Maybank sold off the least with 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 had accentuated the price decline. After all, from 3 April onwards where never before seen such high volume traded and despite considerable buying interest, the sellers including Urusharta’s two foreign fund managers, chose to be only too willing to adjust their SellQ prices to accommodate the buyers. The foreign fund managers do not seem to have a minimum price below that they will not sell given BHIC’s prospects. Their eagerness to sell has a psychological depressing effect on the market price.

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

Izad and company needs to take a reflexive look at their own portfolio restructuring exercise, as a goose laying 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 Holdings should not continue to play the three wise monkeys, but should have spoken out from months ago. Those with responsibilities doing nothing gives the impression that a sinister arrangement is in the making to exploit BHIC. At best it is seen as unprofessional dumping of the shares. Thousands of individual investors rely on honest income and for executives in GLCs to be honest. At stake are also hundreds of thousands soldiers who rely on LTAT as a source of pension security.

* Capt (Dr) Wong Ang Peng (Rtd), Director of Public Communications, Persatuan Patriot Kebangsaan. Tel: 013-3399898