Published August 28, 2008
S'pore firms top wealth-creation chart
They occupy 33 of leading 100 positions in Asean in a Wealth-Added Index; SingTel heads the pack
By GENEVIEVE CUA

Email this article

Print article

Feedback
(SINGAPORE) Singapore companies have done a stellar job of creating wealth for shareholders, despite market volatility and a higher cost of capital.

The first-ever ranking of the top 100 South-east Asian companies in terms of US-based consulting firm Stern Stewart & Co's 'Wealth Added Index' (WAI) finds a total of 33 Singapore companies on the list, the largest number among Asean markets.
In pole position is Singapore Telecommunications, as at June 30. Keppel Corp is ranked seventh, and CapitaLand ninth.
Stern Stewart has also come up with the top 100 WAI ranking for Singapore alone, as well as industry specific rankings. In the regional real estate sector, for example, Singapore companies accounted for eight of the top 10, led by CapitaLand and City Developments.
WAI is a metric developed by Stern Stewart in 2000, based on the idea that companies create value for shareholders only if their total returns - share price plus dividends - exceed an imputed 'cost of equity'. The latter is the minimum return investors should earn for taking on the risk of investing in shares.
The strongest testimonial to the use of the wealth added metric is Temasek Holdings, which on Monday released its latest annual report. Temasek uses wealth added as an internal benchmark, and that extends even to its staff compensation structure.
Related links:
Click here for the WAI rankings
Footnotes
Definitions
As Temasek explains: Wealth added (also called economic profit) factors in the capital employed to produce the returns and the risks associated with each investment. 'To achieve positive wealth added, we need to deliver more than the capital charge, which is the risk-adjusted hurdle applied to the capital employed.' In the year ended in March, the group's wealth added was minus $6.3 billion. The group's five-year cumulative wealth added was a 'healthy' $60 billion above its risk adjusted cost of capital hurdle.
Erik Stern, president international of Stern Stewart & Co, said the firm set up an office here in 1997 mainly to work with the Temasek group. The firm maintained its office here for about five years. It has since closed it, but is looking to re-establish itself in the region.
'To people who want to know more about economic value added (EVA) and the value mindset, I tell them to read the Temasek annual report. There is nothing better. So many companies want to look like they care about shareholder value. Read any annual report, then read Temasek's. There is a very big difference.
'(Temasek) acts and lives it. We're thrilled to be associated with them; they make us look good. They know what this is all about.'
Stern Stewart first developed two metrics in the 1980s, one of which is economic value added (EVA), focusing attention on the cost of capital. EVA is a performance metric, to indicate whether a company has produced value for investors. Its calculation takes after tax operating profit and subtracts an annual charge - a sort of rental charge - on debt and equity.
It is unclear how widely used EVA or wealth added is among Singapore companies. SingTel uses a different metric internally. CapitaLand, however, includes an EVA calculation in its annual report, and tots up the group EVA attributable to equity shareholders.
Mr Stern said the metrics were developed in an effort to overcome the limitations of other metrics, such as total shareholder return, which simply measures the change in a company's price plus dividends between two points in time.
Accounting measures like net profits and sales also do not provide any benchmark for performance, or help in investor decision making. 'The concept of EVA is like meritocracy; there is no cutting corners. The objective is to get employees to think and act like owners, so that they act like the money they're given is their own. That concept is very similar to the Singapore mindset.
'I believe there is no accident that Singapore companies' performance is good. People here are very modest. They say, let's see what happens in the future, and there will be a lot of competition..
'It pays to remember that capital has a cost and shareholders deserve to earn a return on that. If Singapore companies forget that they may find that the paradise they created will be owned by others. As great as they've done, what matters is going forward.'
One point of contention may be the calculation for the cost of equity, which is based on a market's government bond adjusted by a company and market risk premium. Some of Stern's input data are taken from Bloomberg.
Managers, he said, should focus on EVA as an internal measure, and not the share price. 'Companies that consistently make good decisions will see strong performance. The marketplace is showing some fear of the future. The question is what can companies do about it.
'Companies that are well managed usually do well in a downturn and take market share from those that are not well managed.'
There are four drivers of wealth added, which are quantified in the rankings. These are operations; strategy or growth expectations; external financing and governance. The proxy for the latter is a company's cost of equity.
'Our view of governance is that managers must earn the required rate of return as the minimum. But if they don't earn that, they have not been a good steward of capital.'

Published August 27, 2008

Scomi-Larsen JV clinches RM2.5b job

By S JAYASANKARAN
IN KUALA LUMPUR

	Email this article
	Print article
	Feedback

MALAYSIA'S Scomi Engineering, which is in a joint venture with India's Larsen & Toubro Ltd, is believed to have bagged a RM2.5 billion (S$1.1 billion) job to build a 20-kilometre monorail in Mumbai.

'We haven't got a letter as such,' a company official told BT. 'But the government is only talking to us now and they want some clarifications on cost.'

The award is a triumph of sorts for Scomi as it has beaten off such global competitors as Bombardier, Hitachi and Siemens in an international, open tender.

It will also be something of a vindication as the company's critics in Malaysia, including former prime minister Mahathir Mohamad, had repeatedly accused the company of benefiting from its links to Prime Minister Abdullah Ahmad Badawi. Scomi Engineering and its parent - oil and gas company Scomi Berhad - are part-owned by Kamaluddin Abdullah, a Cambridge-trained lawyer who is the premier's only son. Getting the job could also strengthen Scomi's hand in positioning itself as a global player in building monorail systems.

After all the pre-qualification exercises, the bids were winnowed down to two, pitting the Scomi-Larsen consortium against a consortium comprising Anil Ambani's Reliance Energy Ltd and Japan's Hitachi Ltd, according to a news report out of India. Both submitted their final bids in late July and actual construction is slated to begin in May next year.

Scomi Engineering's partner Larsen & Toubro is the largest engineering concern in India and is capitalised at over US$8 billion. The joint venture bid, apparently, won the favour of the Mumbai authorities because the consortium had promised to complete the first phase of the project in two years whereas the others could not make those guarantees.

For all that, however, the news has done very little for Scomi Engineering's shares. It has fallen steadily from its high of RM2.60 in January this year to RM0.89 at the close of trading yesterday.

Published August 27, 2008

Sime's full-year profit rises 40% to RM3.75b

Earnings boosted by contributions from plantations; lower profit seen this year

By PAULINE NG
IN KUALA LUMPUR

	Email this article
	Print article
	Feedback

HEFTIER plantation contributions have boosted Sime Darby's profit by 40 per cent to RM3.75 billion (S$1.57 billion) for the year ended June, but Malaysia's largest conglomerate has cautioned that earnings in the current year are expected to be affected by slower economic growth brought about by higher fuel prices.

Boosted by better yields, merger synergies and strong crude palm oil (CPO) prices, Sime's plantation division registered a 139 per cent increase in operating profit to RM3.9 billion - its contribution more than five times more than the industrial division, its next biggest contributor at nearly RM690 million, the company said in a statement accompanying the release of its unaudited results yesterday.

The group's full-year revenue was up 21 per cent to RM34 billion, while earnings per share amounted to 59.63 sen from 44.16 sen previously.

Re-listed in the last quarter of 2008 following the merger of three plantation groups, the plantations giant exceeded its key performance index (KPI) targets by posting a profit attributable to ordinary equity-holders of RM3.5 billion versus a target of RM3.15 billion. Its return on average shareholders' equity was 18 per cent against a targeted 16.5 per cent.

But in view of the challenges ahead, it plans to review its KPI targets for the current year of RM3.7 billion profit and 16.7 per cent return on shareholders' equity.

Indeed, its fourth-quarter performance was noticeably softer, its pre-tax profit down by 8 per cent against the preceding quarter.

Sime attributed this to lower contributions from plantations despite average CPO prices of RM3,285 per tonne versus RM3,101 per tonne in the third quarter 'mainly due to lower production and sales volume coupled with the higher production costs' as a result of hefty petrol and diesel price hikes of 40 and 60 per cent respectively.

Its weaker Q4 earnings were also in spite of higher profit contributions from its other divisions, property, industrial, energy and utilities.

Reflecting softer earnings expectations, its share price has dropped to about RM6.45, slashing its market capitalisation to less than RM40 billion - a far cry from its listing size of RM66 billion.

Nonetheless, Sime president and group chief executive Ahmad Zubir Murshid said the group would face the challenges from a position of strength and was 'well-placed' to acquire undervalued assets to support its long-term plans. 'The group's balance sheet is currently the strongest it has ever been while its earnings base is well diversified'

In the year under review, the group's motor division managed to double its operating profit to RM203 million from RM63 million in the previous year. But its property division saw a 19 per cent decline in operating profit to RM407 million.

Sime said RM210 million in merger synergies had been realised in the plantation and property businesses in the last fiscal year, which puts it ahead of the RM400 million-RM500 million in earnings before interest and tax synergies targeted by FY2009/10.

In the light of its performance, the board has recommended a final dividend of 34 sen per share and a special final dividend of four sen less tax plus six sen tax-exempt - which would amount to an additional 15 per cent payout on earnings, above its usual 50 per cent payout ratio. Total gross dividend for the year would equate to 49 sen per share.