KUALA LUMPUR: A properly executed Government Linked Companies (GLCs) reform, or GLC Transformation 2.0, could be the most tangible opportunity for Malaysia to reinvigorate the country's economy, according to Maybank Investment Bank.
GLCs make up more than a third of the equity market and even more of the broader economy.
Maybank IB said a GLC Transformation) programme launched in 2004, introducing initiatives such as key performance indicators and board-composition reform to improve accountability and performance, led to greater scale, but not improved efficiency or shareholder returns.
It is therefore advocating a second and more aggressive transformation programme that focuses on the matching of capable, performance-linked and empowered management teams with these asset-rich but efficiency-lacking entities.
Government-linked investment companies (GLICs) such as Employee Provident Fund (EPF), Permodalan Nasional Bhd (PNB), Khazanah and The Retirement Fund Inc (KWAP) dominate the shareholder lists of these GLCs, while state oil & gas corporation Petronas, which is wholly-owned by the government, holds majority stakes in its listed downstream operations.
The research unit said GLCs are asset-rich and dominant in key economic sectors, but have broadly underperformed their non-GLC, privately-controlled sector peers based on efficiency and profitability metrics for decades.
"Given GLCs collectively account for more than a third of KLCI market capitalisation, their poor operating performance has been a key drag on overall equity market performance," Maybank IB said.
"Such GLC dominance effectively crowds out private capital, which is ceteris paribus, accepted as being more efficient, competitive and value-generative for the broad economy. In parallel, GLICs are a reliable share price support, displacing more hardnosed private sector investors and distorting capital-market signaling that is essential to optimizing capital allocation and value-creation discipline," it added.
It said should GLICs such as Khazanah and PNB begin to restructure their mostly-listed domestic investments in earnest, this would be a major catalyst for the KLCI, especially if peer funds like EPF and KWAP also follow suit and become more "activist" with regards stewardship of their investee companies, Maybank IB said.
"There would be significant value-creation potential from disposal of assets, many of which currently incur a 'GLC discount' that weigh on GLIC (government linked investment company) returns, especially if these assets come under new, private sector management.
Maybank IB said at the same time, the decline in GLIC influence on the equity market (as they steadily reallocate more of their asset under management offshore, as EPF has already done) would improve market free-float and allow for more optimal price discovery," it added.