Khazana entry an all-round boost as net foreign inflow tops Rs. 17 b

The entry in to Sri Lanka by Malaysia’s sovereign wealth fund Khazanah Nasional Berhad via John Keells Holdings (JKH) is being hailed as a all round boost for the country, the Colombo stock market as well as the premier blue chip.

JKH which has many first to its credit is also the first stock on the Colombo Bourse to draw interest from a sovereign fund. Khazanah on Friday via its Special Purpose Vehicle (SPV) Broga Hill Investments Ltd., acquired an 8.85% stake in JKH for Rs. 14.5 billion. Of the stake, EPF sold 8.4% stake for Rs. 13.7 billion and the rest it collected from the market.

 “Khazanah is a long term player and its entry and the mega investment is a vote of confidence on Sri Lanka, CSE and JKH,” analysts said. Khazanah, is estimated to be managing over $ 36 billion in assets. Among its investments are Malaysia’s telecom firm Axiata as well as financial services giant CMIB Group, which incidentally tied up with John Keells Stock Brokers. The Friday’s investment in JKH and the CIMB tie up aren’t related.

In a statement following the investment Khazanah’s Managing Director, Tan Sri Dato’ Azman Haji Mokhtar said: “The entry into JKH offers Khazanah and its group of companies opportunities to participate across a wide range of businesses where the JKH group is involved in.”

At the same time, it allows Khazanah to participate in Sri Lanka’s positive growth story, and is in line with our strategy of investing in the region.”

It also said Sri Lanka has already been a positive experience for Khazanah’s investee companies. Axiata’s subsidiary, Dialog, is the largest mobile telephony player in Sri Lanka, while CIMB Group has established an investment banking joint venture in the country.

“Sri Lanka is currently experiencing a strong economic revival post-conflict as evidenced by recent economic growth of about 8% per annum,” the Khazana’s statement added. Central Bank last week however downgraded 2012 GDP growth forecast to 7.2%.

Analysts said that entry of Khazanah could also trigger interest by Singapore Government investment firm Temasek. There was talk that Temasek was originally keen to buy a big block in JKH but following the introduction of the Revival or Expropriation Bill, it backed out.

The investment by Khazanah saw the year to date net foreign inflow top Rs. 17 billion mark. This has boosted sentiments of broker who viewed it as a major plus for Colombo Bourse reversing fortunes after suffering net outflow between 2009 and 2011. The year to date net inflow of $ 146 million is almost close to $ 168 million net outflow figure of 2011 whilst in 2010 it was $ 240 million.

 “We strongly believe that if the market can witness massive foreign inflows, the much expected Bull Run could easily be achieved in near future,” Asia Wealth Management said. Apart from bringing in much needed dollar inflow to the economy, Asia Wealth put Khazanah’s investment in context saying it took place despite the adversities in the current economic sphere and negative ambiance placed over human rights issues by UN Human Rights Council.

There was speculation that Khazanah could be having an appetite for more of JKH but couldn’t be confirmed.

Some expressed concerns over EPF’s sell out. “EPF may have booked hefty capital gains and the sale has brought in much needed foreign funds but when a foreign fun exits usually EPF or some other local fund buys back at a premium which ultimately results in outflow,” they added. However other analysts dismissed this view as subjective and not the case always.

Whilst the foreign interest is a major boost, Colombo Bourse continues to struggle with year to date negative return remaining at 10% level. After being world’s most consistent best performer for 2009 and 2010, CSE is currently the worst performer. On the other hand the MSCI’s Asia Pacific index excluding Japan has so far gained by over 13%.

Reuters quoting unnamed analysts reported on Friday that foreign investors still see the market as overheated, and have also been discouraged from investing by lack of liquidity, insider trading, and market manipulation, mainly driven by local retail investors.

DNH Financial said on dollar terms Colombo was the worst performer down 19% year to date. However it emphasised there still remains strong opportunity.

“Despite the country’s robust macro-economics, it is very disappointing to note that the Sri Lanka bourse has significantly underperformed all global markets this year and is currently the worst performing equity market in the world, down 19%YTD in dollar terms,” DNH said.

“While most market commentators have cited no credible reason for the market’s decline, we believe that it is purely a matter of negative sentiment that has stifled investment flows into the bourse over the last couple of months, while in contrast, foreign investors have been cherry picking investments in blue chip counters. Consequently, we believe the biggest risk to the bourse now is not one of fundamentals but that of negative sentiment that is denting performance and barring the market from re-rating to higher levels,” DNH stressed.

Khazanah is the strategic investment fund of the Government of Malaysia entrusted to hold and manage the commercial assets of the Government and to undertake strategic investments. Khazanah is involved in various sectors such as power, telecommunications, banking, airport management, infrastructure, property development, broadcasting, semiconductor, steel production, electronics, investment holding, technology and venture capital. Some of the key listed companies in Khazanah’s investment portfolio include Telekom Malaysia Berhad, Tenaga Nasional Berhad, CIMB Group, Malaysia Airlines System Berhad, Malaysia Airport Holdings Berhad, UEM Land Holdings Berhad, Axiata Group Berhad and Time dotCom Berhad.

Khazanah made a total of 13 investments amounting to RM5.8 billion (Rs. 238 billion) in 2011 and eight divestments that brought in proceeds of RM7.7 billion, generating gains amounting to RM2.0 billion. In total between 2004 and 2011, Khazanah has made 89 investments worth RM45.5 billion and 45 divestments valued at RM31.7 billion, recording gains on divestments of RM13.6 billion. One Malaysian Ringgit is Rs. 41.

The JKH group has business interests in several key sectors of the Sri Lankan economy including tourism, transportation, leisure and tourism, property, retail and financial services.