UEM purchase stirs up fears in Malaysia stock market

UEM purchase stirs up fears in Malaysia stock market

By Christina Toh-Pantin

KUALA LUMPUR (Reuters): Foreign investors seeking an imminent
return to the Malaysian stock market may have heard a warning
shot this week, analysts said yesterday.

In a stunning announcement, infrastructure firm United
Engineers (M) Bhd (UEM), one of a handful of blue chips favored
by foreign investors for predictable cash flows, said it had
bought a 32.6 percent stake in debt-laden affiliate Renong Bhd
for 2.34 billion ringgit ($692 million).

UEM said it had borrowed funds for the purchase, which it
called an investment in a conglomerate "at an attractive price".

"We're seeing a seminal event in Malaysia's stock market
history," said an equity analyst with a foreign brokerage firm.
"You have a tremendous dilemma of whether to invest in Malaysia."

He said investors had focused on companies with "good
business, reasonable cash flows, reasonable balance sheets", but
now even those candidates could be "stuffed with someone else's
mistakes".

The news dragged down the stock market yesterday and capped a
week of rumors involving UEM, which built the mammoth North-South
expressway and operates its tolls.

At midday, the Kuala Lumpur Stock Exchange's Composite Index
of 100 key stocks was down 41.52 points, or 6.22 percent, to
625.77 -- its lowest level in more than four years.

UEM's shares, which make up about four percent of the index's
weighting, fell 29.9 percent to 4.38 ringgit.

Investors had suspected something was in store and sold UEM's
shares last week.

But speculation had centered on the possibility UEM would take
over the railway or telecommunications activities of Renong,
which owns 38 percent of UEM.

Analysts and fund managers said UEM's surprise purchase of the
stake would help Renong, which has had to borrow funds for
projects including a rail system.

Renong executive chairman Halim Saad is one of the country's
wealthiest and most successful businessmen. Renong was the main
business vehicle of the dominant United Malays National
Organization (UMNO) political party until it was privatized
several years ago.

The group is involved in engineering, construction,
infrastructure, tolls, financial services, telecommunications,
hotel and property development, oil and gas services, as well as
transportation and haulage services.

Neither Halim nor officials at UEM and Renong were available
for comment.

At least two research firms who declined to be identified said
they had downgraded their ratings on UEM to sell from buy.

The move "is seen as a bailout for large Renong shareholders",
said Inter-Pacific Capital Sdn Bhd in a report issued on Tuesday.

Halim owned over 20 percent of Renong, and if a proposed share
buyback by Renong is completed, the aggregate holdings of the
executive and affiliate company Time Engineering Bhd will rise to
47.1 percent from 42.4 percent.

UEM's borrowing of 2.34 billion ringgit to buy shares "of a
debt-ridden company at the time when interest rates are rising is
unquestionably a witless investment move", Inter-Pacific said. It
estimated Renong has at least three billion ringgit in debt.

UEM said the government had waived a requirement that would
have forced UEM to offer to buy up all remaining Renong shares.

"I suppose this represents all the bad things Asia has been
accused of in the past, like a lack of rectitude towards outside
shareholders," said Hugh Young, managing director at Aberdeen
Asset Management.
($1=3.38 ringgit)