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First Pacific CEO and Managing Director Manuel V. Pangilinan, left, and Chairman Anthoni Salim. Investors are urging the executives to dispose of underperforming assets and buy back shares.
Company in focus

Investors press Indonesian conglomerate Salim's holding company to sell assets

As stock price discount widens over 50%, First Pacific struggles to rationalize

KENJI KAWASE, Nikkei Asian Review chief business news correspondent

HONG KONG/TOKYO -- From consumer goods to telecommunications and infrastructure to natural resources, Indonesia's Salim Group has demonstrated its dominant and influential position in Southeast Asia. In addition to its origin in Indonesia and its solid base in the Philippines, the conglomerate's businesses span across one of the fastest growing regions in the world.

Under the wing of Salim Group's Hong Kong-listed investment holding company First Pacific, it controls PLDT, the largest telecom carrier in the Philippines, and Indofood Sukses Makmur, the largest instant-noodle producer in the world, among other companies. First Pacific was established nearly four decades ago by Liem Sioe Liong, the powerful founder of the Indonesian group.

In 2017, First Pacific posted a 17% year-over-year increase in net profit to $120.9 million, 13% growth in recurring profit of $300 million, and an annual dividend of 13.5 Hong Kong cents per share, keeping its 25% payout ratio to its recurring profit, a promise which the company has pledged to shareholders since 2010.

First Pacific's management team has stressed the company's efforts in managing a balanced portfolio, with attention on fast-growing Asia and standing on four pillars of investments: telecom, infrastructure, consumer products and natural resources.

The company has been delivering returns in terms of dividends, while preparing itself for further investment in value-enhancing businesses and considering the sale of its underperforming assets.

While the company says it is working to address investors' concerns, the stock market has rejected those moves.

First Pacific has been under prolonged selling pressure. Its stock price dipped to HK$4 on April 16, a 67% dip from its most-recent high of HK$12.14 in May 2013.

The benchmark Hang Seng index -- of which the company was once a constituent -- has shot up by nearly 30% over the same period, and along the way reaching an all-time high this past January.

The discount versus the adjusted net asset value that First Pacific discloses on a year-end basis is now over 50%, which means the current stock price of the company is less than half of the total market value of the companies it its portfolio. The last time it breached 50% was when the company was crawling back from the global financial crisis in 2008-09.

Christopher Young, chief financial officer and one of three executive directors at First Pacific, says the main culprit for its undervaluation is the stagnant performance of PLDT, in which First Pacific has a 25.6% stake, as the Philippine company struggles to adjust from analog to digital and from voice to data, like many of its global peers.

"I think the market is still coming to terms with that -- still somewhat concerned about PLDT," Young told the Nikkei Asian Review in an interview.

He pointed to the fact that First Pacific is no longer relying on PLDT alone. The telecom carrier had contributed more than 60% to First Pacific's total recurring profit before head-office expenses until 2009, but that figure was down to 30% last year. That compares with 42% from the food and consumer sector, led by Indofood, and 26% from infrastructure, mainly from its Philippine unit Metro Pacific Investments.

"What we are trying to communicate with potential investors is that we now have three strong contributors," Young said, although its fourth pillar, the natural resource business, is still lagging behind.

PLDT's contribution to recurring profit "will improve in 2018 and beyond," according to the company's guidance, and he expects revenue in data, broadband, and home and enterprise businesses to grow.

PLDT has moved to unload assets as it bankrolls a record capital expenditure and better compete against Singapore Telecommunications-backed Globe Telecom. (Photo by Akira Kodaka)

PLDT may just be part of the picture.

Jonathan Galligan, head of Asian gaming and conglomerates research at CLSA, points to other reasons. "They made a number of acquisitions in the past four to five years which resulted in their balance sheet being very stretched," he said. The problem, he added, is that "those acquisitions have not been proven to be high quality."

The total assets of First Pacific surpassed $20 billion for the first time in 2017, a 62% increase from 2011, when both net profit and recurring profit peaked. During that same period, its consolidated net debt ballooned by 3.2 times to $5.73 billion at the end of last year, while net profit and recurring profit dropped by 79% and 29%, respectively.

While Metro Pacific expanded its recurring profit contribution to the group by 73% in six years to $118.3 million in 2017, other major companies' contributions to recurring profit have either dropped or turned negative, including PLDT, Indofood and other new acquisitions. An exception is Goodman Fielder, an Australia-based food company in which First Pacific acquired a 50% stake in 2015, which made a $30 million contribution in 2017, more than doubling from $13.3 million in 2015.

Galligan said, "First Pacific has suffered from a perfect storm, with its core assets underperforming and new investments not performing."

For a long-term shareholder like Patrick Millecam, managing director and chief investment officer of Value Square, the company's problems stem from a wrong acquisition funded in a wrong way.

"The management made a mistake in 2013 by buying into a Singapore-based power plant [and] financed this by a capital increase," the Belgium-based value investor told Nikkei, referring to the acquisition of 70% of PLP, a power plant on the city-state's Jurong Island, for $550 million and a rights offering the same year that raised over $500 million. "Since then, the share price has seriously underperformed the general stock market evolution," Millecam said.

What Galligan, Millecam and other observers and stakeholders are calling for is First Pacific to dispose of underperforming assets and use the proceeds to lower its debt and buyback its own undervalued shares. The management is keenly aware of that, given the market's tough reaction.

"Shares at the moment represent a fantastic opportunity for the company to enhance the value overall," said Robert Nicholson, an executive director, on a conference call with investors on March 20. "It's simply good time to buy back shares."

Manuel V. Pangilinan, managing director and CEO, echoed that view during the same call, saying "the best way to approach is by asset disposal and not by incremental disposal of key assets."

Anthoni Salim assumed the chairmanship of First Pacific in 2003. (Photo by Ken Kobayashi)

Pangilinan, the right-hand man to Chairman Anthoni Salim, stressed that the company's core assets -- Indofood, PLDT and Metro Pacific -- will not be touched, but that means "the rest of the portfolio are available for sale if we could do so."

It is not the first time First Pacific has been pushed by market pressure into slimming down, during the ebbs and flows of expansion and consolidation since its inception.

The precursor of the company was established in 1981 by Liem Sioe Liong, Anthoni Salim's father and the founder of the powerful Indonesian business empire, Salim Group.

Taking over a dormant company -- Shanghai Land Investment, a major British real-estate company incorporated in 1888 -- and later renaming and consolidating it into a single entity in 1988, First Pacific aspired to be "an Asian-based multinational investment and management company," according to a note in the annual report that year by Pangilinan.

Sudono Salim, as Liem was also known, established this alternative investment channel outside of Indonesia to expand its business beyond his home turf, while as Richard Borsuk and Nancy Chng wrote in their 2014 biography, "Liem Sioe Liong's Salim Group: The Business Pillar of Suharto's Indonesia," this "looked like a kind of insurance policy for when Suharto was no longer president."

Liem, who died in 2012, was widely acknowledged for his closeness to the former president who stepped down in 1998 amid the turmoil of the Asian financial crisis after more than three decades of iron-fisted rule.

Manuel V. Pangilinan stressed that the company's core assets -- Indofood, PLDT and Metro Pacific -- will not be touched.   © Reuters

But the company had stretched its balance sheet by the time when the economic storm swept across the region. The market punished First Pacific in 1997 by slashing its market cap 63%, which prompted the management into making substantial asset sales. The long list of disposals included Indonesian-origin Dutch trading house Hagemeyer, its flagship Thai consumer-products company Berli Jucker, a stake in property manager Savills, banks and more. Sudono stepped down and Pangilinan took over as chairman in February 1999.

During the grueling process of downsizing, First Pacific lost its Hong Kong blue chip status after it was delisted from the Hang Seng Index in 2001, while its share price dipped to all-time low of HK$0.69 in 2002. By the end of 2003, the total value of its assets were cut to $2.2 billion, less than a fifth of what they were in 1997, and its consolidated net debt fell to $907 million from almost $3 billion.

First Pacific initially acquired a stake in PLDT and Indofood, which have been steady cash cows for two decades, in 1998 and 1999, respectively. First Pacific's strategy was recalibrated and its resources reallocated with a clear concentration on telecom and consumer-food products, while it restructured its infrastructure business, with a geographic focus in the Philippines and Indonesia.

Anthoni Salim, in his first letter to shareholders in the 2003 annual report after assuming the chairmanship in June of that year, said he was "pleased" to present "a year of substantial progress and achievement." He also proclaimed that the company was prepared for "surprising the market by making intelligent investments into undervalued assets and via our direct and proactive management, improving them to where significant shareholder value can be realized."

Fifteen years later, the company is again facing the prospect of downsizing. Along with the individual group companies, what is at stake is the balance sheet of the holding company itself. Its latest net gearing -- a ratio of net debt to total equity -- is now up to an all-time high of 0.83 times, and the net debt level stands at $1.52 billion.

Indofood's instant noodles under the Indomie brand are displayed at a food stall in Jakarta. (Photo by Keiichiro Asahara)

Even though company executives have identified the challenges, Galligan of CLSA said, "my view is that they have a stretched balance sheet and no financial fire power left to defend their valuation."

Millecam of Value Square points to a lack of speed, given that the company's management has been talking about asset disposal since last summer. "Until today, no sale has materialized," he said. "And some shareholders are clearly losing their patience."

Nicholson, the First Pacific executive director, told investors on the March conference call that "certainly within this year, we have to turn in something that will address our objectives." A few days later, Young told Nikkei that "the process is underway," and if the asset-disposal moves along as planned, the net debt level will be cut by over a third to "below $1 billion," without specifying a time frame.

To shore up its balance sheet, PLDT has moved to unload assets as it bankrolls a record capital expenditure and better compete against Singapore Telecommunications-backed Globe Telecom. PLDT is also under threat of the potential entry of China Telecom as the third carrier in the Philippines.

On Monday, PLDT said it had committed to sell back 6.8 million shares to Rocket Internet, the German e-commerce company in which it invested in 2014. The shares represent 67.4% of PLDT's total stake in Rocket, which currently stands at 6.1%.

Christopher Young, chief financial officer of First Pacific, says the main culprit for the company's undervaluation is the stagnant performance of PLDT. (Photo by Kenji Kawase)

Just as the management did under the much bigger threat during the Asian financial crisis, investors are waiting for real action.

"We keep on being invested as long as we see upside potential," said Millecam, who has been investing in First Pacific for eight years and increasing Value Square's stake along the way. "We think the three main businesses have good long-term potential growth possibilities, in two countries Indonesia and the Philippines [with high growth projections]."

The market is watching closely to see whether First Pacific will be able to deliver on its pledges again this time.

"Buyer comes along, we sell our assets -- this is not true at all," said Pangilinan, who blazed through the financial crisis as managing director and later as chairman, stressing to investors at the March conference call that the company takes an active rather than passive approach. "The management is not in a relaxed position."

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