20 February 20007
By Kathy Fong
KUALA LUMPUR: In the past, companies with huge cash piles were usually perceived as good and prudent. But with investors becoming more discerning, they are no longer impressed when large cash reserves are left idle for too long. They want efficient capital management.
"Earning profits is not good enough," said a merchant banker. "Management needs to make their companies' capital work hard to boost earnings rather than just yielding interest income from the banks." Some top management executives are under mounting pressure when cash piles grow fast without investment plans in store.
This explains why some companies have been generous in declaring dividends post-Asian financial crisis. Also, capital repayment has become more common recently. Dividend yield in the Malaysian market was one of the highest in the region before the start of the current bull run.
For example, Carlsberg Brewery Malaysia Bhd has been paying dividends that were higher than its earnings per share since 2002 to trim its net cash position. The merchant banker said the low interest rates for bank deposits also discouraged companies from keeping large cash reserves.
Furthermore, there were now more avenues for companies to raise funds, he added. Companies that have made capital repayments include gaming firm Berjaya Sports Toto Bhd (BToto), cement maker Lafarge Malayan Cement Bhd and toll-road operator Lingkaran Trans Kota Holdings Bhd.
BToto is expected to have another round of capital repayment later this year. Companies with a steady cashflow from operations, no urgent need for heavy capital expenditure and little borrowings stand a good chance of making capital repayments. They also can afford to pay generous dividends.
Companies that meet these criteria include Uchi Technologies Bhd, Hai-O Enterprise Bhd, Sime UEP Bhd, LPI Capital Bhd and Fraser & Neave Holdings Bhd.
Petronas Gas Bhd (PGas), Magnum Corp Bhd and Malaysian Bulk Carriers Bhd are cash-rich too; as are the telecommunication companies (telcos). "Telcos in Malaysia are in a position to pay higher dividends, given their strong cashflows and minimal capital expenditure. This is happening in Singapore," said RHB Securities analyst Clare Chin. DiGi.Com Bhd, for example, declared a dividend per share of RM1.11 plus two rounds of capital repayments to return RM1.35 per share to stakeholders last year.
PGas has a cash pile of over RM1bil. Analysts, however, find that the likelihood of it returning the excess cash to shareholders is quite low in the near future because the energy group needs cash for investments. But they do not rule out the possibility in the long term. "PGas is in a capital-intensive industry. It is always better to keep a cash pile in case investment opportunities arise," said an analyst.
When it comes to deciding between paying a dividend and making a capital repayment, merchant bankers said it depended on the companies' tax credit, earnings trend and balance sheet.
A capital repayment is tax-free for the company, whereas dividends are subject to an income tax of 28%. "There are many ways that companies could make a capital repayment, including through share premiums and retained earnings," said the merchant banker. Analysts said capital repayment would directly help lift return on equity by reducing the share capital.