Over the past four decades, the Malaysian economy has successfully diversified from dependence on tin and rubber to manufactured exports, which now account for 82% of exports. Electrical goods and electronics make up half that figure. However, the importance of the commodities sector within broader capital markets is greater than meets the eye. For example, there are significant non-listed plantation assets in Malaysia (including several government-related ones, eg, Felda), not to mention the big share of those in Indonesia. And hypothetically, listing Petronas at a forward PE of 15x and assuming 15% earnings growth would create an entity with a market cap of US$207bn (RM754bn).
That would almost double the size of the Malaysian market (around RM890bn). There are several positives that would emerge, including immediate inflows of funds to the government and a catapulting of Malaysia’s market standing in the region. However, political considerations are a significant stumbling block to this scenario and currently, there is no real incentive because Petronas does not need the cash. The outlook for palm oil prices has never been better, with an expected surge in biodiesel demand around the world and particularly in China and India. Malaysia is still the world’s largest palm-oil exporter and its importance is magnified when you consider that Malaysian plantation companies control an estimated 25% of Indonesia’s industry.
Malaysia has significant overseas holdings of oil and gas reserves via Petronas, effectively almost doubling the country’s net oil exports. The oil factor is augmented by the string links with the Middle East and the increasing flows of capital from the region. Malaysian companies such as MMC and Malakoff have won contracts in Saudi Arabia. In turn, Saudi and Kuwaiti banks are expanding their presence in the Malaysian market.
If oil remains in the $50-$70 a barrel range, the initial flow of Middle Eastern money into Malaysia could turn into a big wave as the market gains recognition and other property markets in the region get too expensive. Other investments for big ticket investors could be infrastructure and big-scale developments like UEM World’s Nusajaya South Johor Economic Region.