IFR Asia Malaysia report: equities

IFR Asia Malaysia report, May 2010: Equities

The Malaysian equity capital markets have been through a period of transition, particularly for initial public offerings (IPOs). An earlier pattern – large numbers of small deals – has been replaced by a new one: less deals, raising more money.

“In the last decade or two, we have had a boom in terms of listings for second board and Mesdaq,” says Anuar Omar, Director and Head of Corporate Finance at AmInvestment Bank. Mesdaq refers to the Malaysian Exchange of Securities Dealing and Automated Quotation, launched primarily for technology companies in 1997. “But in recent years, the market moved away from the smaller second board and Mesdaq deals toward mid- and large-cap IPOs.”

This trend can have a distorting effect on the way volume and deal numbers look. “If anyone was to look backward at the number of IPOs last year it seems that we really had a bad year because the number was so much lower: only 14 IPOs, when in our heyday we had 70 or 80,” says Anuar. “But take note that in those days IPOs were dominated by small listings that now are no longer meeting the investment appetite of retail and institutional investors.” Correspondingly, the average funds raised have risen from about RM20 to RM30 million then, to RM80 to 100 million per issue now, and 2009 featured the highest volume of IPO funds raised in the last 10 years, at RM12 billion. “As this trend will continue for IPOs, we may not see as high a number of listings as in the last decades, but IPOs will be dominated by mid- to larger capitalized companies raising more sizeable funds from the market.”

The IPO pipeline is now believed to be considerable. Market talk says that around 30 IPOs were approved by the Securities Commission last year but did not go ahead because of market conditions and are, in most cases, expected to come in the near future. Tan Sri Zarinah Anwar, chairman of the Securities Commission, says that “approvals for fund-raising through IPOs and other equity exercises rose to RM28.4 billion in 2009; a five-fold increase over the previous year.”

Commentators also estimate that after new equity guidelines came into effect in August 2009, a further 25 applications have been lodged with the authorities and are pending approvals or implementation. There is, though, “a time lag for IPOs in Malaysia compared to follow-on offerings,” says Anuar. “It can take six to nine months to roll out an IPO.” Not every mooted deal will reach the market this year – some may never come, as investors are still selective – but practitioners are hopeful of at least a doubling in the number of listings in 2010 compared to 2009, and potentially as many as 40.

Other trends suggest a positive future. “Three China-based companies preferred Malaysia as a listing destination over other regional exchanges” in 2009, Zarinah says. (Sports shoe manufacturer Xingquan International became the first to do so in July 2009, followed the next month by a sports shoe soles manufacturer, Multi Sports.)

Then there was the most notable deal of the year. “Maxis Berhad’s return to the equity market also marked Malaysia’s biggest initial public offering,” at RM11.2 billion, Zarinah says. Maxis was, though, inevitably a one-off. “I don’t think you can replicate what happened last year,” says Nor Rejina Abdul Rahim, managing director for Malaysia at Nomura Asset Management. “Maxis is not something you can come up with every year.” Dato’ Charon Wardini Mokzhani, deputy chief executive officer for corporate and investment banking at CIMB group, adds: “2010 looks like a year that will have a greater number and diversity of issuers and a wider range of deal sizes. A deal on the scale of the Maxis IPO is, however, unlikely.”

At the time of writing only one major IPO had been done in 2010, for hard drive manufacturer JCY International, and even that was downsized from around RM1 billion to RM675 million. “But the pipeline is quite strong,” says Chay Wai Leong, head of RHB Investment Bank. “There are two REIT deals coming, from Sunway City and CapitaLand; CapitaLand may be slightly over a billion [ringgit].” Other IPOs in the pipeline include two subsidiaries of Petronas, Malaysia Marine & Heavy Engineering and a petrochemical business; Masterskill Education, which runs a nursing college in Kuala Lumpur; and Shin Yang Shipping, from Sarawak.

2009 was dominated by big secondary listings, most of them driven by necessity: banks needing capital, for example. Malayan Banking (Maybank) led the way with a RM6.02 billion rights issue in April 2009, the biggest ever rights issue from Malaysia. One month later Axiata Group – the rebranded Telekom Malaysia – raised RM5.25 billion. In November, Maxis launched its record-breaking RM11.2 billion IPO, and MISC, the shipping group, raised RM5.2 billion in a rights issue. There was room for one more jumbo issue before the year was out, and Malaysian Airline System provided it with a RM2.67 billion rights issue in December.

The rebound in the market has since served investors in those secondary deals extremely well: Maybank, for example, has doubled. But from a company point of view, they were giving away a lot of equity very cheaply, and the appeal of such deals quickly tailed off for those who didn’t have to do them. “There were few sizeable equity follow-on fund raising deals towards the second half of last year,” Says Anuar. “I believe a lot more companies which were planning to embark on equity fund raising since last year or the beginning of this year will come to the market this year. Now the equity market has come back and share prices have moved up, they will look at equity fund raising again.”

He cites the example of property companies, who last year were often trading below their own net assets. “It would not have been worth it for them to undertake fund raising last year. But market conditions have improved this year and most counters are no longer trading below their desired levels. Today a lot of projects are coming up, exports and GDP growth are rising, so they know that if they raise funds today they will be able to use them to enhance their earnings.”

Another prompt for secondary activity would be if M&A activity increases, as many expect it to do. “Last year valuations were relatively low, but not all companies could raise funding for M&A because of the weak credit appetite at lenders as well as low equity prices for share swap transactions,” says Anuar. “Increasingly this year M&A can be funded by borrowing given the better credit appetite.” Listed companies will also have the option to fund their M&A, or refinance borrowings for M&A, through equity fund raising. Chay at RHB is looking at a similar trend. “There is plenty that is exciting in M&A, which could lead to more fundraising,” he says.

Also, the news that Khazanah, the investment arm of Malaysia and the closest thing the country has to a sovereign wealth fund, is to divest its 32% stake in Pos Malaysia raises the prospect of more selldowns into the market to improve trading liquidity. “Najib announced they are selling their stake in Pos Malaysia all together – not just a dilution,” Anuar says. “That’s a clear signal.”

The equity markets have experienced considerable regulatory change in the last 12 months. One example is that a previous guideline for new issues on the main market, requiring issuers to be generating at least RM30 million profit after tax for the past three to five years, has been reduced to RM20 million.

Additionally, a long-standing requirement that 30% of a new listing be allocated to Bumiputras, or ethnic Malays, has also been axed as part of a broader shift in Malaysia’s iconic New Economic Policy, an affirmative action policy dating from the 1960s. There is still a requirement that part of the public spread by offered to Bumiputras, but if they don’t take it up, it goes back into the pot; capital markets practitioners have welcomed the change. “This liberalization has helped us greatly,” Anuar says. “The new guidelines give certainty of completion of the IPO once the issuers decide to launch the public offerings.”

Apart from being easier for bookrunners, it may attract new listings from companies who would otherwise have been perturbed from listing because they knew they would have to give up partial ownership of their company under onerous conditions that may not suit them. It also means secondary offerings are possible without having to top up the percentage held by Bumiputras. “I believe a lot of people will want to go for a listing as the uncertainty whether Bumiputera investors will subscribe to their offerings, as in the past, has been removed,” says Anuar.

One troubling element of the Malaysian stock market is the apparent withdrawal of foreigners, who constitute a much lower proportion of the market than they used to. In 2008 42% of the market was held by foreigners; in 2009 it dropped to 27%, and has stayed around that level since. Most left not at the time of the financial crisis, but after the general election results of March 2008. Consequently, Malaysia’s markets were less badly hit in the financial crisis; the major local funds, like the EPF and PNB, were chiefly invested locally and didn’t sell down in the crisis.

 “Foreign participation is dependent on how our market is perceived based on a variety of socio-political and economic factors, compared with other emerging markets in this region,” says Dato’ Yusli Mohamed Yusoff, CEO of Bursa Malaysia.

 “I believe the foreigners will be back,” says Anuar. Mokhzani at CIMB adds: “We are optimistic about this recovery as recent government policy announcements ought to make the Malaysian market more attractive,” particularly the New Economic Model (see economy chapter) and renewed focus on the private sector as a driver for growth. “We believe that the market will gain ground in the coming months as investors come to recognize the significance of these transformational policies.”

Raja Teh Mainmuah, who heads Islamic markets at Bursa Malaysia, says attracting international capital is happening across the capital markets, including in the development of Bursa products. “We’re working on things that would attract global investors, like ETFs that will cover other stocks, not just Malaysian but regional,” she says. “That will make it easier for Islamic fund managers.”

Coaxing foreigners back may require greater confidence in Malaysia’s political and social environment, but in any event the improved economy is likely to help. “And now the ringgit is strengthening, the trend on foreign inflows is likely to change,” says Anuar.

BOX: What’s new at Bursa?

Bursa Malaysia endured a trying financial crisis as all exchanges did, but has rebounded dramatically since. The KLCI index gained 45% over 2009, and at the time of writing was up 59% from its April 2009 low. With activity low, and only 14 IPOs in 2009, Dato’ Yusli Mohamed Yusoff, CEO, says Bursa Malaysia “used this period for capacity building for when market recovery occurs. Our focus was on enhancing infrastructure and out ongoing efforts to enhance liquidity in the market.”

This has included merging the main and second boards into a single main market, and introducing a new ACE market. The exchange also revamped its benchmark along FTSE methodology, and introduced direct market access for equities in November. Other innovations have included the introduction of minimum bid sizes, market making guidelines for structured warrants and exchange traded funds, and the development of a range of REIT and ETF products. “For 2010, we will continue to work on product diversity, greater liquidity, enhanced quality and better efficiency in the market,” Yusli says. “We look forward to more big corporate activity such as M&A, and larger listings in Malaysia. The privatization of certain government assets may contribute towards the latter development, which could also lead to more listings.”

Another innovation has been the listing of sukuk on Bursa Malaysia, which began in August 2009 with an initial flurry of 12 listings by the end of the year, worth US$17.6 billion – already a world leader in terms of listed sukuk programmes. “The whole idea behind it is to enhance transparency and governance,” says Raja Teh Maimunah, global head of Islamic markets at Bursa. “We are the second largest bond market in the region ex-Japan after Korea, and 60% of the corporate paper is sukuk. So to strengthen the market even further, we want to ensure we provide investors with information.” Sukuk list on an exempt basis and do not trade – that is still done over the counter – but by meeting the requirements of listing, sukuk provide greater transparency and also win trust. “By coming to list you are offering yourself to be regulated,” says Raja. “It enhances your profile and it becomes easier to facilitate distribution, even though you don’t trade on the exchange. A lot of pension funds we know require sukuks to be listed – because if it’s listed, somebody else is doing the policing.”

Once that’s done, she would like to see an exchange-traded sukuk framework, “to allow retail investors access to a market that is otherwise predominantly institutional and to facilitate investors diversifying their investment portfolio.”