IFR Asia: Can Malaysia digest two of the region’s biggest IPOs?

IFR Asia, June 2012

Malaysia finds itself hosting two of the biggest IPOs for the region this year, and is doing so almost simultaneously. Is this a sign of Bursa Malaysia reaching a level of increased depth and sophistication? Or should we expect indigestion?

The two deals in question are Felda Global Ventures, whose potentially US$3 billion IPO was being examined by investors at the time of writing, and Parkway Pantai, also known as Integrated Healthcare Holdings, whose deal is expected to be worth around US$2 billion with a listing in July. Between them, they represent two of only three jumbo deals underway in the whole region (the other being Formula 1 in Singapore), with no other obvious candidates in the pipeline. How has it come about that Malaysia is supporting the IPO calendar for the entire region?

“If you look at all the IPO markets across Asia, the most successful in terms of aftermarket performance is Malaysia,” says one regional investment banking head. (Since the two deals between them involve a wide range of international and local banks, interviewees could not be quoted on the record for regulatory reasons.) “If you go back to last year and look at Bumi Armada or Malaysian Sugar (MSM), they were a lot more successful in generating returns for IPO investors than any other market in Asia.”

Why is that? Another regional banker puts it down to the high proportion of domestic investors in the local market. “Roughly 60 to 70% in Malaysia today is domestic demand,” he says. “Even foreign institutions like us deal mostly with domestic accounts rather than foreign ones. These guys have much less concern about what is happening in Greece and France than what is happening in the domestic market.” That makes Malaysia somewhat insulated from global shocks, at least in terms of getting new deals away.

It helps that there is a solid amount of institutional liquidity domestically in Malaysia, most obviously from the Employee Provident Fund (EPF), one of the region’s most prominent investors and – despite changes in mandate to go more international – still an overwhelmingly domestic one in its equity holdings. “There is a lot of trapped liquidity, really, so you’re not relying on the regional portfolio managers but the home market,” says a banker. “There is a lot of comfort around it.”

So these are the reasons we see two such landmarks in Malaysia. At the time of writing, Felda Global Ventures, which was the more advanced of the two deals, appeared to be proceeding well. Having given around one third of the IPO shares to cornerstone investors believed to include a Middle East sovereign wealth fund, Fidelity, high net worth investors and an insurer, there was instead concern about other investors being able to get the allocation they seek. That is exacerbated by some of the peculiarities of Malaysian investment: 11.5% of the company capital will be reserved for Bumiputera investors, 7.5% for Malaysian retail, and 12% for the states within Malaysia where Felda’s plantations are based. CIMB, Maybank and Morgan Stanley are joint global co-ordinators on the IPO, and joint bookrunners with Deutsche Bank and JP Morgan.

Felda’s road to market has not been entirely smooth. Initially, the listed vehicle was intended to include some assets from a settlers’ co-operative called Koperasi Permodalan Felda (KPF), but that was derailed by an injection from a group of settlers which stopped KPF’s shareholders being able to vote on the plan. Then, a new structure was offered, with FGV as a holding company listing its 49% stake in subsidiary Felda Holdings, and the remainder being under control of KPF. Then, KPF did hold its shareholder vote, overturned the injunction, and voted in approval for the original plan. Further negotiations followed before the deal was eventually offered to investors, largely in its original form.

Next up will be Integrated Healthcare Holdings, likely to list under the name Parkway Pantai in both Kuala Lumpur and Singapore, and expected to raise up to US$2 billion. This deal is not yet on the road but those close to it continue to expect it to appear by July. The seller is Khazanah, the investment arm of the Malaysian state; that name always helps a new issue get away.

Bookrunners have been appointed on the deal. Bank of America Merrill Lynch, CIMB and Deutsche Bank are joint global coordinators, with Credit Suisse, DBS and Goldman Sachs joint bookrunners. Since the initial allocation of mandates, Maybank has been added as a joint bookrunner on the Bumiputera and Malaysian retail tranches of the deal.

Local bankers do not appear to fear indigestion or a lack of capacity in the market. Liquidity, says one banker, “is not a problem at all. You could do four more like this at the right valuations with the right story. Liquidity is not a constraint right now.”

In the background of these deals, which will be closely watched and whose performance will have an impact on other IPOs around the region, is the pending general election. The election is due in early 2013 but could potentially take place earlier, and there is a sense that these deals must be done swiftly just in case there is any significant change that removes support for state divestments.

This is the first ever election in Malaysia where there is a reasonable chance of a change of government; the previous election, in 2008, delivered one third of the votes and five out of 13 states to the coalition opposition, an extraordinary development in what had previously effectively been a one-party state. The prospect of democratic change is a healthy social development for Malaysia, but for markets, introduces a degree of uncertainty.

Analysts are pondering what impact the election will have on markets. Writing in March, Nomura analyst Wai Kee Choong said the house was maintaining a base-case assumption that the ruling government would win the election, but added: “The risk, arising from an estimated 30% increase in the number of voters, is recognizably higher this time around. The equity risk premium could rise substantially in the run-up to the elections, as was the case in 2008, resulting in a much weaker market.” Choong adds: “We view our base case to be irrelevant to a certain extent; what matters is how the market perceives the election outcome will be, and due to the new voters, that is anything but predictable.” (The increase in voters he is talking about combines a large number of new registered voters, and an expectation that people who were registered to vote but did not last time around could be motivated to vote in what is expected to be a closer election than previous ones.)

It is worth looking at 2008 in some detail – although then, as now, the global macro picture was not especially helpful. From trough to peak, there was a 303bp surge in the risk premium three months before the elections, resulting in a 23% plunge in the KLCI stock market index. Some of that can be attributed to global markets, but not all; the Hang Seng fell 15% and the S&P500 9% during the same period. Also, with the market trading at about 14 times earnings as of May, it is not especially cheap and has room to fall.

A similar pre-election fall in markets would not be welcome, especially since Malaysia is battling a difficult external environment which will inevitably hit its exports. The broader economy is in decent shape, if not shooting the lights out; real GDP growth was 4.8% in the first quarter of 2012 and 5.1% for the whole of 2012; Nomura expects 4.4% growth in 2012 and 4.3% in 2013, driven by expected EPS growth of about 5%. But as we have seen this year with China, high economic growth figures do not translate into stock market performance if there is an underlying doubt about some facet of the economy or the political system.

In truth, though, Anwar Ibrahim’s coalition is not anti-business, nor even particularly anti-investment, but has instead built a platform around the transparency and probity of deals like that. As is often the case with elections, the outcome is not particularly bad news for markets either way; it’s the uncertainty along the way that causes the problems. That being the case, these jumbos IPOs, while positive, could be the last we see from Malaysia until we know who the election winner is.