Mainstream
Injecting life into new listings
Cheah Chor Sooi 
Wegmans Holdings’ listing ceremony on March 6 was attended by (from left) director Maziah Md Yamin, executive director Collin Law Kok Lim, managing director Keh Wee Kiet, chairman Chan Wan Seong and director Chan Foong Ping
advertisement[x]

MANY newly-listed companies have made lukewarm debuts on Bursa Malaysia as their initial public offering (IPO) prices are deemed unattractive to investors.

There is little premium for investors given that the IPO pricing is being fixed close to market price.

Mark-to-market is an accounting method that records the value of an asset according to its current market price.

Such a negative development is made worse by the current volatile market environment that provides a shot of uncertainty.

Investors may also not be keen to park their money in new listings, given the negative market sentiments.

Recent global events such as possible trade wars between major economies have shaken the confidence of both institutional and retail investors.

Generally, the price of IPOs is derived from their respective valuations which are not limited to the price-to-earnings ratio of companies, according to JF Apex Securities Research senior analyst Lee Cherng Wee.

 

Long-term values

Although some companies may choose to reduce their IPO prices to counter the effects of market volatility, they should factor in their long-term values instead of slashing their IPO pricing every time the market heads south.

Lee gave the example of Lotte Chemical Titan Holding Bhd which priced its shares at RM6.50 each last July - sharply lower than what the Bursa Malaysia Main Market-bound company had originally hoped for - amid a tepid response from investors.

The company had earlier reduced the size of its IPO by almost a quarter to 524.22 million shares from the original 684.7 million.

He tells FocusM: “Generally, there is limited downside to penny stocks during a volatile market situation.

“[For stocks that are perceived to be pricey], the issuer can perhaps consider issuing more shares to lower its price.”

Another option to stem a volatile market situation is for an issuer to contemplate holding back the IPO exercise by opting for bank loans as a source of funding, suggests Lee.

A local fund manager concurs that the attractiveness of upcoming IPOs in terms of pricing and valuations could be affected in the event of market correction.

“In general, companies bound for listing are priced relative to their peers in the sector. The market had a good run up to the end of last year with many companies trading at high valuations.

“Such valuations of IPOs, at which the offer was made public, are also likely to be higher when compared to the current market environment,” he says.

Under such circumstances, if the market continues to be in correction mode, companies that are bound for listing could trade below their issue/offer price when making their debut on the exchange.

However, companies with justified valuations and a sound or unique business model should stay strong and see buying.

“Perhaps, investors hoping to get into IPOs should wait and see how the stock reacts upon listing, which may allow them to buy in at more attractive valuations,” reckons the fund manager.

To date, six IPOs have been listed on the local bourse. On Jan 8, ACE Market-bound Binasat Communications Bhd became the first listing of the year.

It closed at 59 sen above its listing price of 46 sen. The support services provider for satellite, mobile and fibre optic telecommunications networks was last traded at 42 sen on March 7.

Two ensuing IPOs were LEAP counters JM Education Group Bhd and Metro Healthcare Bhd.

Listed on Feb 8 at 45 sen, JM Education closed at 53 sen on March 7 while Metro Healthcare, which debuted on Feb 26, ended at 26 sen or three sen higher than its listing price.

The other three IPOs were MyETF Dow Jones US Titans 50 (listed on the Main Market on Feb 28) and ACE Market debutants Wegmans Holdings Bhd (March 6) and QES Group Bhd (March 8).

Wegmans which debuted at 29 sen, closed unchanged on March 7, while QES Group ended its first day of trading at 22 sen or three sen higher than its listing price of 19 sen.

In 2017, the amount raised from the IPO markets was significantly higher with RM7.4 bil versus some RM600 mil in 2016 – the lowest amount raised in the last five years.

Nonetheless, the performance is still a far cry from its heady past, and more needs to be done by the local stock exchange to bring back its mojo and whet the appetites of retail investors.

Bursa Malaysia has been taking steps to encourage more listings. This includes introducing the Leading Entrepreneur Accelerator Platform (LEAP) Market last year and other measures to boost IPOs.

Among them include allowing dual class shares and coming up with initiatives to make the exchange more vibrant and attractive.

 

New listings

RHB Investment Bank CEO Robert Huray says Bursa has a vibrant stock market where IPO volumes in recent years have outperformed some of the broader Asean markets.

Huray says Bursa's IPO volumes in recent years have outperformed some of the broader Asean markets

He says there is a strong pipeline of new listings across various sectors that are expected to debut on Bursa in the next 12-18 months.

“We are confident that the listings will attract global institutions to further invest in local markets.

“Having said that, regulators can potentially explore avenues to make the exchange more vibrant and attractive to issuers, while maintaining global standards of corporate governance.

“For example, other exchanges are working to adopt dual class shares to attract companies to list on their markets,” Huray says.

Lau anticipates a buoyant IPO market moving forward, backed by the slew of market-friendly initiatives

Rakuten Trade vice-president (research) Vincent Lau believes Bursa's Mid and Small Cap (MidS) Research Scheme and LEAP Market initiatives are the right steps to provide an ideal platform to encourage more listings/IPO, especially of SMEs, as they can grow from LEAP to ACE and the Main Board.

The LEAP Market is a platform for start-up and small and medium companies to raise capital from sophisticated investors without going for public listing.

The two-year MidS was launched in May last year with 22 research houses providing coverage on selected public listed companies.

They (the companies) had undergone both qualitative and quantitative screening criteria, and represent a market capitalisation ranging from
RM200 mil to RM2 bil.

Lau concurs with Huray’s suggestion to have dual-class shares.

He says another potential area for it is the tech companies which the Singapore Exchange Ltd and The Stock Exchange of Hong Kong Ltd are already attracting.

Hong Kong is set to allow the controversial dual-class shares. It will be done under rule changes to be proposed by the city’s stock exchange with the aim of winning blockbuster listings.

In 2014, Alibaba abandoned Hong Kong as its favoured listing venue and held its record US$25 bil IPO in New York. This was because the special administrative region rejected its dual-class structure proposal.

Dual-class shares typically give one set of shareholders – especially top executives – greater voting rights than others. This helps them to control the majority of board appointments.

 

Buoyant IPO market

Lau anticipates a buoyant IPO market moving forward, backed by the slew of market-friendly initiatives.

This includes stamp duty waivers on small and mid-cap companies, liberalisation of margin financing rules and intra-day short selling to Malaysia-Singapore Connect (a stock market trading link), trading fee waiver for new investors, and trading specialist and volume-based incentives for institutional investors.

“Furthermore, the recently announced Employees Provident Fund returns of 6.9% is a feel good factor and bolsters investors’ confidence to put more money in the equity markets,” he says.

Lau also urges companies seeking to list in the local bourse not to delay, given that a typical IPO process requires a lead time of anywhere between six and 12 months before hitting the market.

“Hence, corporates should proceed with their fundraising activities and not be short-sighted because of market fluctuations,” he says.

The EY Global IPO Trends report for 4Q 2017 says that Asean saw a strong performance last year, driven by activity in the Thai, Indonesian and Singapore exchanges which pushed the number to 104 from 77 IPOs in 2016.

Huray says this trend is poised to continue into the year, with the Asian growth story being intact despite equity market volatility.

He believes demand for IPOs should remain encouraging, so long as there is still ample liquidity in the hands of institutional funds and high net worth individuals.

With Malaysia’s gross domestic product registering a growth of 5.9% last year and the outlook for this year anticipated to be on par with that of last year, Huray expects the IPO market to remain strong.

He reasons that companies will want to expand during favourable market conditions, and accordingly, the equity and capital markets present a viable fundraising platform.

“Consequently, there will always be conducive periods during a year to launch an IPO,” he says.

Huray stresses that demand for IPO offerings will be present if they are priced correctly.

“We will see demand from portfolio managers for stocks with good growth potential or strong dividend yields, even during challenging market conditions. This is due to their long-term investment horizon,” he says.

Hooi foresees more equity market activities once the election is over

Grant Thornton Malaysia senior partner and audit practice leader Hooi Kok Mun is also very optimistic about this year’s IPO outlook, given the order book the company currently has in hand.

“I expect to see more companies listed this year. Our firm alone is already working on a few projects for listing on the Main Market, ACE Market and even LEAP, and they are at various stages of submission to the regulators,” he says.

He advises companies seeking to list not to postpone their plan to a later date because of concerns about the equity market volatility.

“We must bear in mind that the whole process to list a company may take at least a year from its inception.

“I believe it is a good time to start preparing now if one is planning to list on Bursa,” he says.

 

IPO performance

Although last year’s 13 Bursa listings – five on the Main Market, six on the ACE Market and two on the entrepreneur-driven LEAP Market – was only one more than 2016, they collectively raised RM7.4 bil.

This was thanks to three major listings – Lotte Chemical Titan Holdings Bhd (RM3.77 bil), Eco World International Bhd (RM2.58 bil) and Serba Dinamik Holdings Bhd (RM584.1 bil).

The figure compares with the RM596.6 mil raised in 2016, which has often been described as an exceptionally bad year for IPO fund-raising.

It was also a year which saw a net foreign fund outflow of RM3 bil from the local bourse. Still, it was much lower than the high outflow of RM19.5 bil in 2015.

In contrast, last year recorded a net inflow of RM10.33 bil while as of Feb 23, foreign investors accumulated local equities worth RM2.1 bil net or 61.5% higher than the RM1.3 bil bought in the same period last year.

 

Concerns

On whether there is a need to remedy the fixed-price mechanism for IPOs, Huray says allocations are typically made once the placement tranche is fully covered.

“As such, in most cases, investors are informed of their allocation before they are required to make any payment.”

On concerns surrounding IPO issuers, Huray says although short-term markets can be volatile and sensitive to global factors, equities as an asset class have generated returns for investors on a long-term basis.

“The FTSE Bursa Malaysia KLCI Index is up almost 5% year-to-date (as of Feb 27).

“Before participating in any IPOs, investors should carefully weigh the merits of the company and its risk appetite in context to the near-term market volatility and future market outlook,” he says.

Huray is satisfied with the supervisory role of market regulators in ensuring IPO issuers disclose vital information that might affect investors’ decisions to subscribe to the IPOs.

“As per the stringent regulations by the Securities Commission (SC) and Bursa Malaysia Securities Bhd, all material information is required to be disclosed in the prospectus.

Pros and cons of going public

GOING public can be a tedious journey for many initial public offering (IPO) issuers, but its benefits are often thought to far outweigh the drawbacks.

This is because the ability to raise capital is paramount for businesses to move to the next level in their growth and expansion process.

Going public enables a company to raise funds from the capital market, gain prominence in the eyes of investors, target customers and potential employees, and provide opportunities to reward loyal staff and associates for their enduring support.

“There are various pros of going public such as for fundraising, liquidity for the company’s shares, reputation with our customers and suppliers, and the prestige and timely disclosure of corporate information,” KIP Real Estate Investment Trust (REIT) acting CEO Chan Heng Wah tells FocusM. The REIT was listed on Feb 6, last year.

“The cons of going public include additional expenses, such as listing cost, the competition being able to assess one’s financial performance, and increased regulatory oversight,” he says.

Chan describes the road to listing on Bursa Malaysia as a long and arduous one with many requirements and obstacles to overcome.

“Nevertheless, during the ‘gong’ day, when it sees the company listed on the local bourse, all the effort becomes worthwhile,” he says.

The objectives of KIP REIT’s listing, Chan says, have been achieved although investors may not be happy that it was unable to maintain the REIT’s unit price.

“While we cannot control the direction of the market in the short run, we believe in the long run our unit price will reflect our strong fundamentals,” he says.

Similarly, Advancecon Holdings Bhd group CEO Datuk Phum Ang Kia sees going public as being advantageous as it provides the means to capture opportunities in the construction boom.

“As we are in an expansion mode, we certainly cannot depend on bank borrowings only. We believe that going public enables us to boost investor confidence,” he says. The company was listed on July 10, last year.

However, Phum stresses the need for listed companies to realise that they have a responsibility to adopt greater standards of corporate governance and transparency in order for shareholders to appreciate their business model and future outlook.

He believes the decision to go public should be based more on the company’s desire to grow rather than on the strength of market sentiment.

“In essence, fundamentally-strong companies should be resilient to withstand negative market conditions and be in a position to flourish when the market rebounds.

“As long as a company is expansion-centric and has firm competencies, its valuation should remain intact.

“Our status as a listed entity has certainly been advantageous. Our raised profile since listing has helped us to secure two new clients and additional contracts from our repeat customers,” Phum says.


Bursa: Consider total cost of IPO exercise before deciding

THE current initial public offering (IPO) framework allows issuers and their advisers the flexibility to fix the IPO price based on underlying fundamentals or other valuation methods that are deemed appropriate.

“In terms of share offerings, the practice of book-building to price the share issue and/or fixed price is common for large IPOs.

“Companies may also need to consider the total cost of an IPO exercise before deciding whether to undertake book-building,” Bursa Malaysia tells FocusM.

The stock market regulator was asked if there is a need to remedy the fixed-price mechanism for IPOs as investors might shy away from participating in it as they need to place their IPO subscriptions and advance payments without knowing the actual number of shares they would obtain.

Bursa says it is a global practice that investors who apply for IPO shares will know the final allocation after the balloting process.

“We are of the view that investors are familiar with the existing pricing mechanism for IPOs launched in the country.

“They have been responding well as almost all our IPOs are over-subscribed by the investing public,” it says.

The regulator has also put in place safeguards to protect investors through the requirement for proceeds to be deposited into a trust account until the listing date.

As of the end of last year, Bursa achieved 14.4% growth in its market capitalisation to RM1.91 tril.

Till end-February, the market capitalisation rose further to RM1.94 tril, a 1.8% increase in just two months.

Additionally, the local bourse also saw greater activities among listed companies last year.

The amount raised through secondary fundraisings grew 19.1%, while those raised from IPOs grew substantially by 70.9% (from 2016).

Although Bursa maintains that it continues to attract “a strong and healthy pipeline of IPOs”, the number of IPOs in recent times have dwindled to 13 last year.

This compares with 11 IPOs each in 2016 and 2015 from 17 in 2012, 2013 (18 including KLCC stapled security) and 2014 (14).



This article first appeared in Focus Malaysia Issue 275.