Hot domestic demand has stifled growth of foreign investments in Malaysian IPOs, but overseas investors will struggle for allocations until they are willing to commit to cornerstone positions.
Source: Reuters/Bazuki Muhammad
Telephone booths are filled with advertisements offering cash loans on the streets of Kuala Lumpur January 16, 2012.
Malaysia is set to provide the main equity action in the South-East Asian capital markets, with two US$1bn-plus initial public offerings planned for the first half of the year.
Both deals are effectively state divestments: plantation operator Felda Global Ventures is government owned, while Parkway Pantai is a collection of healthcare assets that sovereign investment agency Khazanah has accumulated. The two IPOs weigh in at M$6bn (US$1.9bn) and M$5bn, respectively, ranking among the largest anticipated from anywhere in Asia this year and, therefore, drawing plenty of international attention.
Bursa Malaysia has been on foreign investors’ radar since the M$11.2bn IPO of telco Maxis in 2009, which was followed in 2010 with the M$14.4bn listing of state-owned Petronas Chemical. The two offerings were well covered, with Petronas Chemical drawing an incredible US$29.7bn in institutional demand.
Despite the high level of foreign interest, allocations have predominantly favoured domestic investors, and the two big deals this year are likely to be no different, due to the nature of the investor base. “A key and unique feature of the Malaysian equity market is the presence of a very deep pool of domestic institutions, who are active participants and investors,” said Charon Wardini Mokhzani, CEO of CIMB Investment Bank and deputy CEO of CIMB Group.
Under the country’s Bumiputera rules, Felda will need an offering specifically for indigenous investors, meaning they need to be offered half of the IPO. Parkway Pantai primarily holds overseas assets, and will have a dual listing in Kuala Lumpur and Singapore, but has voluntarily included a Bumiputera tranche, limiting the amount of shares on offer to foreigners in the IPO. Bankers note that local participation has expanded beyond the likes of funds, such as PNB, and now has a much broader investor base, including high-net-worth individuals.
Additionally, two large domestic investors, pension funds EPF and KWAP, are not classified in Bumiputera category, but are also almost certain to come into any large Malaysian offerings. This has seen domestic demand alone fully covering several recent offerings on the first day of bookbuilding. This level of support gives issuers a high degree of confidence that their deals will get done.
“The risk of having so much participation by domestic pension funds is that the aftermarket performance could suffer, as a result, but if you look at recent IPOs, it hasn’t,” said one domestic banker.
This strong domestic participation goes some way to explaining why overseas investment in listed Malaysian stocks has not grown much, despite the recent blockbuster offerings.
“Foreign shareholding of Malaysian equities has been rather stable post-global financial crisis at 22.4% end-January 2012 versus 21.3% end-December 2008 (versus a high of 26.2% end-December 2007),” said Wang Chew Hann, head of research at Maybank Investment Bank.
“Foreign interest in Malaysian equities is both a function of valuations and liquidity. In order to attract more foreign interest in Malaysian equities, more big-cap companies, especially those with regional appeal and offerings, should be encouraged to list on the Malaysian bourse,” Wang added.
Felda is likely to be one to attract strong foreign interest because agriculture is a hot sector. CIMB’s Mokhzani said Bursa Malaysia was a natural home for agribusiness listings, with more than 40 listed companies in the palm oil sector, including big names like Sime Darby, IOI Corp and Kuala Lumpur Kepong.
“In the equity space, the plantation (oil palm) and glove producers listed on the Malaysian bourse are among the largest in the world, in terms of market share,” said Wang. “Meanwhile, the trading of palm oil futures on the Malaysian bourse also stands out, as the index is the global benchmark pricing for palm oil.”
With such hot demand anticipated, one way for foreign investors to guarantee their allocations in Malaysian IPOs is to come in as cornerstone investors, but this has been rare, with domestic institutions usually stepping in. French firm Technip, came in as a strategic investor, rather than a cornerstone, in the M$2bn IPO of Malaysia Marine & Heavy Engineering, as a result of which the offering was increased. However, the norm is for foreign investors to take their chances in the bookbuilding and see what domestic demand is like – even though they are often squeezed out.
“Foreigners will only come in once it’s safe,” said a domestic banker, pointing out that foreign accounts had rarely driven the pricing for Malaysian IPOs. “However, that might change with something like Felda.”
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