Bursa Malaysia, traditionally one of Asia’s quieter exchanges when it comes to new listings, is set to play host to some of the largest IPOs in Asia this year. What is behind this sudden resurgence?
Source: Reuters/Shi Tou
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Malaysia finds itself hosting two of the biggest IPOs in the region this year, and is doing so almost simultaneously. Is this a sign that Bursa Malaysia is reaching a level of increased depth and sophistication or should we expect indigestion?
The two companies with upcoming IPOs are Felda Global Ventures and Parkway Pantai. Investors were examining Felda’s potentially US$3bn IPO at the time of writing, while Parkway Pantai, also known as Integrated Healthcare Holdings, is expected to raise around US$2bn in July. The IPOs of these companies represent two of the three biggest deals under way in the whole region – the other being that of 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.
With a wide range of international and local banks involved in the live deals, interviewees declined to go on the record for regulatory reasons.
“If you go back to last year and look at Bumi Armada or Malaysian Sugar, they were a lot more successful for investors than any other market in Asia in generating returns from an IPO.”
Domestic insulation
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 concerns about what is happening in Greece and France than what is happening in the domestic market.”
This makes Malaysia somewhat insulated from global shocks, at least in terms of getting new deals away.
It helps that there is a solid institutional liquidity domestically in Malaysia, most obviously from the Employee Provident Fund, one of the region’s most prominent investors. Despite changes in its mandate to increase international investments, EPF is still overwhelmingly focussed on domestic 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.”
These reasons are adding to confidence that Malaysia can support two landmarks trades in a matter of weeks. At the time of writing, Felda, the more advanced of the two deals, appeared to be proceeding well. Having assigned around one third of the IPO shares to cornerstone investors, including Qatar’s sovereign wealth fund, Fidelity, high-net-worth investors and an insurance company, there was concern, instead, about other investors being able to get the allocations they sought.
Some of the peculiarities of Malaysian investment exacerbate the situation with 11.5% of the company capital having to be reserved for Bumiputera investors, 7.5% for Malaysian retail, and 12% for the states within Malaysia, where Felda has plantations. 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. However, an injection from a group of settlers derailed the move in stopping KPF shareholders from voting 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. As a result, KPF was able to hold its shareholder vote, overturn the injunction, and vote in favour of the original plan. Further negotiations followed before the deal was eventually offered to investors, largely in its original form.
No sign of indigestion
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$2bn. The deal has yet to get on the road, but those close to it still expect it to appear by July. The seller is Malaysian state investment arm Khazanah – a name that 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 co-ordinators, with Credit Suisse, DBS and Goldman Sachs as 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.”
The backdrop to these deals, 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 may well take place earlier and there is a sense that these deals must be done swiftly in case there is any significant policy change that would remove support for state divestments.
This is the first 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, it introduces uncertainty.
Political uncertainty
Analysts are pondering the 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 recognisably 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 continued: “We view our base case to be irrelevant to a certain extent; what matters is what the market perceives the election outcome will be, and due to the new voters, that is anything but predictable.”
The increase in voters combines a large number of new registered voters with an expectation that the chance of a closer result could motivate many people who did not vote in 2008 to cast their ballots.
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 could be attributed to global markets, but Malaysia underperformed other peers: the Hang Seng Index fell 15% and the S&P 500 dropped 9% during the same period. This time around, with the market trading at about 14 times earnings, it is not especially cheap and has plenty of 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 the country’s exports. The broader economy is in decent shape: real GDP growth was 4.8% in the first quarter of 2012 and projected to be 5.1% for the whole of 2012. Nomura expects 4.4% growth in 2012 and 4.3% in 2013, on the back of expected EPS growth of about 5%.
However, as we have seen this year with China, high economic growth figures do not translate to stock-market performance if there is underlying doubt about some facet of the economy or the political system.
In truth, although Anwar Ibrahim’s coalition is neither anti-business nor particularly anti-investment, it has built a platform around transparency and probity that could be interpreted as such. As is often the case with elections, the outcome may not be particularly bad news for markets either way; it is the uncertainty along the way that causes the problems. That being the case, these jumbos IPOs, while positive, may well be the last from Malaysia until the election result is known.
