This article first appeared as 'Rising privatisations of listed firms' in The Edge Financial Daily, on September 17, 2019.

KUALA LUMPUR: So far this year, nearly 10 companies listed on Bursa Malaysia have gone, or are going, private — or have announced plans to do so. The privatisations compare to an initial public offering (IPO) landscape that does not seem all that vibrant.

From Penang-based Suiwah Corp Bhd taken off Bursa by the Hwang family in January, to the selective capital reduction (SCR) offered by automotive friction materials maker Mintye Bhd’s controlling shareholder last month, a back-of-an-envelope calculation of the total reduction in market capitalisation from the privatisation comes to RM3.3 billion.

This does not include companies delisted from Bursa due to failure in complying with listing requirements, such as media group Utusan Melayu (M) Bhd and marble and granite product maker Stone Master Corp Bhd.

Meanwhile, Bursa saw 22 new listings as at Sept 6, raising a total of RM740.5 million, compared with RM633.12 million from 22 listings in 2018. This year’s amount would have been lower if not for Leong Hup International Bhd’s big IPO. However, the amount raised this year is lower compared with RM7.38 billion in 2017.

Noting the rising privatisations by listed companies’ founders or substantial shareholders, AmInvestment Bank executive vice president and head of equity markets Gan Kim Khoon said there are several reasons for this, mainly concerning valuations.

“The founders or owners may have felt the market was not giving their companies a fair value for what they believed or perceived their companies are worth.

“This is especially so when these companies’ market capitalisation is lower than their intrinsic value. For example, if the company’s share price is trading below its audited book value per share or its realisable net asset value per share,” Gan told The Edge Financial Daily when contacted.

Another reason could be poor trading liquidity in the stocks, as it defeats one of the purposes of having a company listed on any stock exchange.

Mintye is one such example. In its offer letter, controlling shareholder Yatee & Sons Sdn Bhd said the proposed SCR allows entitled shareholders to exit and realise their investments in the company immediately, at a premium to the stock’s market price, which they otherwise may have been unable to due to low trading liquidity.

The counter’s 200-day trading volume averaged at only 7,100 shares as at last Friday.

Besides market conditions, founders or owners of companies may look at privatisation to carry out internal restructuring or reorganisation of their various businesses — possibly including those not currently parked under the listed entity — and feel this reorganisation would be best achieved if the company is firstly taken private, said Gan.

It also makes little sense for companies to maintain a listing if the benefits of higher valuations, access to public capital and brand recognition are unable to outweigh the attendant costs as well as regulatory and public scrutiny.

YTL Group, for instance, has undertaken several privatisations of its listed subsidiaries over the past few years, the latest being YTL Corp’s proposal for YTL Land & Development Bhd this year.

YTL Corp took YTL Cement private in 2011 and YTL E-Solutions Bhd in 2016. In May this year, YTL Corp also bought a controlling 51% stake in loss-making cement maker Lafarge Malaysia Bhd.

A stake sale to strategic shareholders is a notable theme too. An example is RHB Bank Bhd’s recent announcement of the disposal of its 94.7% stake in its general insurance arm RHB Insurance Bhd to its peer Tokio Marine Asia Pte Ltd.

“Another reason has to do with rate cuts [in a low interest environment?]” said Areca Capital Sdn Bhd chief executive officer Danny Wong. “Cash-rich shareholders are not making money from idle funds in banks, and privatisation becomes an option.”

It seems mergers and acquisitions and privatisations will persist in the second half of 2019 as the broader market’s weaknesses have unlocked values, said Maybank IB Research, which in a July note pointed out such corporate exercises had moved quickly this year.

MIDF head of research Mohd Redza Abdul Rahman said the market would likely see higher volatility, and higher downward pressure on prices.

This, he said, is due to external uncertainties such as the US-China trade war, Brexit, and expectations of central banks worldwide easing their monetary policy in view of slower economic growth.

“This will attract bargain hunters seeking strategic assets, or investors’ need for cash would result in them being open to sell partial stakes or even exit their prized investments,” he said.

Shrewd investors, including majority owners of listed entities who have seen low trading prices of their investments, may see this as an opportunity to obtain greater control or consider privatisation, to reap the lower costs of buying shares they do not own.

These uncertainties will also result in a lesser appetite for IPOs as companies fear not being able to get their desired valuations, said Mohd Redza.

Malacca Securities Sdn Bhd head of research Victor Wan and Wong support the view that the IPO market for this year will continue being less exciting.

They said this is due to the current weak market sentiments amid continuing uncertainties over external issues such as US-China trade ties, the extent of the US Federal Reserve’s future rate cuts, the decision to add Malaysia into a watch list by the World Government Bond Index and Malaysia’s Budget 2020.

Both of them added that the bearish market has pushed potential companies to defer their listings as the pricing and valuations may not be attractive.

QSR Brands (M) Holdings Bhd, operating KFC and the Pizza Hut chain of restaurants in Malaysia, has deferred its listing indefinitely after key potential investors deemed its valuation unpalatably high.

Initially, QSR Brands was hoping to price its IPO at price-earnings (PE) multiple of somewhere in the mid-20s. However, it was reported that cornerstone investors were only willing to subscribe to the IPO if shares were priced at a PE multiple of 15 to 17 times.

“The market has no appetite for any new listings for now, as the FBM KLCI, [one of the worst-performing indices in the region,] has been on a downtrend, [down 5.28% year to date,]” Wan said.

“At the end of the day, it all boils down to valuations. This kind of market is very difficult for a company to go for a listing as it does not get the premium valuation that it wanted.”

Of this year’s listings so far, the bulk or 12 were on the LEAP Market, seven on the ACE Market and three on the Main Market.

Of the three, the only company raising more than RM100 million was Leong Hup International, at RM275 million. HPMT Holdings Bhd and UWC Bhd raised RM42.31 million and RM57.4 million respectively.

Leong Hup International was also the only company with an issue price of more than RM1, at RM1.10. The stock, debuted on Bursa on May 16, has dropped to 72 sen before recovering. At last Friday’s price of 80.5 sen, it is still 27% below the listing price, with a total market value of RM2.94 billion.

Several other newly listed stocks have fared poorly upon listing in recent weeks as well, as weak market conditions amid the US-China trade war dampen investor enthusiasm.

This includes steel manufacturer Tashin Holdings Bhd, having debuted at its IPO price of 58 sen on Aug 1, fell by half to 29 sen last Friday.

Wan said the current market sentiments are unfavourable to new IPOs, describing their performances as “worrisome”.