Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022

A sense of vigilance hovers over Malaysia’s initial public offering (IPO) market as Bursa Malaysia-bound companies and investors monitor escalating concerns — and there are many. Rising inflation, further interest rate hikes and the ongoing geopolitical tensions are but some of the many issues weighing heavily on market sentiment, and could derail plans for a flotation exercise in the second half of the year (2H2022).

A report on global IPO trends by consulting firm EY cautions prospective IPO candidates that the market remains receptive to quality high-growth companies in these trying times, but they will need to be well prepared and show resilience with innovative business models, agility in getting around supply chain problems, and financial strength.

M&A Securities managing director of corporate finance Datuk Bill Tan tells The Edge that companies have taken a more careful, wait-and-see attitude towards launching their IPOs in 2H2022.

“Going by the principles of economics, equity markets tend to fall when inflation and interest rates go up. Seeing as market speculation has been rife that Bank Negara Malaysia will raise the overnight policy rate (OPR) further, investors are holding back for now as they wait for rates to settle,” he says, adding that interest in the IPO secondary market has waned considerably, notwithstanding the fair valuations of companies that have released their prospectus.

Tan believes investors will need to take a longer view to eke out a profit from listings, instead of trading for quick gains, as is typical when investing in an IPO. While there is still liquidity in the market, investors are holding back until the matter of inflation and interest rate hikes are resolved. There is also the upcoming general election, which adds to the uncertainty,” he observes.

In the meantime, local indices continue to slip. The benchmark FBM KLCI had fallen 147.47 points, or 9.4%, year to date to close at 1,420.06 last Thursday, while the ACE Market had sunk 1,866.78 points, or 29%, to 4,552.82 over the same period.

It is worth noting, however, that stock market volatility did not deter qualifiers from listing in 1H2022, as the bourse registered 20 IPOs — two on the Main Market, 14 on the ACE Market and four on the LEAP Market. The two Main Market debutants were Senheng New Retail Bhd and Farm Fresh Bhd, which raised RM267.5 million and RM1 billion respectively from their listing exercise.

The performances of the 20 listings to date have been mixed as nearly half of them have led to losses for investors. Senheng, for one, is down a considerable 44% from its IPO price. ACE Market-listed SIAB Holdings is now only worth half as much as the design and build services company has seen its share price drop to 15 sen.

Investors of ACE Market-listed Coraza Integrated and SFP Tech Holdings are doing much better as the firms are trading about 86% above their IPO price.

ACE Market debutants Orgabio Holdings Bhd and Infoline Tec Group Bhd, which listed in July, kicked off 2H2022 by raising RM29.97 million and RM30.8 million respectively from their IPO.

Relatively few submissions may affect 2023 listings

In January, Bursa Malaysia forecast 37 listings for the year, from 30 in 2021. Nevertheless, CEO Datuk Muhammad Umar Swift cautioned that the actual number would depend on market circumstances.

Data provided by corporate secretarial services provider Tricor Investor & Issuing House Services Sdn Bhd show that the amount received for IPO subscriptions — which reflects investor interest in the stocks — was as high as RM990.3 million in 1H2022. However, the amount plunged to a low of RM42 million in July.

Although dealmakers say there has been a pick-up in listing submissions to Bursa, if markets continue to deteriorate, the IPO market could be headed for a slow 2H2022, and likely spill into 2023, as the IPO process usually takes 1½ years from initiation to listing date.

Currently, 20 companies have filed their prospectus exposure with Bursa to list on the ACE Market. They include L&P Global Bhd, Synergy House Bhd, TT Vision Holdings Bhd, Wellspire Holdings Bhd and ETA World Group Bhd.

Upcoming prospectus launches include that of SNS Network Sdn Bhd in mid-July. The technical services provider intends to list in early September, and market observers believe its valuation will be about 10 times earnings.

“Upcoming debutants are good companies with fair valuations. But many are holding back because of the volatility in the market. There are some, however, which are confident enough to proceed,” says Tan.

Players eyeing a Main Market listing include DXN Holdings Bhd, Kumpulan Kitacon Bhd and ITMAX System Bhd, which certain quarters believe may be able to launch their IPOs before year end.

Another upcoming listing is that of vehicle insurance comparison platform Bjak.com. The company was said to be planning to launch one of the largest local IPOs in recent years, but a source says it will certainly not happen this year as the listing procedures have yet to commence.

MTT Shipping Sdn Bhd, which owns and manages a fleet of container vessels, received regulatory approval at end-2021 and is believed to be preparing for a listing in 2023.

“As MTT is a strong beneficiary of what is happening in the global supply chain, it is potentially looking at an upward valuation of its IPO to meet market expectations. It plans to utilise its listing proceeds for capital expenditure for the expansion of its fleet, as well as paying down debt,” says the source.

Meanwhile, Johor Corp’s (JCorp) plantation unit Kulim (M) Bhd — previously listed and then privatised — is understood to be planning to raise about RM1 billion in an IPO as early as next year. JCorp is also reviving relisting plans for another unit — QSR Brands (M) Holdings Bhd, the operator of the KFC and Pizza Hut restaurant chains — by way of a multibillion-ringgit IPO as part of a group-wide restructuring that includes a full-scale review of its existing business ventures.

“QSR may submit its IPO application this quarter. If all goes well, the company’s listing will be next year,” says the source.

Meanwhile, AME Elite Consortium Bhd is understood to be planning to inject RM557 million worth of industrial and industrial-related real estate assets into its upcoming real estate investment trust, AME REIT. Further news on the REIT is pending as AME has received the approval of the Securities Commission Malaysia and is reported to be planning for a 2H2022 listing.

Global IPO market outlook in 2H2022

Volatile conditions in the global IPO market resulted in a significant slowdown in 2Q2022, after recording high levels of IPO activity last year.

In its Global IPO Trends report, EY says the global IPO market in 2Q2022 saw IPO deals more than halve to 305 from 659 in the previous corresponding period, while proceeds plunged 65% to US$40.6 billion from US$115.7 billion. In Asia-Pacific, the number of IPOs fell to 181 from 288 last year, lowering proceeds by 42% to US$23.3 billion from US$40.3 billion.

Nevertheless, EY believes that the IPO market remains receptive to quality, high-growth companies, although “strong headwinds from market volatility and uncertainty are likely to remain”.

The consulting group believes that the technology sector is likely to continue as the leading sector in terms of the number of deals coming to market. There will be a greater focus on renewable sources of energy as oil prices increase and the energy sector is expected to continue to lead by proceeds from bigger deals, it says.

“IPO candidates looking to go public will need to be well prepared. They will need to demonstrate resilience with innovative business models, agility in navigating supply chain constraints, strength in financial positions and preparation in adapting to ongoing concerns around Covid-19,” says EY, adding that companies need to be realistic and flexible about valuation levels.

In addition, extensive pre-marketing and pre-IPO funding, complete with cornerstone investors, will need to be conducted to mitigate uncertainty and improve pricing leverage. Given the evolving regulatory environment, companies should be able to clearly articulate their embedded environmental, social and governance strategy and culture.

“Given the tightened market liquidity and significant decline in stock prices of many new economy companies that went public in the last two years, investors are becoming more selective and are refocusing on the companies’ fundamentals instead of just ‘growth’ stories and projections, such as sustainable profits and free cash flows,” says EY.

 

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