This article first appeared in The Edge Malaysia Weekly on August 8, 2022 - August 14, 2022

DESPITE declining trade volume and velocity on the local stock exchange, the initial public offering (IPO) pipeline remains a bright spot for Bursa Malaysia Bhd as it anticipates more companies listing this year compared with 2021.

To date, 22 companies have made their debut on the bourse, of which three were on the Main Market, 15 on the ACE Market and three on LEAP.

“We are focusing on bringing more products to market or new listings. We have a fairly healthy listing funnel. Companies may be impacted by changes in the market and they will always want to maximise prices,” says Bursa Malaysia CEO Datuk Muhamad Umar Swift in an interview with The Edge.

Malaysia topped its peers in the regional market in IPO proceeds raised during the first quarter of 2022 (1Q2022), with the largest listing to date being dairy producer Farm Fresh Bhd, which raised some RM1 billion in March.

Umar says companies seeking a listing, particularly in the tech space, prefer a market that has depth and is highly liquid as they can then maximise prices. He adds that investors should not be too hung up on Grab’s decision not to seek a listing in Malaysia.

“Companies would always seek to list in markets where they can maximise prices and that is entirely up to entrepreneurs and investors to make that choice. Large markets are not fundamentally different from [smaller markets]; it’s just that in absolute terms the figures are larger, as in the pool of capital available.

“Large listings such as Grab … they did not look at the Singapore Exchange or Bursa Malaysia but at the US market so that they can maximise prices.”

Umar adds that the bourse will continue to engage with such growth companies to match them with the right anchor investors.

However, the challenge also lies in growing large-cap companies on the local bourse so they can continue to attract foreign investors.

“Over the past quarter, we have seen an increase in the foreign shareholding of large companies like Petronas Chemicals Group Bhd (PetChem), CIMB Group Holdings Bhd and Malayan Banking Bhd (Maybank) because these are large caps and that is what foreign investors are looking for,” Umar says.

According to MIDF Research’s fund flow report for the week ended July 29, the top three sectors that saw net inflows by foreign investors were Financial Services, Utilities and Consumer Products and Services at RM222.8 million, RM49.8 million and RM25.1 million respectively. To date, international funds have been net buyers for 19 out of the 30 weeks of 2022, with a total net inflow of RM6.27 billion, although there were signs of a significant reversal of foreign funds inflow in July.

Falling average daily trade volume (ADTV), coupled with the risk of higher inflation and continued supply chain disruptions for listed companies, are likely to result in a tepid performance for Bursa, which recently announced markedly lower earnings for the second quarter ended June 30, 2022 (2QFY2022) of RM59.47 million, from RM88.97 million a year ago. Revenue slumped 22.55% to RM151.89 million, from RM196.1 million previously.

“There are a lot of funds available, so it’s a call to action. The catalyst of course will be the Russia-Ukraine conflict being settled, which would change things. Of course, the ringgit is under pressure because interest rates in the US are up. So, if you have a risk-free rate in the US versus emerging markets, you will redeploy capital.

“We have also seen the US slipping into a technical recession, the pressure on interest rates is perceived to be ameliorated, and that means investors will be back on risk and will be coming back to our part of the market,” says Umar.

Bursa is currently working on new products to be launched in the near term, such as the Voluntary Carbon Market, broader environmental, social and governance (ESG) indices and a new Digital Gold Dinar asset class.

Even so, Kenanga Research observes in a client note that Bursa would only be earnings-accretive in the medium term. The upcoming quarters are expected to show weakness in view of unfavourable global risks, the research outfit states.

“The supply chain disruptions stirred by the Russia-Ukraine conflict may require significant efforts to mend even if a resolution is achieved. Foreign participants are expected to sideline local markets as the US Federal Reserve continues to raise interest rates and our rising domestic overnight policy rate or OPR (another two 25-basis-point hikes are expected in 2022) would only further widen the risk-reward profile for margin trading.”

Kenanga says positive catalysts for Bursa include an earlier-than-expected general election, positive economic reports, lower-than-expected inflation and a sustained performance by commodity prices.

Bursa’s trading revenue decreased by 44.7% to RM147.2 million in 1H2022 from RM266.1 million in 1H2021, mainly due to lower ADV for on-market trades (OMT) and direct business transactions (DBT), which decreased by 45.5% to RM2.46 billion in 1H2022, compared with RM4.51 billion in 1H2021. Trading velocity in 1H2022 was also lower at 33% compared with 61% in 1H2021.

MIDF says in a research note that Bursa’s trading activities will rebound once the dust settles and the expectation that the Federal Reserve will reduce the pace of its hikes.

“This will improve sentiment and market valuation going forward. Furthermore, we have seen interest from foreign investors starting to return this year. We believe the recent share price decline means that the stock is currently undervalued,” MIDF says. Based on Bloomberg consensus ratings, four research firms have maintained a “buy” call on the stock, 10 a “hold” rating and two recommended a “sell”.

Bursa intends to maintain a 90% dividend payout of its profit after tax and had declared an interim dividend of 15 sen per share for the financial year ending Dec 31, 2022 (FY2022), amounting to RM121.4 million.

Asked how Bursa balances creating a vibrant market while ensuring that minorities are not being taken advantage of, Umar says, “We actually have overlays of filters to see what behaviour is taking place.”

He adds that there are several layers of regulatory oversight in the form of software to protect the individual investor from potential market abuse.

“The philosophy is to let the market run and closely monitor it to flag any activities that may look suspicious. We look at relationships, who is related to whom. And then we track the trading between each individual group.

“But if we see market conduct that we don’t like, there is an escalation process, broker engagement, compliance function and we would perhaps issue a warning on the stock, which has been seen in the past,” Umar explains.

Umar declined, however, to comment on the controversial issue of Serba Dinamik Holdings Bhd’s falsification of its accounts and the subsequent fines imposed on those involved. Note that Bursa Malaysia Securities Bhd is involved in a legal battle with Serba Dinamik.

There is a greater value proposition in decentralised finance (DeFI), Umar contends, especially if it truly removes impediments and becomes more efficient and can facilitate investors. DeFI is an emerging fintech that lives natively on the internet and provides financial services without the control of a bank.

But he is of the view that cryptocurrency is a risky investment because of the absence of any valuable underlying asset.

“We invest for growth and dividends. Crypto does not tick either of those boxes. It does not create value, fund, generate profit or create jobs. It just exists. I don’t have a value judgement whether it’s good or bad, but what I am telling you is people are just speculating.”

Shares in Bursa have risen 2.49% year to date, closing at RM6.54 last Friday, giving it a market capitalisation of RM5.3 billion.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.