This article first appeared in The Edge Financial Daily on October 18, 2018

KUALA LUMPUR: The two upcoming sizeable initial public offerings (IPOs) — QSR Brands (M) Holdings Bhd and Leong Hup International Bhd — are expected to bring excitement to Bursa Malaysia, which has been experiencing an IPO drought in recent years.

But by the same token, the success of the two IPOs is much dependent on market enthusiasm and valuation.

It is learnt that QSR, which operates the Kentucky Fried Chicken (KFC) and Pizza Hut chains in Malaysia, is looking at a price-earnings ratio (PER) of more than 30 times, and Leong Hup International, which is involved in livestock feed manufacturing, egg production and poultry farming, of over 20 times.

The IPOs are the relisting exercises for the duo.

Johor Corp’s (JCorp) president and chief executive officer Datuk Kamaruzzaman Abu Kassim previously told the media that the group expected a market value of RM6 billion for QSR.

Based on the expected market value of RM6 billion and the group’s net profit of RM182.98 million for the financial year ended Dec 31, 2017, a back-of-the-envelope calculation shows that the valuation of the company is at a PER of about 32 times.

For comparison, Berjaya Food Bhd — which operates the Starbucks and Kenny Rogers Roasters brands — has a forward PER of about 20 times, according to Bloomberg.

Still, consumer stocks, for instance Nestle Malaysia Bhd, QL Resources Bhd, Fraser & Neave Bhd and Power Roots Bhd, are trading at PER above 35 times (see table).

While the timing of the listings may be questionable, the take-up for the upcoming listings of QSR and Leong Hup International could fare better at the proper valuations, as Areca Capital Sdn Bhd chief executive officer Danny Wong said there is demand for shares in consumer companies.

“I’m not sure whether it is the right time for these IPOs but definitely the demand is there for consumer stocks, as there is an uptick in consumer sentiment. That could mean higher consumer spending and these are some of the factors that investors look at,” he told The Edge Financial Daily.

However, Wong commented that the pricing of these IPOs cannot be too aggressive as he said these are “old economy” stocks and should not demand premiums that are too high.

“As long as they are decently valued and the premium is not too high, I’m sure there will be investors interested in them. If the premium is too high, the IPOs might not do well,” he said.

QSR, is looking to issue up to 1.465 billion shares, according to its draft prospectus.

Meanwhile, Leong Hup International, which has strong presence in the Asean poultry industry, is looking to issue up to 1.6 billion shares to raise proceeds for the repayment of bank borrowings, capital expenditure and working capital.

For the financial year ended Dec 31, 2017 (FY17), Leong Hup International reported a net profit of RM192.57 million, 5.5% higher than its FY16 net profit of RM182.48 million. Its revenue was RM5.5 billion, up 4.6% from RM5.26 billion in FY16.

Alliance DBS Research head of research Bernard Ching said the valuation for QSR may be high, adding that it is uncertain whether investors would be interested.

“The PER looks quite expensive at over 30 times. I’m not sure if investors have the appetite for this, given the valuation,” said Ching, but noting that he does not have a full picture of the listing.

“Based on the numbers quoted by the media, it looks expensive. However, we will need more information and we will have to assess their growth plans first and we are not privy to that yet,” he said.

While Lotte Chemical Titan Holdings Bhd’s IPO, which had to reduce its offer price and size, is still fresh in investors’ minds, some quarters opine that the two mega listing exercises would be opportunities for Bursa Malaysia to demonstrate that the local stock exchange is conducive to sizeable equity fund-raising exercises as it was in 2012.