MALAYSIA’S capital markets are undergoing a change.
The appetite for initial public offerings (IPOs) is significantly dwindling. The depressed market sentiment and foreigners shunning Malaysia are huge reasons for the lack of appetite in new offerings.
For 2015, cumulative net foreign outflow as at July 24 stood at RM10.9bil, which has significantly surpassed the RM6.9bil outflow for the whole of 2014.
The FTSE Bursa Malaysia KL Composite Index (FBM KLCI) has now been down for almost two consecutive years. It was down 7.33% last year and is down 2.49% in 2015 on a year-to-date basis.
It is not like there aren’t any exciting new IPOs. The two most celebrated IPOs of the year were Malakoff Corp Bhd and Sunway Construction Group Bhd (SunCon).
Malakoff was listed in May and is so far the biggest stock offering, raising some RM3bil. This week, after an 11-year hiatus, SunCon made a comeback to the local bourse on Tuesday, raising some RM478mil and making it the second-largest IPO of the year.
It is now August and Bursa Malaysia has only seen some six new listings thus far. In 2014, Bursa had 15 listings compared with 17 in 2013. The trend for new listings is clearly on the wane.
Corporates and advisers are already wisening up to this disheartening trend and are, in fact, capitalising on Malaysian stocks trading at big discounts. The current trend is for companies to seek funding from existing shareholders via rights issues.
“Let’s take this opportunity to raise funds from shareholders when valuations are cheap,” says one equity capital markets director of a local bank. Another adviser adds that existing shareholders already understand the business model of the presently functioning company.
“With existing companies, there is more or less a track record. Shareholders are familiar with the management and growth potential of the company. For example, when Mah Sing Group Bhd and Eco World Development Group Bhd raised funds, shareholders are more comfortable putting money for these proven personalities,” says the director.
Mah Sing is one of Malaysia’s largest property companies led by the formidable Tan Sri Leong Hoy Kum.
The company not only delivers double-digit returns on equity but is also armed with unbilled sales of RM5.3bil, zero gearing and cash of some RM1.4bil.
Mah Sing is now building up its war chest in preparation of bigger things to come and is on the lookout for bigger investments, especially in prime areas in Kuala Lumpur.
Meanwhile, Tan Sri Liew Kee Sin is one of the most respected personalities in Malaysia’s property and corporate circles.
Since his exit from S P Setia Bhd, his star has, in fact, shone even brighter, with his son Tian Xiong taking over Eco World Development Group and the upcoming listing of his latest company, Eco World International Bhd, next year.
Thus, not surprisingly, the rights issues and fund-raising exercises by Mah Sing and Eco World went by without any hitches.
Earlier this year, Mah Sing raised RM630mil from a rights issue exercise for land acquisition and general working capital.
Eco World, on its part, raised some RM788mil from its rights issue in March this year. This was part of its corporate exercise which raised a total of RM2.8bil.
On a less positive note, a banker says that the dwindling number of IPOs is also mainly due to the many rejections received by aspiring companies looking for a listing.
“The regulators are getting increasingly strict. I would say the only way of fund raising now is through a rights issue, a placement or bonds. A rights issue, if structured properly, has a much higher chance of being approved,” he says.
One of the biggest upcoming rights issues for the year will be the RM2.5bil to be raised by RHB Capital Bhd (RHB Cap).
Back in April, RHB Cap first announced that it will issue new shares through a rights issue of up to RM2.5bil and inject the capital into its main operating entity, RHB Bank.
Huge rights issues by big companies is a trend already seen last year. This was led mainly by the issuance of both PBB and Bumi Armada.
In May 2014, Malaysia’s third-largest financial institution PBB announced its first cash call in 17 years, proposing an RM4.8bil renounceable rights issue. That amount made it the highest raised among local financial institutions.
Meanwhile, Bumi Armada’s rights issue last year raised gross proceeds of some RM2bil to fund the group’s huge capital expenditure.
Not to be left out, Malaysia Airports Holdings Bhd (MAHB) also proposed a one-for-five rights issue to raise RM1.32bil to acquire the remaining 40% in its Turkish airport venture. This exercise was completed in March this year.
It’s not only the large heavyweight companies that are raising cash. Property company Sunsuria Bhd is also looking to raise some RM380mil from its rights issue. The issuance involves a renounceable rights issue of 475.08 million new shares at an issue price of 80 sen per rights share on the basis of three rights shares for every one existing share held, together with 158.36 million free warrants.
Telecommunications network services provider OCK Group Bhd is targeting to grow its business via a renounceable rights issue that will roughly raise RM145mil. It will propose to undertake a rights issue of up to 290.49 million new ordinary shares on the basis of one rights share of 50 sen indicatively for every two existing shares held. There will be free detachable warrants on the basis of one warrant for every one rights share subscribed.
The other interesting thing to note is that rights issues can actually increase shareholder value over time.
Generally, when a company makes a cash call or announces a rights issue, shareholders tend to punish the company by selling down its shares. After all, who likes being asked to put in more money for their investments?
However, over the last few years, advisers have sweetened the deal by giving shareholders free warrants with the rights exercise.
Thus, once the rights exercise is completed, not only do the shares begin to appreciate but shareholder value also increases through the free warrants given by the company.
As these warrants are free and typically make their debut at a low absolute value, their percentage gain is always higher than the mother share.