PETALING JAYA: The equity capital market (ECM) saw one of its slowest years in 2016, with no major initial public offerings (IPO) taking place. This, in turn, could suggest a cloudy outlook for 2017.
In 2016, the value of the top 10 ECM deals stood at US$2.2bil (RM9.87bil). This was down 42% from the top 10 deals made in 2015, which carried a value of some US$3.8bil (RM17bil), according to data by Maybank IB Research.
These issuances picked up the slack from the IPO dry spell last year.
Sime Darby’s private placement topped the list of top 10 ECM deals for 2016. The conglomerate raised US$517.7mil (RM2.5bil). In second place was utility giant TNB’s US$289mil placement while banking group Malaysia Building Society Bhd followed with a US$257.8mil rights issue.
Nonetheless, a seasoned banker reckoned that equity fundraising in 2016 turned out to be surprisingly good considering how volatile markets were and the several “black swan events” that took place, such as Brexit and Donald Trump’s victory in the US presidential election.
“Given the backdrop of difficult market conditions and foreign fund outflows, this year’s equity-raising activity in Malaysia was relatively healthy,” he said.
In fact, when compared with the rest of Asean, Malaysia ranked second after Singapore in terms of value of top 10 deals made last year.
The value of Singapore’s top 10 deals last year stood at US$3.2bil and this was led by two major IPOs, namely that of Frasers Logistics & Industrial Trusts and Manulife US Reit.
Meanwhile the Philippines, Thailand and Indonesia recorded less than US$2bil worth of ECM deals respectively.
The volatility and weak sentiment in the equity markets in 2016 resulted in both investors and companies shying away from investing and raising money.
The FBM KLCI closed 2016 with a 3.5% drop, marking a third consecutive year of decline.
A market observer explained that there was a mismatch in the market, with investors expecting lower values and issuers not wanting to discount their offerings too much.
“Investors have been spoiled for choice as many companies’ share prices trade at undemanding valuations.
“In comparison, new issuances usually demanding higher valuations.
“So many company owners didnt’ find it compelling to raise money in this soft market as they could not fetch valuations they could have got say two years ago,” the market observer said.
For IPOs alone, last year saw RM1bil raised from 11 listings on on Bursa Malaysia, the lowest figure since the global financial crisis in 2008-2009. The figure is a far cry from the RM4.7bil and RM4.1bil raised in 2015 and 2014, respectively.
The impact of the softer market has also seen IPOs being priced at lower earnings multiples as compared to two years ago.
Notably, some of the IPOs that took place in 2016 were priced at single-digit earnings multiples, a rare occurrence in previous bullish markets. Dancomech Holdings Bhd, which listed last July and the upcoming listing of Rhone Ma Holdings Bhd are examples of companies listing at single digit price earnings multiples.
However, one investment banker points out that there is a healthy IPO pipeline in the next couple of years and that this would lift ECM activities. “The market has priced in the negativity. At least for now there is more certainty and this in turn could result in the backlog of IPOs coming to the market,” a banker says.
The listing of Serba Dinamik Holdings Bhd, which is raising some RM600mil for its planned floatation on Feb 8, 2017, will be a watershed deal for IPOs.
That’s because it would end the 2016 dearth of major IPOs. This would be more so if EcoWorld International Bhd (EWI) joined the fray.
EWI is the overseas real estate unit of the Eco World development group and is looking to raise RM2bil from its planned 2017 listing.
The IPO pipeline in 2017 in Malaysia is in line with expectations of a rebound in IPO activities in Asia-Pacific.
According to Reuters, ECM activity in Asia-Pacific dropped in 2016 as weak IPO performance curbed demand for new listings in the region and listed companies slashed secondary offerings because of volatile markets. It said the US$207.4bil of equity offerings were the lowest since the US$159bill raised in 2013.
But while more major IPOs are in the pipeline for 2017, the question remains if there is appetite from investors for such offerings.
Consider this: some of the major listings of 2015 (there were no major listings in 2016) currently trade below their IPO prices.
This in turn could be a reason why investors are shying away from participating in major IPOs. This includes Malakoff Bhd which closed at RM1.38 on Dec 30, 2016, which was 24% below its IPO price of RM1.80.
Meanwhile, in terms of merger and acquisitions (M&As), the top 10 deals in 2016 amounted to US$7.9bil, lower than US$10bil in 2015. “M&As would be the theme for 2017 especially with the continuous volatility in the market and much needed consolidation in the steel and oil and gas industries,” said one corporate banker.