A sugary IPO rush

Investment choice: A file picture showing people monitoring share prices in Kuala Lumpur. The market is flush with liquidity due to low interest rates, and investors are scrambling for IPO shares in the hope of higher returns.

As the pandemic ravaged through businesses in 2020, companies should begin rebuilding themselves this year.

Theoretically, the results of the recovery should only be seen in 2022.

But something slightly different is playing out. At least going by the pipeline of companies seeking to float on the stock exchange.

There are 30 companies that are to get listed this year alone, according to the Securities Commission.

One top investment banker says that in all his working life, he’s never been as busy this year, working on initial public offering (IPO) deals for the Main Market.

But how can the companies go for listing if their businesses were badly hit last year?

If that is not surprising, here’s another bunch of numbers that are going against the norm – massive amount of liquidity is looking for IPO shares of the recent ACE Market listings. This has resulted in record-breaking oversubscription rates.

To put it in perspective, just four ACE Market listings attracted a whopping RM1.47bil in applications this year for only RM94mil worth of public portion shares.

This clearly points to a market flush with liquidity, a result of low interest rates, and investors scrambling for IPO shares in the hope of higher returns.

Considering that, could it be the case that company owners and their advisers are rushing out listings to capture this opportunity?

Could there be cases of owners wanting to cash out of their businesses? Could valuations be at stratospheric levels, thinking that due to the strong demand, investors will just snap up IPO shares regardless of their pricing?

One investment banker working on a few large listings on the Market Market says the reason for the new listings has less to do with the above-mentioned reasons. Instead, he puts it down to three “buckets” of companies that are coming to the market.

One are the clear beneficiaries of the Covid-19 pandemic and a good example of this would be rubber glove manufacturers.

It has been reported that two rubber glove players are making their way to the market.

Harps Holdings Sdn Bhd and Smart Glove Corp are reportedly seeking to raise about RM2bil and RM1bill respectively via listings on Bursa Malaysia (see sidebar).

Their valuations will be similar to current glove stocks on the market, points out the banker, adding that they are likely to offer a slight discount to leave something on the table to investors.

“Sure, it does seem that valuations of glove stocks have come down recently, but the demand for the products is there. If you are a glove company certified to sell to the United States, with full environmental, social, and governance or ESG compliance, there should be no disruption to your growing business, ” he adds.

The second group of companies are those whose business was relatively unaffected by the pandemic. And yet another group of companies are those whose recovery from the pandemic has been better than expected in terms of earnings.

One of the more interesting IPOs this year will be CTOS Digital Sdn Bhd, a credit reporting agency that provides credit data and information online for the banking sector.

It was reported that CTOS is seeking RM2bil valuation at an unknown valuation.

Private equity firm Creador owns 80% of CTOS.

Credit scoring firms seem to be favoured by investors.

The top three credit scoring companies, namely, UK-based Experian PLC, US-based Equifax Inc and TransUnion trade at earnings multiples of 48 times, 43 times and 52 times respectively.

Creador is also enjoying some goodwill thanks to its successful flotation last October of another company it backed, namely MR DIY Group (M) Bhd. In just six months, MR DIY’s share price has more than doubled to RM4.10 from its RM1.60 IPO price.

The stock now trades at 75 times its earnings.

Farouk Kamal Urusharta Jamaah Sdn Bhd Head of Investments Farouk Kamal expects that listings this year like CTOS would do well due to the high demand from funds ready to deploy capital in light of a recovery from the Covid pandemic. In addition, CTOS’ syariah-compliant status also bodes well.

“MR DIY was listed at a time when the Covid-19 was at its peak but the company’s share price has performed well since then.”

“With a combination of factors of the economy opening up and investors, both institutions and retail, looking for new ideas, this would make the IPO market for this year an exciting one, ” he tells StarBizWeek.

“But, of course this still depends on valuations, and the businesses the companies are in, ” he adds.

One of the biggest factors driving companies to go public is the prolonged bull run in the stock market, says M&A Securities managing director of corporate finance Datuk Bill Tan.

“It is increasingly looking like the worst of the pandemic is over and economies are looking like they are on a recovery path. So both issuers and investors are not wanting to miss the opportunity to catch this wave”.

Tan reckons that the amount of liquidity in the market today is as big as in 1997, when the economy was growing between 7% and 10%.

“The liquidity in the market will remain buoyant as investors are hungry to look for investment opportunities, ” he adds.

Bursa Malaysia has been one of the worst performers in the region with volumes drying up and foreigners selling out.

The FBM KLCI, which gauges the performance of the top 30 companies, has been down in the past five out of six years prior to Covid-19.The IPO market had also been lacklustre. There had only been between 12 and 17 new listings every year on Bursa Malaysia from 2012 to 2017.

In comparison, there were close to 30 listings every year in 2010 and 2011.

“Our market was mundane and there was a lack of interest especially among the retail investors.

“That story is reversed now, as retailers are making up a bigger chunk of the volume traded, as they hope to ride this once in a lifetime opportunity of economic recovery post the pandemic, ” Tan says.

Earlier this week, Bank Negara said Malaysia’s economic growth, as measured by gross domestic product (GDP), is projected at between 6% and 7.5% in 2021. In 2020, Malaysia saw its GDP contract by 5.6%.

Small company listings on the ACE Market particularly stand out due to the price performance. Some have tripled on their first day of trading. This has fed into the frenzy by retail investors to apply for such shares thus pushing up IPO subscription rates.

One fund manager notes that this “seemingly excessive” liquidity seems to be more interested in small company IPOs due in large to “speculative interest” of the investors.

He says this is possibly why the same investors were not enthusiastic about applying for shares in MR DIY, which was a listing that raised a massive RM1.5bil, but which saw its public portion oversubscribed by a mere 0.07 times.

IPOs involve private companies becoming publicly traded ones, where company shares are accessible to everyone to buy and sell on Bursa Malaysia.

Some recent IPOs such as Flexidynamics Holdings Bhd and Volcano Bhd (which will be listed this week) have seen their shares being oversubscribed by a whopping 156 times and 176 times, respectively.

While many recent listings have seen their share price perform well, this is not always the case.

“Investors should be aware share prices cannot keep rising. They have to be careful not to get caught up in the hype, ” an analyst warns.

The increasing retail participation in the market should lead to a spike of interest in the ACE Market this year. According to the SC, in 2020, retail investor participation in the local stock market made up 32.4% of total value traded, significantly higher than the five-year average of 21.4%.It was also discovered that 83% of retail volume in the month of August last year was attributed to stocks priced at less than 50 sen. And that 75% of retailers were investing only in ACE Market counters.

In addition, last year net buying in the local equity market by retail investors made up a total of RM14.3bil, surpassing the RM10.3bil net buying by local institutional investors.

Astramina Advisory managing director Wong Muh Rong suggests that investors chasing IPOs should spend time digesting the information on the company provided in their prospectuses before making an investment decision.

She also points out that the spike in the oversubscription rate for IPOs is attributed to the limited supply of shares for the public.

“Over the last few years, the number of share offers to the public has been reduced and hence could not cater to the growing demand, ” she says.

Whatever the case, 2021 is likely to be a significant year for the IPO market.

Among the other companies that could get listed this year are Ramsay Sime Darby Health Care Sdn Bhd that is looking to raise around RM1.3bil and Affin Hwang Asset Management Bhd that could raise around RM500mil.

Others include construction services company Tuju Setia Bhd and manufacturer of animal health and nutrition products Yenher Holdings Bhd.

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