M&As in the spotlight

AS 2025 begins, the question on many people’s minds is where will the market be heading and what will it take to propel the FBM KLCI upwards.

New listings have often been seen as one of the factors driving wealth creation, market liquidity and investor interest.

No doubt Bursa Malaysia Bhd has benefited tremendously from the active interest and trading in stocks.

The flurry of initial public offerings (IPOs) on the local exchange offers a smorgasbord for investors to indulge in equities, but many of the recent listings haven’t significantly impacted the FBM KLCI.

The exception has been 99 Speed Mart Retail Holdings Bhd, as the popular convenience store chain’s IPO found favour among retail investors.

There were 55 new IPOs on Bursa last year, the highest in 19 years.

While the pipeline of companies was a coup for the stock market, the new listings did not really light a fire among the broader breadth of investors.

Foreign investors, after an initial surge of buying, turned into net sellers by the end of the year.

The same was true with retail investors, leaving local institutions to carry the torch of investing domestically.

However, this captive investment focus may not add any major allure to the market as continued investments by large local institutions could make Malaysian stocks seem expensive in the eyes of foreign investors, who often seek strong value propositions.

The earnings outlook for KLCI stocks will be under the microscope to determine if they can draw in investors looking for value.

After what many feel to be a bumper earnings growth in 2024 compared with recent years, the key question is whether this will be enough to siphon in fresh capital into the market, especially considering the thematic plays that have driven interest in local stocks and a rapidly appreciating ringgit against the US dollar.

Which brings us to the other fillip for local markets – mergers and acquisitions (M&A) activity on Bursa.

Talks of consolidation always linger in the market, but two recent deals – Malaysia Airports Holdings Bhd (MAHB) and Public Bank Bhd’s bid for LPI Capital Bhd – failed to breach the desired acceptance levels needed to trigger compulsory acquisitions.

However, Global Development Alliance has extended its offer period for MAHB and remains confident of being successful.

M&A activity can be a significant driver of the stock market, if there is genuine value to be unlocked.

While companies do rely on organic growth, the earnings profile of the broader market until last year has been relatively weak.

Thus, companies acquiring competitors within the same industry as a way to drive earnings and valuations does make sense.

Just look at the banking sector, which has been a hotbed of M&A activity over the years.

The consolidation of the banking industry towards a smaller number of large players has propelled earnings for this group of stocks, which have also benefited from Malaysia’s demographic dividend, gross domestic product growth, and continued demand for credit.

Today, financial stocks account for a significant portion of the weightage of stocks on the FBM KLCI, and it is their earnings growth that will be key in driving both their valuations and the KLCI upwards.

Maybe other industries can take a leaf from the financial sector, exploring how acquiring competitors within their own industries can drive earnings and enhance valuations.