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Enter season of public listings

by Ronnie Teo, bizhive@theborneopost.com. Posted on June 16, 2013, Sunday

THE beginning may have been slow but after May 5, companies are competing for space to list on Bursa Malaysia.

The year, so far, has seen unique players such as Tune Insurance Holdings Bhd, low cost aviation mogul AirAsia X Bhd and three more special purpose acquisition companies (SPACs) going for public listing.

BizHive Weekly takes an in-depth analysis of this market trend.

Boom in listings on Bursa after elections

WITH AirAsia X Bhd (AirAsia X) being the latest to join the queue for listing on Bursa Malaysia, it is certainly a robust time for the domestic capital market at play.

The bourse has seen a slow start to the year. This pales in comparison to the flurry of IPOs seen in the first half of last year. However, these activities picked up after the 13th general elections (GE13).

Before the conclusion of polling on May 5, Bursa Malaysia only accommodated three listings — China Automobile Parts Holdings Ltd on January 30, Tune Insurance Holdings Bhd on February 20 and CLIQ Energy Bhd (CLIQ Energy) on April 9.

SOURCE: Bursa Malaysia

However, once the elections were concluded, the market picked up with KLCC Property’s stapled structure listing on May 9, Matrix Concepts Holdings Bhd on May 28 and Leon Fuat Bhd on June 5.

Other dates for listing include MPHB Capital Bhd tentatively on June 25 and AirAsia X on July 10.

Three more listings – Sona Petroleum Bhd, TerraGali Resources Bhd and Australaysia Resources — under the category of Special Purpose Acquisition Companies (SPACs) are gearing up for IPOs in the coming months.

Number of New Listings (As at June 5, 2013)

Several property players are also looking to …………

“A lot of listings were held back prior to GE13. Once the political risk overhang was removed, there was slew of pent-up issuances coming on stream,” HwangDBS Investment Management Bhd (HwangDBS IM) head of equities Gan Eng Peng noted in an exclusive with BizHive Weekly.

Gan believed there existed buoyant liquidity and demand for good investment opportunity from Malaysia, further reaffirming his stance that “good quality IPOs will be well-bidded.”

“There is also a scarcity of supply of good stocks available,” he added.

“By that we mean stocks with good fundamentals and valuation. For now, we are left with stocks with good fundamentals to choose from, not both, as valuation has normalised and some has run up a fair bit post-GE.”

Positioning portfolios in Malaysia

Gan said the market has certainly been stronger this year compared to the last as investors were very adversely positioned for any uncertainty from GE results late last year.

“As we moved closer to the election event, foreign investors started to position their portfolio in Malaysia as our market had been lagging the regional peers and they were attracted to our strong economic fundamentals.

“This is seen from the firm market performance leading up to the election. Our local market rallied strongly immediately after GE13 and it remains firm to date.

“Now that the buying frenzy has fizzled off, we think the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) has another 10 to 15 per cent upside for the rest of the year as it has lagged five to 25 per cent versus other Southeast Asian markets in the last six months.”

Gan reaffirmed that the sheer weight of liquidity in the market and the lack of investing opportunity due to low interest rate environment in the global front will drive the local market.

The small to mid-cap stocks has legs to continue its run as the large caps have run up by a lot now.

“Should the market remains buoyant, we are expecting a dozen more listings in the pipeline until the end of the year, considering the already bullish sentiment in the market and improved risk appetite among the investors.

“Note that there are many investors that missed the rally earlier on. They will take this round of IPO as their opportunity to participate in the market rally, albeit them entering at a higher valuation now, as mentioned above,” he explained.

Gan also said he was not expecting any particular large-sized ones to be listed (those with more than RM 10 billion in market cap) other than IOI Properties this year, adding that his expectations were listing should be driven from the medium-sized companies (those with around RM 1 billion market cap).

The specs on SPACs

THEY own no offices, equipment or assets but plan to list and then use the proceeds to acquire assets.

Welcome to the world of special purpose acquisition companies (SPACs), a relatively new concept on Asian bourses.

SPACs are companies that have no operations or income-generating business at the point of IPO, and have yet to complete a Qualifying Acquisition (QA) with the proceeds of such offering.

The spurt of SPACs comes after Malaysian equities rose for four straight years, including a banner year for IPOs in 2012, and as investors anticipate a jump in mergers and acquisitions in Southeast Asia.

To date, South Korea is the only other established market apart from Malaysia with such companies.

As such, a SPAC relies heavily on the credibility of its management team who can identify attractive targets and make value-creating acquisitions that will meet the SPAC’s strategy and enhance shareholders’ value.

The management team must have the track record, qualifications and experience that are relevant to specific industries where acquisitions are intended to be made and to achieve the SPAC’s business strategy as laid out in the prospectus and to competently perform their individual roles.

Southeast Asia’s first listed SPAC — Hibiscus Petroleum Bhd – has seen very encouraging performance since its listing in July 2011.

Hibiscus Petroleum is now an oil and gas exploration firm after making acquisitions in the Middle East and Norway.

Cliq Energy recently listed on April 9, also with its foray into the oil and gas industry.

Three more Malaysia-based SPACs – Sona Petroleum Bhd, TerraGali Resources Bhd, and Australaysia Resources and Minerals Bhd – are slated to list in coming months.

Listings of SPACs are also known as blank check IPOs because such companies raise money through the stock market without a single asset on their books.

SPACs are mere shell companies with no business to speak of other than a plan to buy corporations that will be folded into the entity.

“Essentially, investing in SPACs is buying into the quality of the management team and their ability to acquire assets in their field
of expertise. These assets tend to be at earlier phases of business development stage which inherently means higher risks,”
commented Gan from HwangDBS IM.

“In terms of investor base, so far, it has attracted the interest of high net worth retail investors. However, institutional investors have not really invested into this space in Malaysia yet.”

Despite its positive performance to date, Gan is not particularly ‘enamoured’ into this space for several reasons.

“Firstly, it would mean investing into a close-ended fund which traditionally trades at a discount to its fund value upon listing. The logic behind this is the underlying assets hold more risk than the initial cash holding of the fund,” he explained.

“In other words, investors could potentially get a better entry price after it has been listed. That aside, how well the SPAC will perform beyond that is purely up to ability of the management and the quality of its underlying portfolio assets.”

Secondly, Gan noted that SPAC assets tended to be higher risk compared to, say, large cap stocks, making them only suitable for higher risk mandates.

“Thirdly, in most cases, investing into the underlying assets requires specialised knowledge and they are also difficult to keep track of in terms of performance except through the SPAC management itself.

“In this context, keeping updated on the business and third party verification on the business’ health will be challenging.”

SPACs in Malaysia

Most of the SPACs in Malaysia are operating within the oil and gas sector with a few upcoming SPACs slated to enter the mining and resources industry.

SPAC is more developed in the US and South Korea, compared to Southeast Asia.

While Malaysian SPACs are mainly in the oil and gas, and mining sectors, their US counterparts are mainly in the technology industry.

Properties: Finding the right time

KUCHING: Mega listings are anticipated from property players this year, with players such as KLCC Stapled REIT already listed and Iskandar Waterfront Holdings and IOI Properties in the planning stages.

“Within the next few months, there will be three new listings with potential market capitalisation of RM9 billion to RM13 billion each which should boost both local and foreign investors interest in the sector,” highlighted an analyst from HwangDBS Vickers Research Sdn Bhd.

Gan from HwangIM added that the Malaysian property stocks have been in a state of flux since SP Setia Bhd’s shareholding changes last year.

“In the sense, there is no perceived market leader in the property development sector in our local bourse,” he added. “The listing of large-cap property developers such as IOI Properties and Iskandar Waterfront Holdings, come in at the right time to fill the vacuum of a leader in the property development sector in our local bourse.”

These listings are on the back of a robust property and construction scene post elections which are seeing major projects making progress, one in particular is the KL-Singapore high speed rail (HSR).

Several awards of government redevelopment projects will also accelerate, highlighted the HeangDBS Research analyst, with more details expected soon. These include the Tun Razak Exchange, the Bandar Malaysia project, and the Bukit Bintang City Centre.

There is also the return of foreign property buyers into the market which will benefit certain high-end projects in Kuala Lumpur and Penang.

“Although foreign buyers make up less than two per cent of overall transaction volumes, certain high-end condo projects in Penang and KL have experienced a pick up in foreign sales to 20 to 30 per cent,” said the analyst at HwangDBS Research.

“Recent launches in Nusajaya & Medini saw foreign buyers (mainly Singaporeans) contributing 50 per cent of sales. Enquiries are on the rise, including from cash-rich Japanese and mainland Chinese (strongest growth segment and top 2 applicants for Malaysia My Second Home programme which offers incentives to foreigners).

“We expect this positive trend to continue as uncertainty over policy risk has dissipated post-elections, regulators in regional markets remaining hawkish on the property sector, and improving bilateral ties (especially with Singapore).

“Malaysia properties are still relatively cheap compared to other more developed markets with limited restrictions on foreigners (who are even allowed to own freehold land).

The return of foreign buyers in a big way should help revive the sluggish high-end condos and office segment which have been plagued by large incoming supply depressing rentals and increasing vacancy rates.

It should also help broaden demand and set new price benchmarks. These, in turn, will spur players to take the next step towards growing via public listing.

BizHive Weekly looks at three property players’ listing prospects:

 

KLCC REIT (Market Capitalisation: RM13 billion)

KLCC Property Holdings Bhd (KLCC Property) listed the first-ever Islamic stapled security real estate investment trust (KLCC REIT) structure on the main board of Bursa Malaysia on May 9 this year.

The group also conducted a restructuring exercise which allowed the Petronas Twin Towers, Menara 3 Petronas and Menara ExxonMobil to be housed under KLCC REIT while its remaining assets – Suria KLCC, Menara Dayabumi and the Mandarin Oriental Hotel – remaining under KLCC Property.

The listing of KLCC REIT was much anticipated mainly for the fact that it was the first ever stapled REIT in Malaysia on the lack of it being the largest Malaysian REIT by market capitalisation as well as asset size of RM15 billion.

To recap, a stapled security is where investors own two or more securities which are generally related and bound together through one vehicle.

“KLCCP is a good investment story for us, despite it has rallied a fair bit last year and this year as they are the leader in the REIT space in Malaysia,” Gan stated. “We are expecting the purchase of Suria asset will compress its yield further, and this is the basis of us holding on to this stock in our portfolio.”

HwangDBS Research highlighted that the group’s dividend yield is still an attractive 4.7 per cent for super prime commercial assets with resilient earnings from long-term leases with bluechip tenants (including triple net leases with parent PETRONAS).

“We are also of the opinion that the injection of Suria mall – which is 70 owned by KLCC Property and CBRE owning the rest – into the REIT is imminent,” the analyst said.

“We also do not discount the possibility of potential placements in future to improve liquidity as Petronas’ effective stake has increased to 75 per cent from 51 per cent post-conversion of RCULs (minimal dilution impact with tax savings from REITs).”

 

Iskandar Waterfront Holdings (market capitalisation RM9 billion)

Iskandar Waterfront Holdings Sdn Bhd (IWH) is expected to list on Bursa Malaysia sometime within the next two months.

IWH is the master developer in Iskandar Malaysia, a metropolis in the making in the peninsula. IWH is developing its land into a waterfront city which is slated to be fully completed between 30 and 50 years’ time.

IWH is looking to raise funds to undertake more reclamation works for the Johor Bharu coastline and the rivers within the about 1,700 hectares (ha) that it has in the southern tip of Johor, besides building roads, sewerage and other infrastructure.

Of the about 1,700ha, IWH has about 809.37ha in Danga Bay, which will be developed into 10 flagship projects, including a marina. Each development will be different for better unit take-up rates.

Of the balance land-bank, 768.9ha are in the Johor Baru city centre and the eastern side or Tebrau Coast of the southern tip of Johor Baru, and it also has 121.41ha in Desaru. The about 1,700ha made up about 1.12 billion sq ft of gross built-up area, the source said.

“We expect interest in IWH to be strong given lack of large-cap purer proxies to Iskandar Malaysia (aside from UEM Land). IWH will be among the largest landowners in Iskandar Malaysia with 4500 acres (potential RM80bn GDV) in the more matured Johor Bahru, Danga Bay, and Tebrau (via 47 per cent-owned Tebrau Teguh) areas,” said HwangDBS Research.

“Valuation will likely be at a premium, likely benchmarked against China-based developer Country Garden’s recent acquisition of 55 acres in Danga Bay at RM376psf.

“Khazanah and Johor state government each owns a 20 per cent stake in IWH while Tan Sri Lim Kang Hoo has 60 per cent (execution track record however is rather patchy).”

 

 

IOI Properties (market capitalisation RM12 billion)

Upon listing sometime by the latter portion of this year, IOI Properties will be among the most profitable developers with earnings before interest and tax of more than RM500 million and margins of more than 40 per cent thanks to low land cost from conversion of plantation estates.

The group’s asset size is estimated at RM15 billion with Malaysia, Singapore (Sentosa Cove) and China (Xiamen) contributing 1/3 each.

“We believe IOI Properties can be the new bell-weather for the sector given the dearth of large entrepreneurial-driven developers with strong track records and earnings growth, following a spat of M&As over the past two or three years,” noted HwangDBS Research.

“IOI Properties will have one of the largest exposures to townships, leveraging on the robust demand for affordable housing.

“Its landbank in Ayer Keroh also stands to benefit from potential stop along the proposed KL-Singapore high speed rail while its Kulai landbank can ride on rising investments into Iskandar Malaysia (located near Johor Premium Outlet).”

Meanwhile, HwangIM’s Gan believed that the investor pool for IOI Properties will likely be from IOI Corporation as shareholders in the latter stock are given dividend in-specie for the former stock.

“In addition, given the general higher market valuation now, it will be more attractive for IOI Corporation investors to access IOI Properties by exercising the dividend rights given to them.”

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