Bursa Malaysia priced its long awaited IPO on Friday, raising Rm531.2 million ($139.8 million) from the sale of 166 million shares. This represents roughly 33% of the company, which has a total of 500 million shares.
The IPO was priced right at the top of the indicative range of RM2.50-RM3.20 a share and the institutional book was said to be 40 times covered. International investors took 50% of the deal and domestic investors took the other 50%. Of the domestic tranche, 20% went to domestic institutions and 30% went to domestic retail investors and employees. This tranche of the deal was priced at RM3 a share, a 6.6% discount to the institutional tranche. It may seem strange that a deal that is 40 times subscribed needs a discount, but as the IPO for AirAsia showed, it is becoming a custom. Indeed this discounting is one way of boosting domestic retail interest in the equity markets, an interest that has waned significantly since the crisis.
Nevertheless, final allocations of the institutional side saw 70% going to foreign institutions and 30% to domestic institutions. The move to favour international participation was taken at the highest levels, by officials who saw the IPO as a way of reconnecting the Malaysian equity markets with international investors.
Indeed in coming weeks the government will be announcing which international brokers and fund managers will be chosen for five licenses each to operate in the domestic markets in Malaysia, creating an opening up of Malaysia's markets unprecedented since the crisis.
The company and its book runners UBS and CIMB certainly did their best to tell as many people as possible about the Malaysia equity story, visiting Hong Kong, Singapore, London, Germany and Italy on a two week road show. Being a Reg S deal, no US institutions were visited. It is understood that the deal was five times covered on the first day of the trip, which is unusual in that Asian investors tend to be more price sensitive than European investors and usually come in at the end of a road show not at the beginning.
Still, with no greenshoe on offer and no chance of upsizing the deal, it became somewhat inevitable that the deal was going to price at the top of its range. Investors are hoping that some more liquidity becomes available once the company is listed on March 18th. Stockbrokers and remisers who were the mutual owners of the exchange before it demutualized and corporatized own some 40% of Bursa Malaysia. These shareholders are subject to no lock up and so there could be some sales from them. The Ministry of Finance and the Capital Markets Development Fund hold the rest of the exchange.
From a valuation point of view, investors inevitably compared Bursa Malaysia with its cousin across the causeway in Singapore, the SGX, with whom Bursa Malaysia is developing a tie up. Analysts point to a valuation metric of EV to net operating profit after tax (Nopat). Bursa Malaysia's forecast figure for 2006 is 13.2 times, which is a 9% premium to that of SGX. However on a PE basis of 13.4, Bursa Malaysia is slightly cheaper than SGX, which trades at 13.8 times earnings.
According to Sunil Garg, the head of Asian bank research at Fox-Pitt Kelton, when the overall market goes up, stock exchanges perform very well, but when the market falls, they do very badly. "Stock exchanges tend to be very high beta assets," he says. "But they are good way to follow the overall market."
Bursa Malaysia makes roughly half its revenues from the primary market and half from the secondary market. Indeed 47% of its revenues comes from clearing fees, 18% come from trading fees, 13% from depositary services, 8% from listing fees, 6% from informational sales and 9% from other sources.
Given Malaysia's current favour with international investors, the outlook for revenue growth is positive. However, the exchange has an internal target of increasing its velocity (the amount of the total exchange capitalization that is traded every year) up from a level of around 30% to 60%. To put it into perspective, Korea and Taiwan have velocity figures of over 100%.
This shows that there is great scope for the amount of trading to increase rapidly in Malaysia. The key determinant will be whether or not domestic retail investors can be persuaded back into the market and be persuaded to by the 40 or so government linked companies that dominate the exchange. This IPO shows that foreign institutions have bought into the story. It is now time to tell it domestically.
