Wednesday 25 July 2012

Malaysia's IPO bonanza may be deceptive

Below an article by Wayne Arnold from Reuters, warning that a few big IPO's do not mean that the Malaysian economy is doing particularly well, especially in these difficult (global) times.

To me, the big IPO's (Felda and IHH) make a rather artificial impression. Also, listing a company is called "going public", but that sounds the wrong term if the public gets only a tiny percentage of the shares allocated. Bursa Malaysia should force companies that want to list to allocate a decent minimum percentage (say 10%) to the public. If the public can't participate, then what is the use of listing, better keep the company privately owned, and trade the shares between the big players.

IHH is listed today (both in Malaysia and Singapore) at a rather high PE ratio, "priced to perfection".

With this week's market debut of IHH, Malaysia surprisingly holds claim to the world's two biggest initial public offerings after Facebook.

And more are coming, including a broadcaster and the world's biggest condom maker.
But idiosyncrasies of the Kuala Lumpur market, an export-reliant economy and pre-election politicking should give investors pause.

Anemic markets have issuers nixing deals elsewhere.

But Malaysia's government steamed ahead on listing hospital operator IHH and palm oil producer Felda as part of an ongoing privatization drive.

Felda's US$3.2 billion (S$4.0 billion) deal cut the government's stake to 40 per cent.

And IHH's US$2 billion IPO trimmed the government's stake from 62 per cent to less than half.
The timing is auspicious. Prime Minister Najib Razak must call elections by next summer.

His ruling coalition is battling to reverse a slide in popularity that in 2008 cost it its two-thirds majority in parliament for the first time in 20 years and in April culminated in violent protests.

Selling down its stake in IHH should provide a US$385 million injection into Malaysia's sovereign wealth fund.

And the government made sure to cut Felda's farmers, a key source of electoral support, into that deal, giving them the right to buy shares at a discount on top of a roughly US$5,000 handout equivalent to a year's pay.

Moving big, government-backed issues is deceptively easy in Malaysia.

Underwriters can count on pent-up demand from a handful of local, powerful pension funds to soak up their allotment, while the prospect of a floor under prices draws in foreign institutions.

Big listings like Felda's also make it a shoo-in for inclusion in local benchmark indexes and thus a must-have for equity funds.

Next up will be Malaysia's partially state-owned, dominant pay TV provider Astro, which hopes to raise US$1.5 billion in an IPO by September. That's encouraging some other private companies to jump in, like Karex, the world's largest maker of condoms, which is aiming to go public next year.

But Malaysia's economy may not prove as impermeable as Karex's prophylactics.

Prices for palm oil and other commodities are weakening, as are exports to China and Europe and Malaysia's reliance on borrowing from European banks leaves it more exposed to Europe's crisis than other big exporters like Australia or Taiwan.

Investors should take care in distinguishing between a few well-timed election-year listings and a genuine Malaysian boom.

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