Corporate Financing Analysis - Malaysian ECM Bull Run Set To Strengthen Further - 23 OCT 2017


With economic growth strengthening, and with the local Kuala Lumpur Stock Exchange (KLSE) in positive territory, equity capital market (ecm) activity in Malaysia is on course to record its largest haul of deals by combined value for three years. Moreover, in BMI's view, the foundations are in place for this bullish momentum to carry on over into 2018 too, with an undervalued currency, cheap valuations on a relative basis, and a strengthening economy providing plenty of tailwinds. Back in Q216, we pointed to Malaysia as one of two IPO destinations in Asia, outside of China (Singapore being the other), that would be likely to outperform over the course of H217 and beyond ( see, ' Non-Chinese Asian IPO Exchanges Profiting From Bullish EM Equities ' , June 14 2017), and recent data suggests that continues to be the case.

On The Up
Y-T-D Malaysia Announced ECM Activity By Deal Value, USDmn
Source: Zephyr (a Bureau van Dijk product), BMI

Benefitting From SWF Diversification

The latest deal to add to the y-t-d tally of deals on the KLSE (or the Bursa Malaysia, as it is more commonly known) was in the secondary market, with national sovereign wealth fund (swf) Khazanah Nasional Berhad selling down a further 3.5% holding in airport manager Malaysia Airports in a MYR476mn (USD112mn) overnight block trade. Credit Suisse and Maybank served as joint bookrunners on the deal. Spinning off the holding at speed meant doing so at a discount, with the swf selling 58.2mn shares at a discount of between 0% and 3.76% to the firm's last close on the day prior to the deal, at MYR8.52 per share, with ecm investors no doubt hoping that Malaysia Airports will be designated funds from Malaysia's 2018 budget - something which it has requested but, as of the time of writing, does not yet know whether or not it will receive funds. The firm and its investors will not have to wait long to find out, however, with Prime Minister Datuk Seri Najib Tun Razak scheduled to table next year's budget in Parliament on October 27. With both Malaysia's air freight and air transport networks already well developed, this means stability for investors, even in the face of oil price fluctuations and exchange rate volatility. However, this also means that there is little room for expansion in the sector, meaning that muted growth - at best - is what investors can hope for. We highlight that, more broadly, the move by Khazanah Nasional comes as part of the fund's broader move to spin off non-core equity interests in state-backed companies in order to raise the funds to be spent on transactions overseas - a shift in strategy that supports our existing view that government investment vehicles are diversifying their approaches in order to provide more reliable investment returns ( see, ' SWFs Adapting To Survive ' , April 5 2017).

On A Bull Run

According to data from Zephyr, a Bureau van Dijk product, Malaysia ecm activity has tallied USD4,615mn in the 2017 y-t-d period across 168 deals. This combined value of deals currently ranks as the largest the country has played host to since the 2014 y-t-d period, when equity issuance tallied USD10,035mn by this stage in the year. Around one third of these deals have been IPOs (USD1,486mn), while the remaining two-thirds have taken place in the secondary market (USD3,121mn). In terms of recent trends, this represents a sharp downturn in follow-on activity - from USD5,243mn worth of deals recorded by the same stage last year - but a more than six-fold increase in the value of first time share sales (USD244mn) recorded during the 2016 y-t-d period, as shown by Zephyr data. This all puts ecm activity in the South East Asian nation on course to topple the full-year activity hauls of USD4,794mn (via 295 deals) and USD5,552mn (via 270 deals) recorded during 2015 and 2016, respectively. Furthermore, we believe that the market has the potential to go further in 2018 as well. The benchmark equities index, the FTSE Bursa Malaysia KLCI, is up by 6.92% in the y-t-d period and 5.82% from where it stood a year previously, according to Bloomberg data correct to October 13. In our view, there is further upside potential in the index's current rally too, with Malaysian stocks expected to outperform the broader Emerging Markets rally over the coming months, and should even hold up well in the event of a sharp US equity market decline, which is looking increasingly likely over the coming months in the view of BMI's Global team. We caution, however, that while the Bursa Malaysia has found itself ranking highly on the leaderboard among the big-hitting exchanges of the IPO world before - such as those in Mainland China, Hong Kong, the US, and Europe - we are not expecting it to compete for deals with more established bourses at the same clip this year, and potentially not in 2018 either. However, the recent uptick in activity will certainly have strengthened the Asian nation's case for appealing to a broader pool of potential listing candidates once more.

Support From Economic Growth And An Undervalued Currency

BMI points to two key fundamentals which will provide a favourable backdrop for local Malaysian listings going forward: improving economic growth and an undervalued, but strengthening ringgit.

In the view of our Asia team, the Malaysian economy has shown significant resilience when compared to other Emerging Market oil exporters, particularly when considering the rise in political risk witnessed globally across the course of 2016. We note that Malaysia's real GDP expanded by 5.8% y-o-y in Q217, bringing H117 growth to 5.7%. On a q-o-q seasonally adjusted basis, the economy grew by 1.3% in Q217, slowing slightly from the 1.8% q-o-q recorded in the previous quarter. Continued strong demand for electronics suggests that exports will be the main driver of growth over the coming quarters, while higher, or even stabilised oil prices will be supportive of overall growth. Domestically, we expect there to be a slight increase in government spending in the run up to the general elections that must be held by August 2018. To date, the ruling Barisan Nasional (BN) coalition has already announced a range of measures aimed at boosting support and we expect this to continue as elections draw near, providing a boost to headline growth. We have, therefore, recently upgraded our 2017 and 2018 real GDP forecasts to 5.3% and 5.0%, respectively, from 4.7% and 4.6% previously.

Together with the improving economic growth forecasts, we highlight that overseas ecm investor sentiment towards the local market continues to improve, owing to the undervalued but strengthening MYR, which means that investing is cheap but that the economy is showing signs of strengthening more broadly. Consequently, BMI's Malaysia analyst continues to hold a positive outlook on the MYR, with the currency showing signs of consolidation following a break of resistance. Over the longer term, we expect the currency to appreciate as it remains supported by a stabilising political outlook, an improving fiscal position, and a still-undervalued real effective exchange rate. Indeed, Malaysia's real effective exchange rate (REER) remains cheap by historical standards, despite having appreciated by 5.5% y-o-y since the beginning of the year. We expect this to be supportive of Malaysia's external competitiveness over the medium term. The country's positive NIIP position should also provide support for Malaysia's income account and the MYR in the future, as the currency is less susceptible to portfolio outflows. As such, we forecast the currency to remain on a broad appreciatory trend, averaging MYR4.25/USD in 2017 and MYR4.15/USD in 2018. We have also upgraded our end-2017 forecast to MYR4.05/USD from MYR4.20/USD previously and end-2018 forecast to MYR4.00/USD from MYR4.10/USD to reflect the ringgit's stronger than expected appreciation so far this year.