This article first appeared in The Edge Malaysia Weekly on October 3, 2022 - October 9, 2022

ALTHOUGH capital markets everywhere are in a bearish mode as global central banks’ tightening monetary policy raises funding costs, Bursa Malaysia looks set to see a record year for initial public offerings (IPOs), at least in terms of the number of new listings on the ACE Market.

So where is this liquidity coming from?

Market observers say there is pent-up demand for new ideas and the volatility in the market that started in the beginning of the year has led many investors to sit on the sidelines.

At last count, a total of 28 companies have been listed this year — four on the Main Market, 19 on the ACE Market and five on the LEAP Market. A market observer says Bursa Malaysia could see a total of 37 IPOs by the end of this year.

There are three upcoming listings on the ACE Market this month — water technology solutions provider Cosmos Technology International Bhd, electronic manufacturing services (EMS) company Betamek Bhd and solar player Sunview Group Bhd.

Last week, steel products manufacturer Leform Bhd entered into an underwriting agreement with MIDF Amanah Investment Bank Bhd for its IPO, also on the ACE Market.

Meanwhile, on the Securities Commission Malaysia’s (SC) website, there are five prospectus exposures by companies seeking a Main Market listing. They are DXN Holdings Bhd, Kumpulan Kitacon Bhd, ITMAX System Bhd, CPE Technology Bhd and Cape EMS Bhd.

According to sources, health supplement producer DXN could be the next largest IPO for the Malaysian stock market after Farm Fresh Bhd, which was listed earlier this year. Farm Fresh made its debut on March 22, raising almost RM1 billion.

It was reported that DXN was seeking to raise about US$400 million, or RM1.80 billion.

“The IPO of DXN could be this year or in the first half of 2023. The roadshow with cornerstone investors has already started. However, it will depend on the market conditions as a larger IPO would take a longer time. The impending general election could push back the listing,” a source familiar with the company tells The Edge.

In 2021, 30 companies went public, compared with 19 in 2020.

Year to date, a total of RM2.91 billion has been raised from new listings, of which Farm Fresh Bhd made up about 36%.

A total of RM2.51 billion was raised from the IPO market in 2021 and RM1.99 billion in 2020.

The timing of these IPOs may be regarded as odd as more investors may be opting to hold tight onto their cash as market conditions remain volatile. But there appears to be ample liquidity in the IPO market.

A senior investment banker believes that the volatility in the market is not a big factor when it comes to companies seeking to list on the ACE Market.

“We believe that the trend of ACE Market listings will continue as there is a lot of liquidity in the market, and many investors are holding cash,” he says.

Astramina Advisory Sdn Bhd founder and managing director Datin Wong Muh Rong points out that many of the ACE Market listings offer a small number of shares at their IPO, which explains the double-digit oversubscription rate.

“Over the years, the number of shares offered to the public has reduced and demand is increasing,” she says.

Wong adds that the change in the regulatory framework that makes Bursa Malaysia the sole authority, or “one-stop centre”, to approve new listings on the ACE Market has boosted the IPO market.

“The listing process is a lot faster now for the ACE Market since the new framework started earlier this year,” she adds.

In the past, companies had to seek both Bursa Malaysia and SC approval for ACE Market IPOs. The more relaxed framework was part of the SC’s Capital Market Master Plan 3, which aims to enhance fundraising efficiency through a seamless listing process.

M&A Securities Sdn Bhd managing director of corporate finance Datuk Bill Tan sees the ACE Market listing trend continuing. He concurs that the new framework has made the market more competitive.

“Some companies are not ‘big’ enough for the Main Market, and the ACE Market is sponsor-driven, which many SMEs are more comfortable with before they move on to the Main Market,” he says.

Unlike the Main Market, the ACE Market is open to all companies that can comply with the listing requirements. There is no profit history requirement, but any admission must be through a sponsor, which usually involves investment banks.

“The ACE Market prepares companies to get to the Main Market. Although some of these companies may be making ‘Main Board’ profit, but qualitatively they may not be ready for it,” Tan adds.

He says small and medium enterprises (SMEs) make up 90% of the country’s economy; as such, it is natural to see more ACE Market IPOs moving forward.

“The Malaysian economy is driven by SMEs and it is definitely a good thing as they are more creative and agile, which is crucial for business success. Many of the local SMEs that have survived during the pandemic are expected to enjoy exponential growth as the economy opens up,” he adds.

Investor interest in new listings, especially on the ACE Market, is stronger than ever despite the weak market sentiment.

To put things into perspective, four ACE Market listings attracted a total of RM2.36 billion in applications this year for RM228.98 million worth of public portion shares.

This clearly points to the fact that the market is indeed flush with liquidity, despite a higher interest rate environment.

Another reason could be that owners of companies and their advisers are looking to other avenues to raise funds, including the equity market.

MIDF Amanah Investment director of corporate investment banking Sherilyn Foong agrees that there is ample liquidity in the market, but says investors are more selective.

“It depends on the returns, with a tendency and bias towards lower risk thresholds and appetites of late,” she says.

Foong alludes to the fact that the ACE Market is deemed as a higher-growth market, which is attractive to retail investors who are looking for growth companies, especially in the SME sector.

“SMEs are indeed the backbone of our Malaysian economy and play a most crucial role by providing much-needed employment to our population.

“Companies with decent and good valuations, coupled with steadfast investment banks as IPO sponsors and advisers, are major catalysts driving the growth of our ACE Market,” she adds.

However, Foong points out that there could be a dearth of mega IPOs owing to the volatility in the market.

“Quality, big market capitalisation issues are indeed much anticipated by our capital markets,” she says.

Of the 10 recent IPOs, the share prices of the counters listed on the ACE market have done better than those on the Main Market, surging as much as three times on the first day of trading.

Even if investors held their positions beyond the first day, many of these IPOs are trading at 40% to 80% higher than their offer prices, a sign that the market is hungry for fresh ideas.

For instance, medical devices distributor Umedic Group Bhd saw its share price surge more than 37% on the first day of trading on July 26. As at last Wednesday’s close, the counter had gained 157% to 82.5 sen from its IPO price of 32 sen.

Meanwhile, engineering support provider SFP Tech Holdings Bhd and digital solutions specialist Agmo Holdings Bhd have gained 485% and 242% to RM1.75 and 89 sen respectively from their IPO prices.

It is worth noting that some counters are trading below their IPO value, namely gold jewellery wholesaler YX Precious Metals Bhd and building materials wholesaler Unitrade Industries Bhd, which fell 29.6% and 26.7% to 19 sen and 22 sen respectively as at last Wednesday’s close.

Meanwhile, Main Market-listed Farm Fresh gained 17.8% to RM1.58 as at last Wednesday’s close, while consumer electrical retailer Senheng New Retail Bhd and rubber processor Seng Fong Holdings Bhd dropped 35% and 12% to 68 sen and 63 sen respectively from their IPO prices.

According to a report by Crowe Malaysia PLT, the technology, financial services, healthcare and plantation sectors are the star performers in terms of share price movements since IPO, with all the companies in these sectors recording gains after their listing.

“This could be attributed to market sentiments in the era of accelerated digitisation and adoption of technology. The worst performer is the construction sector, where the share prices of both companies listed under this segment are below their IPO prices,” the report says.

The firm points out that IPOs continue to be one of the major avenues for companies to raise funds for expansion.

“The high number of IPOs despite the lacklustre equity market also demonstrated that growth companies can attract investors if they have a compelling business model and where the company demonstrates a good profit track record.”

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