Malaysia IPOs – The Gap

01.09.12 / Author: Siddharth Podar, PE Asia

Billion dollar IPOs and record setting highs describe Malaysia’s stock market, as public valuations push way ahead of private ones. But for how long? Siddharth Podar reports.

Never mind Facebook’s $16 billion blockbuster IPO in May on the Nasdaq, even though it was the listing heard and third largest listings of the year globally were not in the US, nor in Hong Kong as one might expect, but in Malaysia.

The comparatively low-profile stock exchange in Kuala Lumpur (KLCI) recorded $5.28 billion in two key IPOs in the first half. Felda Global Ventures, a Malaysian palm oil company, raised $3.28 billion in a June debut and a month later hospital operator IHH Healthcare had a dual listing on the Kuala Lumpur and Singapore exchanges, raising RM6.3 billion (€1.6 billion; $2 billion).

The KLCI also closed at a record high in July and it trades around 15 times estimated profit, one of the most expensive exchanges in Southeast Asia, according to data from Bloomberg.

The hot stock market has created a pretty good valuation gap between public and private markets, according to sources.

Public companies have a double-digit earnings multiple while private company valuations are in the single-digit multiples, says Paran Puvanesan, executive director of PricewaterhouseCoopers M&A team in Kuala Lumpur.

“There is a good possibility that private valuations will move in tandem with investors’ promising perceptions of our capital market,” Puvanesan says, adding that he anticipates “stronger private valuations in the not too distant future.”

Big ticket IPOs in home markets tend to send a message to entrepreneurs that their company is worth more than it was before. The perceived worth of companies a step or two away from public listings will likely be the first to rise as “they will find that their valuations will be based on prospective valuations in the future”, adds Deepak Natarajan, a director at Intel Capital.

However, if a company is further back in the pipe with a couple years before listing, then there will be only a marginal impact on valuation. “In such cases, private investors will really evaluate the business for what it is today,” he says.

Brahmal Vasudevan, chief executive officer of Creador Capital, adds: “We do not anticipate any change in investment strategy in light of increasingly active equity markets.”

Creador backs small- to mid-sized companies with $100 million -$500 million enterprise value and with deal sizes between $10 million to $50 million, says Vasudevan. He points out that the KLCI has so far only attracted large companies in traditional sectors, and offerings from small- to mid-cap companies are often viewed as risky and bypassed, which tends to keep their valuations sensible.

In Malaysia, a company intending to list should have enterprise value in the $500 million to $1 billion range, because they are the ones that are often warmly welcomed by the public market.

“When we meet small- and mid-cap companies that are still unlisted, we encourage them to take capital from us in order to grow their business first and then attempt to go public,” Vasudevan says.

On the investment side, Malaysia’s few private equity players generally do not invest in IPOs or do PIPE deals. Nor do the global players, who find more compelling opportunities in China and Hong Kong. Dubai-based Abraaj Capital was the only private equity firm involved in the IPOs in Malaysia this year, selling its 7 percent stake in IHH.

There has been “little to no participation from private equity players in this increased flurry of activity”, either before or after the IPOs, says Vasudevan, adding that “they are preoccupied with other larger markets in the world”.

If the KLCI has a few more billion dollar IPOs, that could change.