IPO valuation decline persists despite robust pipeline

TheEdge Wed, Feb 28, 2024 02:00pm - 2 months View Original


This article first appeared in The Edge Malaysia Weekly on February 19, 2024 - February 25, 2024

THE initial public offering pipeline is expected to remain robust this year with Bursa Malaysia Bhd aiming for 42 IPOs, compared with 31 in 2023. However, the new listings may not necessarily fetch higher valuations given that the average price-earnings ratios (PER) have trended downwards over the last two years.

In 2023, the local bourse saw 31 IPOs (excluding the Leap Market) compared with 30 in 2022. On average, the 31 listings in 2023 had lower valuations than the 30 listings in 2022. (Refer to table).

Apex Securities Bhd head of research Kenneth Leong tells The Edge he does not expect the valuations for new listings this year to re-rate higher due to the absence of fresh domestic market catalysts. Overall, he expects the valuations for IPOs to hold at a similar level as in 2023. “However, should the ringgit strengthen and Bursa Malaysia sees a continuous inflow of foreign funds to provide support, valuations may see an improvement.”

The valuations of new listings also vary depending on the sector, company size and growth prospects. In particular, highly sought after companies in technology-related industries such as artificial intelligence (AI) and cloud computing services, as well as renewable energy (RE) and electric vehicle-related industries are often perceived as having high growth potential that would command premium valuations.

Earlier, Bursa Malaysia revealed that underpinning this year’s target of 42 IPOs is the existing applications for 24 IPOs, which are already in the pipeline.  

Among the market debutantes, highway concessionaire Projek Lintasan Kota Holdings Sdn Bhd (Prolintas) is one of the hotly anticipated IPOs this year.  It is slated to be one of the largest IPOs in the country in two years, with its valuation estimated at RM3.5 billion, according to reports  citing sources.  Prolintas is a unit of Permodalan Nasional Bhd.

Upstream oil palm plantation company Johor Plantations Group Bhd is among the others idling on the IPO runway. The valuation of the IPO is estimated at RM2.5 billion,  according to a report by The Edge citing sources.  Johor Plantations Group is wholly owned by Kulim (M) Bhd, which in turn is 96.33% owned by Johor Corporation, according to data from the Companies Commission Malaysia.

Johor Plantations Group is set to be listed under Kulim (M) Bhd.  Kulim is 96.33% owned by Johor Corporation, according to data from the Companies Commission Malaysia.  

At a glance, companies that debuted at higher valuations in the last two years include those in electronics manufacturing services (EMS), engineering support providers for semiconductor industries, healthcare service providers and retailers of consumer products, such as electronics and dairy products.

The seven Main Market IPOs in 2023 had an average PER of 17.4 times, compared with 21.71 times for the five Main Market listings the year before.

The 24 listings on the ACE Market in 2023 had an average PER of 16.58 times, versus an average 17.15 times for 25 companies in 2022.

Among Main Market listings in 2023, EMS provider Cape EMS Bhd topped the valuation chart with the highest PER of 31.6 times, followed by golf equipment retail chain operator MST Golf Group at 27 times and engineering precision parts manufacturer CPE Technology Bhd with a PER of 23.49 times.

Property developer SkyWorld Development Bhd’s IPO price of 80 sen a share gave it a PER of 7.55 times, making it the company with the lowest valuation among Main Market listings last year. Its peer, Radium Development Bhd, which was also listed last year, debuted at a PER of 17.06 times, based on its IPO price of 50 sen per share.

In the same year, the top five listings on the ACE Market with the highest PERs were construction company Vestland Bhd (29.2 times), aesthetic medical services provider DC Healthcare Holdings Bhd (26.10 times), engineering support provider for integrated circuit assembly and test processes Edelteq Holdings Bhd (23.53 times), global business services provider Daythree Digital Bhd (23.1 times) and snack food distributor Wellspire Holdings Bhd (22.98 times).

In contrast, five listings with lower valuations were logistic service provider KGW Group Bhd (6.21 times), EMS provider NationGate Holdings Bhd (6.8 times), stainless steel sanitary valves, tubes and fittings distributor Minox International Group Bhd (10.68 times), infrastructure utilities engineering services provider Jati Tinggi Group Bhd (11.58 times) and packaging solutions provider L&P Global Bhd (11.72 times).

In 2022, Khazanah-backed dairy producer Farm Fresh Bhd was valued at a PER of 69 times when it debuted on the Main Market, making it the highest of all the listings that year and in 2023.  The high valuation contributed to the overall high average for Main Market listings in 2022. 

This was followed by smart city integrated system and solution provider ITMAX System Bhd at 37.7 times and Senheng New Retail Bhd was valued at 28.84 times. Farm Fresh, ITMAX System and Senheng all debuted on the Main Market.

The top valuations among the 25 listings on the ACE Market in 2022 were healthcare service provider Cengild Medical Bhd (27.01    times), pawnshop operator Pappajack Bhd (24.39 times), cybersecurity firm LGMS Bhd (20.61 times), EMS provider Cnergenz Bhd (19.27 times), sheet metal fabrication Coraza Integrated Technology Bhd (19 times).

The listings with relatively lower valuations were frozen seafood trader and processor PT Resources Bhd (6.8 times), instant beverage premix maker Orgabio Holdings Bhd (10.06 times), underground utilities and substation engineering services firm MN Holdings Bhd (10.55 times), ICT solutions provider SNS Network Technology (11.21 times) and building materials wholesaler and distributor Unitrade Industries (11.9 times).

Retail, tech and RE sectors to drive IPO activity this year

Despite PERs trending lower, the IPO pipeline remains healthy as this is not expected to affect companies’ decision to list.

“The change in IPO valuation was probably due to valuation for different sectors. In 2022, there were generally more IPOs in the technology sector, which demand higher valuations,” says Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.

“This year, we are expecting a couple of retailers to pursue IPOs. As the economy improves with lower inflation, consumer confidence shall rise. We are also expecting healthy growth in tourist arrivals, hence the retailers might perform well this year.”

Apex Securities’ Leong is bullish on the technology sector riding the recovery trend in semiconductor sales and the technology revolution, such as AI, cloud computing, as well as the RE sector which will benefit from various incentives to spur the adoption of green energy.

However, he is not too keen on property companies as the outlook for the sector remains cloudy due to the high overhang of units, particularly in the high-rise segment.

Rakuten Trade Sdn Bhd equity research vice-president Thong Pak Leng suggests keeping an eye on potential risks that could affect IPO valuations.

One is funds flow, which can influence market liquidity and investor appetite for IPOs. Second, heightened geopolitical tensions can create uncertainty and volatility in financial markets, leading to investor risk aversion which affects IPO valuations.

Higher commodity prices could raise production costs for companies across various industries, which leads to compressed profit margins, which could potentially affect the attractiveness of their IPOs, he adds.

IPO valuation not deterred by small-cap crash

Despite the recent sell-down in the small-cap space, market players believe this would not affect IPO valuation and activity.

“So far, the market volatility created by certain penny stocks has been well digested by investors. These stocks are largely speculative in nature, whereas the performance of stocks with sound fundamentals are unfazed by these noises. We think that the IPOs this year would continue to be well received as investors are looking for fresh new ideas,” Yong says.

“Currently, trading activity in the market is considered quite vibrant with average daily value exceeding RM3 billion in January 2024. The market was supported by positive news flow in the property and construction sectors, as well as inflow of foreign funds. Given current good sentiment, IPOs are likely to perform well generally.”

Apex Securities’ Leong says the overall interest in IPOs remains positive, judging by the oversubscription rates in recent months. Going forward, he expects demand to remain fairly stable, particularly for IPOs on the ACE Market and those with attractive valuations in line with industry averages.

The Malaysian equity market has witnessed a notable divergence in the performance between the main benchmark index the FBM KLCI, and the mid-cap index the FBM ACE Market Index.

In January, the FBM ACE Market Index dropped 10.65% to 4,755.03 and sank further to 4,698.21 last Friday (Feb 2), its lowest since October 2022 before rebounding to 4,896.55 on Feb 15.

The FBM KLCI, meanwhile, showed resilience, gaining 4% to 1,512.98 in January. It has gained further to 1,528.38 on Feb 15, marking its highest since June 2022. 

 

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