This article first appeared in Capital, The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

THE number of initial public offerings (IPOs) on Bursa Malaysia’s ACE Market gathered steam in 2023, even though its index retreated from a 12-month high of 5,843.23 points in February and drifted lower during the year. The FBM ACE Index closed at 5,226.58 points last Thursday.

There were 24 listings on the ACE Market this year, one less than the 25 in 2022, which was the highest number of listings since the market started in 2009.

Despite the weakness in the local stock market, the overall IPO market continued to be robust this year. A total of 34 listings raised RM3.55 billion, compared with 35 IPOs that raised RM3.27 billion in 2022.

The 49 IPOs on the ACE Market in 2022 and 2023 exceed the 47 companies that made their debut on the market from 2017 to 2021.

There is evidence that the streamlined approval process for IPOs, in addition to less stringent listing requirements compared with the Main Market, has made the ACE Market even more attractive as a listing destination.

M&A Equity Holdings Bhd managing director of corporate finance Datuk Bill Tan reiterates that the change in the regulatory framework that makes Bursa Malaysia the sole authority, or “one-stop centre”, to approve listings on the ACE Market has helped boost the number of IPOs.

In the past, companies seeking to list on the ACE Market had to get the approval of both Bursa Malaysia and the Securities Commission Malaysia. The more relaxed framework is part of the SC’s Capital Market Masterplan 3, which aims to enhance fundraising efficiency through a seamless listing process.

“The approval process is now more efficient. But the bigger factor is that many companies in Malaysia are small and medium enterprises (SMEs), which make up about 90% of the country’s economy, and are more suitable for the ACE Market,” says Tan.

“The weakness in the broader market does not supersede the sentiment for new listings on the ACE Market. But large listings are impacted by market sentiment. There are not that many big corporations in the country,” he adds, noting that investors have an eye for technology and semiconductor stocks.

The flurry of small listings continues as companies see the ACE Market as an incubation period before graduating to the Main Market.

KAF Investment Funds Bhd chief investment officer Chue Kwok Yan says since some companies do not meet the profitability requirement of the Main Market — in addition to the fact that Main Market IPOs are governed by the SC and the turnaround time tends to be longer — promoters and advisers may be incentivised to list on the ACE Market instead.

According to Areca Capital Sdn Bhd CEO Danny Wong Teck Meng, this is in line with the global trend, which has seen many smaller companies flocking to list on the Nasdaq in the US and in Australia.

“Many of the companies that went into the ACE Market are in technology and renewable energy (RE), which is a high growth sector, and the profitability is not there yet compared with the Main Market’s listing requirements. But going into an IPO provides visibility and fundraising opportunities for these kinds of companies,” Wong tells The Edge.

“It is not because the Main Market companies went in at high valuations compared with the ACE Market listings. In my opinion, it is because of the timing.

“If you look at the FBM KLCI’s performance, the overall market sentiment is down to the US Federal Reserve’s aggressive monetary policy and that the big capitalisation share float is higher than that of ACE Market companies, which made it hard to manage that kind of float in 2022 and 2023.”

Despite the soft sentiment on the ACE Market as reflected by the downward pattern of the index, the majority of the new listings have managed to trend above their respective offer price.

Only four of the 24 listings this year are trading below their IPO price. The companies are DS Sigma Holdings Bhd, MYMBN Bhd, Plytec Holdings Bhd and KGW Group Bhd.

The other 20 listings are trading above their IPO price. Nationgate Holdings Bhd is the star performer, having rallied 297% to RM1.51 from its offer price of 38 sen. Others whose share prices have more than doubled since their IPO include Wellspire Holdings Bhd, TT Vision Holdings Bhd, Oppstar Bhd and Mercury Securities Group Bhd.

Of all the Main Market listings this year, only Cape EMS Bhd is trading above its IPO price, up 19% to RM1.07 from 90 sen per share. The overall performance of the seven Main Market IPOs appears to pale in comparison with the performance of the ACE Market listings.

The rest are trading below their IPO prices. MST Golf Bhd is the worst performing of the new listings on the Main Market this year. The golf equipment retailer was almost 40% lower at 49 sen on Dec 20 against its IPO price of 81 sen.

Raymond Chooi, regional head of equity capital market at Maybank Investment Banking Group, attributes the average post-listing performance of -12.7%, or market capitalisation weighted average of -8.9%, to having been dragged down by selected stocks in the property and retail sectors.

He, however, points out the merits of listing on the Main Market.

“The seven Main Market listings have raised RM2.17 billion compared with RM2.23 billion in 2022. This may give an impression that the Main Market is less attractive. But on the contrary, if one were to look at comparable sectors of the Main Market and ACE Market — namely, industrial, manufacturing and consumer — the Main Market has attracted price-earnings multiples at a premium to the ACE Market. The wider accessibility of the Main Market to various funds, including international ones, helps to support such fundraising,” he says.

Meanwhile, there has been a noticeable absence of blockbuster IPOs like that of MR DIY Group (M) Bhd or Farm Fresh Bhd in recent years. Khazanah Nasional Bhd-backed Farm Fresh was listed in March 2022, valuing the dairy producer at RM2.5 billion while the IPO of MR DIY in October 2020 valued the company at RM10 billion.

KAF’s Chue explains that it could be due to IPO advisers tending to push the valuations of Main Market IPOs higher. “Many local companies lack the scale and for those that do, the promoters may be waiting for the profit level to hit a more mature level before listing,” he suggests.

Fund managers and investment bankers reckon that the overall stock market will do better next year as the US seems to have paused its interest rate hikes.

“The stock market should do better in 2024 as the Fed is putting a pause on its interest rate hikes, which is a positive for the capital market, coupled with lower inflationary pressures. In return, this would be a positive sign for more companies to go into the market, especially for the larger listings,” says Areca’s Wong.

The market is anticipating the listing of highway operator Projek Lintasan Kota Holdings Sdn Bhd (Prolintas) next year through an infrastructure fund, Prolintas Infra Business Trust (Prolintas Infra BT). The IPO could value the trust at RM3.5 billion.

Other anticipated large listings on the Main Market in 2024 are grocery chain store 99 Speed Mart Sdn Bhd, which seeks to raise RM1.5 billion, and Loob Holding Sdn Bhd, the owner of the Tealive bubble tea brand.

M&A Securities’ Tan expects ACE Market listings to remain vibrant in 2024 despite anticipating that liquidity will remain tight in the stock market due to high interest rates.

“I’m currently working on several IPOs that will be listed in 2024. In terms of the number of new IPOs on the ACE Market, I think it will be more than this year,” he says.

Maybank Investment Banking Group’s Chooi believes the overall equity capital market in 2024 will be vibrant given that “there are signs that interest rates have peaked and that central banks should be looking to pause further hikes, if not cut interest rates”.

“The economy has also coped well with the challenges this year and corporates are expecting to register stronger growth in core earnings for next year, at +15.6% for companies under Maybank IB Research’s coverage versus +11.2% for the FBM KLCI. This compares with +2.6% and +1.5% respectively for this year,” he says.

“We expect IPOs in 2024 to surpass 2023’s, potentially turning out to be the highest since 2018. Evidence of implementation of the economic blueprint announced this year should bode well for investor confidence in 2024. We may also see REITs (real estate investment trusts) exploring fundraising as the peaking of interest rates should reduce concerns about compressing spreads.”

The robust local market outlook for 2024 is in line with global trends, which will spur the IPO market.

The EY Global IPO Trends 2023 report says the enthusiasm for IPOs is high, and smaller deals are emerging with improved after-market performance.

“Globally, moderating inflation and potential interest rate cuts in 2024 could attract investors back to IPOs, by improving liquidity and return outlooks. However, sustained geopolitical instability may undermine confidence. Broadly, the year ahead hinges on an improving macroeconomic backdrop for IPO revival, as companies eagerly await more favourable market conditions to widen the IPO window,” it adds. 

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