Malaysia will introduce rules governing initial public offerings of business trusts by next month as it seeks to extend a wave of share sales that saw the country surpass Hong Kong and Singapore in IPOs this year.
Companies including toll road operators and power producers are ideal candidates for setting up business trusts as investors roiled by Europe’s debt crisis seek stable returns, said Eugene Wong, executive director of corporate finance and investments at Malaysia’s Securities Commission.
Kuala Lumpur has been home to three of Asia’s four biggest IPOs this year as proceeds more than tripled from 2011 to 21.1 billion ringgit ($6.9 billion), data compiled by Bloomberg show. Business trusts, a structure through which companies have raised more than $9 billion in Singapore since 2004, may help Malaysia draw more offerings, according to Wong.
“There is an actual need and we have to keep the market current,” Wong said in an interview. “We have to provide more avenues of capital raising.”
Business trusts pool cash-generating assets and typically distribute a large portion of profits as payouts, making them similar to real estate investment trusts. They also comply with Islamic laws, Wong said. Shariah-compliant trusts prohibit income from investments in gambling, financial services based on interest payments, hotels and bars. Wong declined to say when he expects Malaysia’s first business trust IPO to take place.
Ports to Hospitals
Since introducing business trusts in 2004, Singapore has drawn 13 such IPOs listing assets ranging from ports to hospitals that now have a total market value of about $13 billion, according to the city-state’s stock exchange.
Hong Kong’s first business trust went public in November last year when PCCW Ltd. (8), the city’s biggest phone carrier, raised HK$9.3 billion ($1.2 billion) in a listing of telecommunications assets.
“It makes perfect sense for Malaysia to try to align itself with what’s happening in Singapore,” said Philippe Espinasse, former co-head of Asian equity capital markets at Nomura Holdings Ltd. “Southeast Asian exchanges have been very good with innovation. Whether it is real estate investment trusts or business trusts or Islamic products, they’re certainly much more innovative than exchanges in North Asia.”
Malaysia rose to prominence as an IPO center this year as palm oil producer Felda Global Ventures Holdings Bhd. (FGV) and hospital operator IHH Healthcare Bhd. (IHH) raised a combined $5.4 billion, with demand for both sales exceeding supply.
Investors were drawn to the offerings partly on optimism that Malaysia’s economy would continue to weather the effects of Europe’s credit contagion. Gross domestic product rose 5.4 percent in the three months through June from a year earlier, accelerating from the previous quarter’s 4.9 percent growth.
While both Felda Global and IHH Healthcare have risen from their IPO prices, Astro Malaysia Holdings Bhd. has slumped 12 percent since completing a $1.5 billion IPO last month.
JPMorgan Chase & Co.’s senior country officer for Malaysia, Steve Clayton, said he expects more billion-dollar IPOs in the country with the introduction of business trusts, citing a surfeit of large companies with suitable assets such as highways, telecom, utilities and gaming firms.
“There’s a lot of interest in these business trusts at the moment,” said Clayton. “It means that the momentum that we’ve seen in the last six months will continue into the new year.”
Business trusts have had a mixed performance in Singapore and Hong Kong. Hutchison Port Holdings Trust (HPHT), which raised $5.5 billion in Southeast Asia’s biggest IPO, has tumbled 23 percent since it started trading in Singapore in March 2011. Pacific Shipping Trust, the first shipping trust, was delisted in March this year amid sluggish trading. HKT Trust, comprising the telecom assets sold by PCCW, has gained 60 percent in Hong Kong this year.
This year, Religare Health Trust, Ascendas Hospitality Trust and Far East Hospitality Trust listed in Singapore. Far East and Ascendas issued so-called stapled securities that include a business trust component. Aviation Capital Trust, which will be backed by planes from General Electric Co.’s aircraft leasing unit, and Berjaya Sports Toto are also planning initial share sales in the city-state.
“Bundling cash-generating assets into a trust is one thing; there also needs to be a clear and convincing story,” said Espinasse, who’s the author of “IPO: A Global Guide.” “At the end of the day, these are equity securities and when it comes to equities, it’s all about a story and growing a business in addition to dividend payments.”
Malaysia, which started a $444 billion 10-year development plan in 2010 to build roads, railways and power plants, pioneered Islamic finance 30 years ago. It has the biggest global bond market that complies with religious tenets and was also the first to introduce Shariah-compliant REITs. The Southeast Asian nation is also home to Al-Aqar Healthcare REIT, the oldest publicly traded Shariah property trust.
Prime Minister Najib Razak announced in his annual budget speech on Sept. 28 that tax and stamp duty exemptions will be given to companies setting up business trusts as part of efforts to develop the market.
“Malaysia is an Islamic finance hub and business trusts will fit perfectly in providing more Shariah-based investment opportunities,” Wong said.