Petronas Chemicals brings record Southeast Asian IPO

Petronas Chemicals Group has raised M$12.89 billion ($4.15 billion) from the largest ever initial public offering in Malaysia and Southeast Asia, exceeding Maxis Berhad’s $3.3 billion listing at this time last year.

At the moment it ranks as the fifth largest deal both in Asia and globally so far this year, but if the 15% greenshoe is exercised in full, it will raise $4.77 billion and push ahead of Samsung Life’s $4.4 billion offering to become the fourth largest – after AIA, Agricultural Bank of China and Dai-ichi Life Insurance. The deal brings the total IPO volume in Southeast Asia this year to $14.5 billion, which is more than triple last year’s volume and well ahead of the previous full-year record of $8.1 billion from 2007.

Remarkably, this year has now seen record-size IPOs in six Asian markets. Aside from Malaysia, Singapore (Global Logistics Properties $3 billion), the Philippines (Cebu Air $537 million, which is a record in dollar terms), India (Coal India $3.46 billion), South Korea (Samsung Life $4.4 billion) and Hong Kong (AIA $20.5 billion) have all broken new ground, and while no further records are expected before year end, the deal flow looks set to continue unabated for the next four weeks at least.

Petronas Chemicals is a spin-off from state-owned oil and gas giant Petroliam Nasional (Petronas) and the leading petrochemicals producer in Southeast Asia. It is also part of the government’s efforts to make more public sector companies available to domestic and international investors a means to attract more private investment and to boost liquidity in the country’s capital markets. The company sold a 31% stake at the top of the price range at M$5.20 per share. The shares were initially offered between M$4.50 and M$5.20.

As indicated by the price, investors were keen on the stock which gives exposure to a profitable company with a strong market position is several key chemicals. According to a source, the deal attracted about $30 billion of institutional demand, which means the institutional tranche was more than 14 times covered.

As indicated by the price, investors were keen on the stock which gives exposure to a profitable company with a strong market position is several key chemicals. According to a source, the deal attracted about $30 billion of institutional demand, which means the institutional tranche was more than 14 times covered.

The company offered 51% of the deal to institutional investors, domestic and international, while 37% was set aside for ethnic Malay investors under the so called Bumiputera tranche and 11.8% went to retail investors. The latter category was offered to buy the shares at a 3% discount, which resulted in a final price of M$5.04 per share.

About two-thirds of the institutional demand came from international investors with Asia accounting for about 60% and the rest split between US and European account, according to a source. Long-only investors accounted for more than half the demand. A portion of the institutional tranche, equal to 18% of the deal, was sold to Malaysian pension funds the Employees Provident Fund and Kumpulan Wang Persaraan as per a pre-launch agreement.

International funds have been keen on increasing their exposure to Malaysia in recent month amid expectations that the country’s equity market will at some point play catch-up with other Southeast Asian markets. Year-to-date Malaysia is the fourth best performing stock market in Asia with an 18% gain, just ahead of India, but well behind Indonesia, Thailand and the Philippines which are up between 44.3% and 35.6%. But while Petronas Chemical would have been an obvious choice from a liquidity perspective – Hwang-DBS Research estimated in a report that the stock will be the fifth largest on Bursa Malaysia in terms of market cap and will quickly be included in the benchmark KLCI index -- the valuation was viewed by some to be on the rich side.

The final price of M$5.20 translated into a 2011 price-to-earnings ratio of about 15.8 times and an enterprise value-to-Ebitda of 9.1 times. Among its key comparables Thailand’s PTT Chemicals trade at a 2011 P/E of 13.3 times and at an EV/Ebitda multiple of 8.9. In the Middle East, Saudi Basic Industries Corp (Sabic) trade at a 2011 P/E of 12.7 times and an EV/Ebitda multiple of 7.8. However, both these companies gained significantly during the marketing of Petronas Chemicals, which helped make the valuation of the newcomer look more reasonable. Since the start of investor education four weeks ago, PTT has added 20% and Sabic 14.9%.

Petronas Chemicals is scheduled to start trading on November 26. CIMB, Deutsche Bank and Morgan Stanley acted as bookrunners, while Citi and UBS were co-bookrunners.