Lead managers JPMorgan and RHB Sakura cleared a $603.95 million IPO for PLUS Expressways yesterday (Wednesday) bringing to $1.4 billion the amount of equity raised from the Malaysian market over the last month.
This represents no mean achievement given that PLUS and Maxis before it have raised in one month almost double the entire amount of equity issuance from Malaysia in nearly three years. In a regional context, the two IPOs also rank as the second and fourth largest in 18 months alongside CNOOC and PTT.
From the outset, PLUS was always considered the more difficult of the two because of a less exciting equity story and a troubled past, which many international investors did not feel had been adequately reflected in the valuation. However, because the flotation was always heavily slanted to a domestic audience, the international portion effectively amounted to a manageable $235 million.
The company offered 930 million shares, with a 67%/33% institutional and domestic split. A 630 million share institutional placement was priced at M$2.55 just below the middle of an M$2.40 to M$2.85 indicative range. This tranche closed two times covered, with a geographical split of 70% Asia (of which 60% went to Malaysia), 20% Europe and 10% US.
About 170 accounts participated and 15 placed 10% orders of which about four were for more than $50 million. Most were said to either be global emerging markets funds or Malaysian country funds. "Two accounts said that this was their big re-entry to Malaysia since the financial crisis," one observer comments.
Where the domestic retail tranche was concerned, there were 300 million shares on offer, with pricing at M$2.295, representing a 10% discount to the institutional tranche. This tranche was said to have closed 1.33 times covered.
The retail offering comprised a 46.8 million share placement to PLUS employees, a 26.2 million placement to users of the company's electronic toll payment system and 101.35 million to retail investors, with 30% set aside for Bumiputra investors. In addition, 125.64 million shares were offered to former UEM shareholders on the basis of one PLUS share for every four UEM shares.
In total, the offering represented 19% of the company's issued share capital and at issue price, PLUS will command a $3.18 billion market capitalization, just placing it in the country's top ten.
Co-leads for the institutional tranche were CLSA and Credit Suisse First Boston, with ING Barings acting as co-manager. The execution of the deal was considered to have been handled well and as the lead unusually capped itself at 70% of the selling concession, the three banks had a bigger incentive than usual to earn some money from their syndicate roles.
It would have been needed in the final two days ahead of pricing as the unsettling impact of the prime minister's snap resignation and retraction over the weekend killed hopes for a final burst of momentum just before books closed. On top of this, PLUS had to contend with equity markets which have been falling across the region for the whole of the roadshow period and a very large deal ahead of it, which had already sucked a lot of demand out of the market.
Many funds did not buy the deal. As Chong Yoon Chou of Aberdeen Asset Management in Singapore says, "We didn't feel that it had enough of a kicker for a regional fund like us. We already have a number of investments in Malaysia we're happy with. We didn't want to change our neutral weighting on the country and didn't want to switch out of any of our existing stocks, so we didn't buy it."
Two concerns for fund managers were a lack of clarity over dividend payments and lingering doubts that management will run the company in the best interests of all the shareholders. Both issues are tied to the company's links to the UEM/Renong group, its subsequent forced privatization by the government and eventual debt restructuring.
Under the terms of the restructuring, debt was reduced from M$16 billion ($4.21 billion) to M$7 billion ($1.84 billion), but this still means that the company has a very weak debt to EBITDA ratio of 5.8 times forecast 2003 earnings. Under the terms of company's existing bond covenants, PLUS will be unable to pay a dividend until it has paid down some of the debt and re-built its retained earnings.
It estimates that it will be able to pay a dividend of about 3.5% from 2003 onwards and has said that of every M$1 of revenue the company will be able to pass on $0.56 to shareholders. "The company's EBITDA earnings are almost all free cash flow," one observer explains. "There is almost no capex, low operating expenses and no tax until 2006, so it will all be put towards de-leveraging."
Because the company will require only 10% of revenue to maintain operations and capex is limited, investors were shown annual EPS forecasts of about 17.5% for the next three years. For investors that did buy the equity story, the company should offer defensive predictable earnings, with an attractive equity kicker tied to GDP growth.
Since it opened in 1994, the 847.7km north to south expressway has averaged annual traffic increases of 7.5% per annum and forecasts that the figure will rise to just under 8% going forwards. The company operates a concession which expires in 2030 with tariff increases gazetted to increase by 10% every three years for the entire period, keeping political risk and regulatory uncertainty to a minimum.
As a result, pricing at a 14% discount to a current DCF valuation of M$2.96 per share was said to be reasonable relative to both regional comparables (which are limited in number) and more established toll road operators in Europe which trade at similar levels.
In the past Renong management frequently made free with their cash cow to finance less profitable areas of the group. The valuation of the IPO affords investors little safety margin for untransparent management and its successful completion may, therefore, be viewed in some quarters as a vote of confidence in a Malaysia with or without Mahathir.
As one participant concludes, "This deal shows investors believe that Malaysia has turned a corner on corporate governance."