Steelmaker completes Malaysia's largest IPO this year

Perwaja Holdings, a spin-off from Kuala Lumpur-listed Kinsteel, raises $111 million.
Upstream steelmaker Perwaja Holdings has raised M$367 million ($111 million) from MalaysiaÆs largest initial public offering so far this year. However, two-thirds of the shares were offered to existing shareholders of its controlling shareholder, Kuala Lumpur-listed Kinsteel, at a discounted price and 14.9% went to employees and retail investors, leaving only 17.4% for the private placement to institutional investors.

A source close to the company says the somewhat unusual offering structure û especially with regard to the split price û was implemented as an incentive to KinsteelÆs shareholders as Perwaja contributes a significant portion of KinsteelÆs profit and the spin-off means losing part of that. However, the backing by KinsteelÆs controlling shareholders would also have been helpful at a time when a difficult economic environment and rising inflation has led to all-time low trading volumes on the Malaysian stock exchange.

While the split pricing would have required a bit more marketing effort as it adds a layer of complication to the deal, the strategy proved to be right as the deal ended up attracting good demand both for the ôKinsteel trancheö and the private placement û the involved parties having successfully convinced investors that the company is worth owning at the higher price too. RHB was the sole bookrunner, while CLSA acted as the international placing agent.

Kinsteel shareholders were given rights to buy one Perwaja share for every four Kinsteel shares at a price of M$2.23 apiece, which marked a 23% discount versus the M$2.90 price that was offered to other investors. As the rights were tradable, some of the shares in the so called ôrestricted offerö may have ended up with institutional shareholders who do not own shares in Kinsteel.

About 35%-40% of the demand for the institutional tranche was said to have come from foreign investors, but since Kinsteel is also about 30% held by international shareholders (who were eligible to buy through the rights offer), sources estimate that about half of the overall deal ended up in the hands of international investors.

According to one source, the overall offering was about 1.5 times subscribed when it closed on Wednesday after two weeks of bookbuilding, although RHB stopped accepting orders from institutional investors a couple of days earlier as the level of demand was already sufficient. It also encouraged investors to submit non-inflated orders.

The interest in the stock was at least partly driven by a largely positive outlook for the sector for the next few years, as demand, fuelled by the fast-growing economies of Brazil, Russia, India and China as well as the Gulf region, continues to outpace supply. Supporting the outlook, global steel giants US Steel and ArcelorMittal both reported strong earnings during the bookbuilding and indeed, Perwaja itself announced early last week that it made a net profit of M$222.6 million in the first half of this year û a number that already exceeds the M$162.5 million that it earned during all of last year.

ôItÆs in the right sector but also, the valuation was not crazy,ö one source says with regard to why investors wanted to buy.

Based on the M$2.90 offering price and the first half profit (annualised), Perwaja will come to market at about five times its 2008 earnings. However, RHB is estimating that the profit will be greater in the second half, resulting in a 178% increase to M$452 million for the year as a whole, which will bring the price-to-earnings multiple close to four. And based on the discounted price to Kinsteel shareholders, the P/E multiple would of course be even lower.

The company offered a total of 150 million shares, which represented 26.8% of the enlarged share capital and will give the company a market cap of about $485 million at the time of listing. Of the total, 60 million were new shares, while 90 million were existing shares sold by Kinsteel and Maju Holdings. Pre-IPO Kinsteel owned a 51% stake in Perwaja which it bought in 2006, while investment, construction and consulting company Maju Holdings controlled the remaining 49%. Their respective stakes will drop to 37.3% and 35.9% after listing.

Perwaja sold 101.476 million shares through the restricted offer to Kinsteel shareholders; 11.2 million shares through each of the retail and employee offers; and 26.124 million shares through the placement to institutional investors. The offer prices were fixed at launch at M$2.23 for the restricted offer and at M$2.90 for the other three tranches.

Perwaja is an integrated producer of primary steel products and according to RHB research the largest upstream steel miller in Malaysia. It makes direct reduced iron (the pure iron that is left after removing oxygen from iron oxide, commonly referred to as DRI) and semi-finished long steel products, such a blooms, billets and beam blanks which it sells to steel companies further downstream for processing into various types of steel products, including light and heavy sections, beams, bars, rods and wire rods. About 65% of its sales go to Kinsteel. The company has secured a long-term supply of iron ore and its plants are also located right next to a port, giving it an edge over the competition.

Perwaja is more than twice the size of the second largest IPO in Malaysia this year û a $50 million offering by Sealink International, an integrated shipbuilder, owner and fleet operator, last month that was arranged by Ambank. Year-to-date there have been 12 IPOs in Malaysia, but given the small size of the others, this is the first deal to have a noteworthy participation by international investors. The management did a roadshow in Singapore and Hong Kong.

The shares are expected to start trading on August 20.
¬ Haymarket Media Limited. All rights reserved.
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