COMPANIES looking to raise cash from the market this year will face tougher conditions. Malaysian bond yields are now higher as the ringgit has weakened further against the US dollar, translating into dearer cost of debt and investors seeking higher returns to compensate for what they perceive as higher risk.

The ringgit’s weakness, as Brent crude oil prices last week skidded below US$50 a barrel for the first time since May 2009, also means that investors, especially foreigners, will have to be convinced there will be even higher potential returns to compensate for weaker ringgit-denominated returns, says Choo Swee Kee, executive director and chief investment officer of TA Investment Management Bhd.

While cash calls are generally frowned upon, especially during tough times, investors judge any capital-raising requirement on a case-by-case basis based on synergy values of the corporate proposal.

“[Successful fundraising] is partly market dependent but it also depends on the opportunities available to the company … as long as investors or shareholders are convinced of the potential returns,” he says.

Vincent Khoo, head of research at UOB KayHian in Kuala Lumpur, says conditions for fundraising “are obviously tougher this year” but the appetite for equity fundraising varies, depending on the sector.

 “Energy assets or any asset with good concession-like or stable cash flows still see good demand, although it will be costlier to raise funds this year as the overall interest rate environment is trending up,” says Khoo.

 Companies slated to go for an IPO this year include MMC Corp Bhd’s power unit Malakoff Bhd (US$1 billion) and 1Malaysia Development Bhd’s energy unit Edra Global Energy Bhd (US$3 billion).

MMC’s impending listing of Malakoff would add to the growing list of companies and investors that are unlocking value and raising cash by floating a unit.

Money raised from new investors from the proposed listing of Sunway Construction Group Bhd — reportedly worth US$200 million — will go to its parent Sunway Bhd, which is offering for sale part of its 100% stake in the construction division.

On Dec 30 last year, Berjaya Corp Bhd (BCorp) made an aggregate gain of RM1.023 billion or 24.6 sen per share from placing out a portion of its stake in Berjaya Auto Bhd. Of the aggregate gain, RM164.17 million was gains from placing out a 7.42% stake on Nov 25, 2014, while another RM859.82 million was based on fair value gains on the carrying value of its remaining 36.74% stake in BAuto, which it no longer consolidates in its books following the placement that cut its stake from 44.16% to 36.74%. The move allowed it to “realise part of the capital gains on its investment in BAuto” and proceeds will add to its working capital.

BCorp shares have a RM1 par value and closed at 40 sen last Thursday. A quick search of Bloomberg data shows that at least 270 Bursa Malaysia-listed companies are trading below their respective par values. They include BCorp, TA Global Bhd and TA Enterprise Bhd, which have market capitalisations of more than RM1 billion each. Others with at least RM300 million in market cap include Berjaya Assets Bhd, Malayan United Industries Bhd, Mulpha International Bhd, KNM Group Bhd, Insas Bhd, Shin Yang Shipping Corp Bhd, MK Land Holdings Bhd, Landmarks Bhd, I-Berhad, K&N Kenanga Holdings Bhd, DutaLand Bhd, Chemical Co of Malaysia Bhd, Karambunai Corp Bhd, Malton Bhd and Lion Industries Corp Bhd.

These companies will have to reduce their par value to enjoy greater flexibility in issuing new shares at more compelling valuations. This is because new shares cannot be issued below their par value.

For example, China-based sports shoes and apparel maker Xidelang Holdings Ltd (XDL) on Dec 31, 2014, applied to reduce the par value “of every issued and unissued share of XDL” from 10 US cents to 3 US cents.

“The proposed par value reduction will provide the company with greater flexibility to raise funds at a more attractive price and implement future corporate exercises that entail the issuance of equity and equity-related securities, including ordinary shares and convertibles ...,” XDL said in its statement dated Dec 31, pointing out that its Dec 30, 2014, share price of 9.5 sen (2.7 US cents based on the exchange rate of US$1:RM3.4985) was at a 72.8% discount to its existing par value of 10 US cents (35 sen).

On its own, a move to reduce par value does not change a company’s issued share base, cash flow or earnings.

It is not immediately certain whether XDL’s move was a prelude to a corporate exercise but it might have to reduce its par value further,  given that the US dollar has strengthened further as its share price slipped.

According to theedgemarkets.com, the likeliness of XDL making a corporate exercise is “high”. Its stock price is deemed highly volatile, based on its ascribed 4 out of 5 points on “volatility” by theedgemarkets.com. Its fundamental score, however, looks decent at 2.7 points out of 3, but it only scored 1.2 points out of 3 on “valuation”.

It remains to be seen whether any corporate exercise will take place. Nonetheless, for companies that are already listed, the dilutive impact from share placements to third parties would be more expensive for existing shareholders as valuations have generally fallen from their respective peaks, an observer says.

Bloomberg data showed average price to earnings (PER) multiples for the FBM KLCI had fallen to 15.48 times compared with 15.78 times for 2014 and 17.59 times for 2013 and is projected to slide further to 15.33 times in 2015 and 14.09 times in 2016. Lower multiples generally imply lower valuations, which means shares have to be sold for less money to be attractive to potential investors. That may spell tougher times ahead for dealmakers.

This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.