ARE some fundamentally sound Malaysian stocks undervalued? This question comes to mind because one of the goals of the Capital Market Masterplan 4 (CMP4) entails “optimising equity market valuation”.
The Securities Commission (SC) explains that the plan is to help raise “the visibility of quality companies, catalysing re-ratings where warranted and establishing structured recovery pathways for laggards”.
But do such laggards really exist in our market? One could argue that the opposite is the case – that many high-quality Malaysian companies listed on Bursa Malaysia are overvalued.
One key reason is the trapped liquidity in our market due to the large presence of government-linked investment companies (GLICs) on Bursa Malaysia.
These GLICs account for some 25% of total market capitalisation on Bursa Malaysia.
They tend to put most of their money into Malaysian equities and have in recent years been discouraged by the government from investing abroad.
While it isn’t clear if GLICs contributed significantly to the run up of Sunway Healthcare Bhd’s shares this week, they must have played a role in nudging up a stock that had already priced its floatation at frothy valuations.
Sunway Healthcare does have what we call the scarcity premium, the result of its small issuance – it only has a public float of 18% – and that it is rated as the best run and fastest growing healthcare provider in the country, with a good execution track record. There have also not been any new healthcare listings in recent years in Malaysia or the region.
At its close on Thursday, Sunway Healthcare was valued at 35 times its enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) on a trailing twelve months basis.
On a price earnings (PE) multiple basis, the stock is now at 84 times. It is very possibly the most highly valued public listed hospital group in the world today.
Clearly, the market is ascribing it a “superstar” status but it is not the only one in this boat.
There are many other Bursa superstars that command valuations higher than similar companies in other markets. I would say that companies like Vitrox Corp Bhd (historical PE of 62 times), Solarvest Holdings Bhd (25 times), Press Metal Aluminium Holdings Bhd (30 times), MR DIY Group (M) Bhd (25 times), 99 Speed Mart Retail Holdings Bhd (48 times), and Oriental Kopi Holdings Bhd (33 times) are good examples of the frothy valuations I am referring to. Peers in other countries trade at much lower PEs.
Malaysian stocks get decent coverage. There are a huge motley of analysts hungry to cover stocks and a decent number of public relations and investor relations firms that do a good job at promoting their clients at very reasonable fees.
Aside from the GLICs, we have a thriving asset management industry – the SC is right to boast about the RM1.14 trillion figure of assets under management in the country today. A big chunk of that money is invested in stocks on Bursa Malaysia.
Is having premium valuations a good or bad thing?
It can be good, opines the SC.
“The success of large public listed companies in establishing valuation premiums will have large positive spill-over effects in attracting more domestic and foreign companies to raise funds in the Malaysian capital market.
“This would, in turn, reinforce Malaysia’s position as a regional gateway and as an Islamic hub for ethical and sustainable products,” the regulator states in its CMP4.
But for Malaysian investors, why buy expensive stocks? Could this, in turn, partly explain the increasing interest among Malaysian retail investors to put their money into the markets such as the United States, a trend of course facilitated by the new digital platforms that make it easy and cheap to do so?
That said, the Malaysian market has an overall PE of only 15 times, even lower than Singapore, which used to be a laggard market. Why is that? Is that because aside from those superstars that perform well on Bursa Malaysia, we have a multitude of companies that sit in the range of the mediocre to the just really bad.
One indication of this is the fact that despite having a record high number of new listings over the past few years, the bulk of the entrants do not seem to be able to sustain their earnings growth once going public.
In this regard, the SC’s CMP4 has some notable plans. It aims to target the rot, referring to those companies as the “persistently non compliant or dormant firms”.
There had been numerous discussions in the past about how Bursa Malaysia ought to have some automatic delisting process for companies that don’t make the cut, but our regulators have always tended to thread carefully due to concerns of hurting minority shareholders who end up owning such crappy stocks.
But now the SC is saying it hopes to get enhanced statutory powers to “direct and oversee exits” from the stock market but hopes to do so but “with clear safeguards for minority shareholders”. This is a move in the right direction and it is time our investors ought to realise that as painful as a delisting can be, this is the risk you take when you invest in companies, especially questionable ones.
But the SC also has preventive measures. It intends to ‘review’ these bad actors.
“Companies at greater risk of distress will be subject to rigorous supervision and supplemented with more proactive interventions. Turnaround actions can then be initiated during an ‘action-plan’ window to provide the companies more time and support to improve their performance.”
This is great on paper. Executing it will be a challenge.
First, what is the criteria to determine if any company falls within this “risk of distress” category? Secondly, how does this sit with existing listing rules that already cater for the categorisation of companies that go into problems?
The SC says that the goal is for companies to have regular disclosures on value-creation targets and structured transformation plans. And that boards will be expected to demonstrate greater accountability for setting and achieving the more ambitious performance targets.
This is clearly the right thing to do. The SC needs to spend its efforts focusing on the bad actors on Bursa and less on the quality companies which already enjoy premium valuations.