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Wednesday, 14 November 2018

Malaysia Capital Markets Deal

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Sime Darby’s first follow-on equity offering since it listed in 1980 was a crucial capital raising that helped restore confidence in the debt-laden Malaysian conglomerate.

The well-timed M$2.35bn (US$527m) placement was the country’s biggest equity financing during the review period, and one of the most challenging. At the time of marketing, not one of the 17 broking houses that covered the company – including Maybank, the sole bookrunner for the placement – had a buy call on the stock.

Sime Darby, which has interests the plantation, property, automobile and industrial sectors, was in far from its best shape. Moody’s cut its rating to Baa1 from A3 in March, less than a year after S&P cut it to A– from A in May 2015. Both ratings were on negative outlook, as sluggish commodity prices and volatile currency markets weighed on its businesses.

All four of the company’s main units had reported weak earnings for the nine months to March 31.

While the group had been selling assets to reduce its gearing, and had completed a successful perpetual sukuk earlier in the year, the equity proceeds were relatively small. A successful placement was therefore critical for the company’s deleveraging efforts.

A trading improvement in the April-June quarter provided a window, with three divisions – all except property – reporting stronger earnings. The company unveiled the results on August 23 and plans for the placement on the same day.

After obtaining regulatory and shareholder approval, Sime Darby pulled the trigger on October 4. It sold 316.3m shares, or 5% of the company’s share capital, at the top of the M$7.40–$7.45 range, a tight 2.1% discount to the pre-deal spot.

The books were well covered, with bids totaling M$6.2bn. Forty accounts participated and the top 10 were allocated 85% of the deal. Domestic institutions accounted for 90% of the investors and, of these, 95% were long-only investors.

Existing shareholders Permodalan Nasional and Employees Provident Fund subscribed to around 40% of the deal. Their presence provided early momentum to the deal, helping the company to close books within a couple of hours of launch.

The financing was the largest share placement in Malaysia since CIMB’s M$3.55bn follow-on in 2014. It was also the second-largest deal of the year in South-East Asia after Frasers Logistics’ US$633m Singapore Exchange IPO.

The deal triggered a rebound in Sime Darby shares. By December 5, the shares were a comfortable 7% higher since the placement at M$8.17, while the benchmark FTSE Bursa Malaysia index was down 2.5%.

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