Singapore's Public-To-Private Trend To Continue
Fitch Solutions / Corporates / Singapore / Wed 14 Aug, 2019
Singapore's IPO market may have started to bounce back from its underwhelming performance in 2018, however, we forecast that it will face a strengthening cocktail of headwinds up ahead over the coming months. At the macroeconomic level, the fact that the souring economic performance is increasing the threat of a technical recession which would be a heavy blow to risk sentiment among issuers and investors alike. Meanwhile, at a micro level, we forecast the continuation of a worrying trend which is seeing a steady flow of public-to-private delisting deals on the Singapore Stock Exchange (SGX). This is bad news for both the IPO arena and local equity capital markets (ecm) more broadly. Furthermore, we note that while Singapore could stand to prosper from the ongoing trade tensions between the world's two largest economies which will catalyse an increasing flow of companies from the Chinese Mainland opting for a floatation deal outside of the US, we put the Hong Kong Stock Exchange (HKEX) in prime position to benefit from the potential upside (see 'Chinese Floats: US' Loss To Be Hong Kong's Gain', June 2 2019).
Being Undermined
Singapore - YTD Announced IPO Activity By Deal Value, USDmn (2007-2019)
Source: Zephyr (a Bureau Van Dijk Product), Fitch Solutions
Slowing Growth Not Helping
The macroeconomic backdrop in Singapore is certainly not helping the renaissance of the local IPO market this year. The advance estimates of Singapore's economic performance showed that growth contracted 3.4% on a quarter-on-quarter seasonally adjusted annualised basis in Q219, down from 3.8% growth in Q119. On a year-on-year basis, the economy grew by a meagre 0.1% during the second quarter, moderating from 1.1% y-o-y in Q119. As a result, our Asia team has recently revised their growth forecast for the 2019 full-year period to 0.9%, down from 2.2% previously. As a result, the threat of a technical recession is now more pronounced, but we believe that the government and the Monetary Authority of Singapore (MAS), which previously forecast 2019 full-year GDP of between 1.5% and 2.5%, have room to implement policies to support growth in the second half of the year and avoid a contraction in growth. Whatever the outcome, the stuttering economic growth in Singapore and the uncertainty around what will be the state's next move can only serve to weigh on IPO sentiment as it has done to local equities more broadly.
Base Effects Boosting STI
After reaching record highs early last year, the benchmark FSTE Straits Times Index (STI) lost value across the 2018 full-year period, returning -6.4% in total return terms. The downturn reflected concerns relating to rising global trade tensions and a slowdown in global growth (we forecast global real GDP to come in at 3.0% in 2019, down from 3.2% in 2018). That said, more accommodative monetary policy in many developed markets, particularly the US, appears to have been supporting Singaporean equities during the first half of 2019. While in positive territory in the ytd period (up by 7.6% as of the end of July, and now contracting by 0.6% y-o-y), data from the SGX show that the benchmark FSTE Straits Times Index (STI) has underperformed a number of key markets across the Asia Pacific region – significantly, including those on the Chinese Mainland – during the first seven months of the year. The STI posted returns that lagged behind Australia's ASX 200 index (up 10.0% in the ytd period); Thailand's SET index (9.5%); Shanghai's SE Composite index (17.6%); and Shenzhen's SE Composite index (23.9%) during the period in question. However, it outpaced the Hang Seng index in Hong Kong (up 7.5%); the Nikkei 225 in Japan (also 7.5%) and the Jakarta SE Composite Index (3.2%); the Korea SE KOSPI index (-0.8%); and the FTSE Bursa Malaysia KLCI index (-3.3%) across the same time period – according to SGX data. We highlight, however, that the STI's gains were largely from base effects contracting significantly across the course of 2018.
New Floats Coming Back
Despite the headwinds and the largely bearish sentiment, 2019 has (so far) proven to be a bumper year for first-time share sales. According to data accurate to August 6 2019 from Zephyr (a Bureau van Dijk product), there have been nine floats announced in the ytd period which successfully tapped local ecm investors for a combined USD1.11bn. This represents an increase from the USD884mn raised across 16 deals during the equivalent period last year, but it still ranks below the ytd average seen across the last nine years (USD2.36bn), according to our calculations.
The haul of deals in 2019 has already outpaced the 2018 full-year tally of USD920mn raised across 24 transactions. An active remainder of H219 would provide the 2019 tally to close the gap on the more recent full-year highs for funds raised from new listings in 2017 (USD2.65bn via 24 deals) and 2016 (USD2.32bn via 14 deals) – Zephyr data show.
While the STI's 2019 performance appears impressive at first glance, zooming out from the headline numbers suggests that the rebound has merely come from a low base to return to more historically average levels. In our view, the same can be said for new listing activity in the SGX. Last year (2018) was an exceptionally slow year for floats and saw just four deals which raised over USD100mn. The largest among them was the proposed USD245.4mn float of an unknown stake in power distribution holding company Summit Power International. The deal, which would have been the first overseas float by a Bangladeshi firm, failed to reach the market, however. It was postponed until further notice having cited a lack of demand from ecm investors for non-real estate investment trust (REIT) listings on the SGX. Citigroup, DBS and UBS served as the joint global coordinators on the failed deal.
REIT Time, REIT Place
In the 2019 to-date period, Zephyr data show that there may have been a trio of announced floats valued at USD100.0mn-plus; however, all three of them have been larger than the largest listing of 2018. Significantly, all three deals have been from REITs too. Prime US Real Estate Investment Trust (a commercial REIT) has announced a USD294.98mn deal in return for a 36.283% holding in the company; ARA US Hospitality Trust (a hospitability REIT) has announced a 67.109% float valued at USD334.20mn; while Eagle Hospitality Trust (a fellow hospitality REIT) has announced the largest deal of the year: a USD452.84mn fundraising via a 66.893% float. Illustrating the lack of appetite among local ecm investors for non-REIT floats that Summit Power encountered last year, we highlight that the largest deal to be announced on the SGX by a non-REIT so far this year has been on the Catalist board from iron ore concentrate exploration services firm Fortress Minerals in a deal valued at just USD11.1mn in return for a 15% holding in the company.
Such deals suggest that the SGX remains a go-to fundraising source for the Singaporean REIT sector, which continues to ranks as the biggest in Asia (excluding Japan). We note that there are 42 REITs and property trusts active in Singapore at the time of writing, with a combined market capitalisation of SGD90bn representing a substantial portion of the real estate market. As well as from ecm investors, the sector receives plenty of support from the state too. For example, in 2015, the MAS decided to scrap a 60% leverage limit for REITs that retain a credit rating, which would subsequently be subject to the same limit as other REITs. The MAS also said it would raise the leverage limit for all REITs to 45% of the total assets, up from 35%. Furthermore, it increased the limit on property developments by 15-25% of a REIT's assets to allow for more operational flexibility.
The Delisting Flow
One of the biggest factors which informs our bearish view on the SGX IPO market is that the number of delistings on the SGX continues to outnumber the volume of new listings. As a result, the number of listed companies in Singapore has declined for each full-year period since 2013 onwards through to the end of 2018, by which date there were 741 companies on the exchange. We do not expect 2019 to mark the end of this trend either. According to DBS Group Holdings, there are as many as 14 companies undergoing privatisation or in the process of being bought out this year. Bloomberg research points to aircraft maintenance firm SIA Engineering, event producer and promoter Unusual, engineering plastics producer Fu Yu Corporation, high-tech capital and consumer equipment service provider Frencken Group and luxury watch retailer The Hour Glass as potential delisting candidates before year-end. Meanwhile, we point to the climate of low valuations as largely to blame: the STI is trading at one-year forward price-to-book ratio of 1.05 compared with 1.34 for the MSCI Asean Index, according to Bloomberg data accurate to August 12 2019. SGX data also show that equity flows are heading in a similar direction too, with institutional investors net selling -SGD981.7bn during the month of July.
The regulator's attempts to halt this attrition have started to be phased in, with both the introduction of direct measures to reduce the appeal of delisting as well as moves to increase the appeal of the SGX to investors more broadly.
The SGX has tweaked the rules to make a desilting less favourable, rather than stop them completely. Under the new laws, companies looking to voluntary delist will now have to pay a higher premium to get a deal completed; receive the approval of 75% of shares held by independent shareholders; and gain the approval of the appointed independent financial advisor (IFA) that they are both 'reasonable' and 'fair' – a move which pushes potential listing candidates to give shareholders a better exit value. In this sense, 'fair' means a quantitative assessment determined only by the value of the offer price compared against the value of the target's shares – according to the Securities Industries Council of Singapore's guidance. Meanwhile, in order to boost its profile in the Asia Pacific region, we highlight that the SGX has bought a USD25mn 20% share in a forex platform, BidFX. This move dovetails with their larger multi-asset strategy and position as the region's top foreign exchange centre. In our view, all of these changes will serve to stem some of the flow of delistings over the coming months, however, we do not expect them to reverse the trend altogether.
Reason To Be Optimistic Long-Term
Despite the headwinds and our bearish outlook for Singapore IPOs in the near term, we highlight that the tradition for hosting firms with strong ratings will always give it the potential to attract bumper deals and compete with the larger exchanges – such as the Chinese Mainland exchanges of Shanghai and Shenzhen and the offshore resort of Hong Kong - for deals in Asia (see 'Non-Chinese Asian IPO Exchanges Profiting From Bullish EM Equities', June 14 2017).
The plans for a stock-trading link between the SGX and the Bursa Malaysia (BM) should help to keep the exchange on the radar of regional ecm investors going forward. The tabled tie-up (see 'Malaysia-Singapore Propose Stock Link', February 21 2018) stands to deepen the pool of liquidity between the two exchanges, offering ecm investors access to over 1,600 tradeable stocks with a combined value of around USD1.2trn. However, at the time of writing, the platform has yet to launch.