Tapering unlikely to dampen IPO flow

[SINGAPORE] The wave of liquidity in the markets may have started to ebb, but bankers still expect keen interest in the initial public offering (IPO) scene here this year.

Real estate investment trusts (Reits) and business trusts, which enjoyed a strong run last year, will continue to come onto the market, they said.

Vineet Mishra, head of equity capital markets for South-east Asia at JP Morgan Chase, said that central banks' pullback on quantitative easing (QE) will not make investors abandon new Reits and business trusts, although they will be scrutinising total returns rather than just the yield itself.

"Tapering has started, but investors understand that tapering does not imply an interest rate increase," he said. "Asian markets have digested tapering news."

Reits and business trusts have enjoyed a surge in popularity in the past few years as investors chased after yields amid a low interest rate environment. The prospects of a start in tapering of the US QE in May last year, however, sent their share prices crashing - the FTSE ST Reit Index fell from a high of 890.16 to a year-low of 697.07 in August.

Reits and business trusts are highly geared, and a hike in interest rates would affect their borrowing costs. The US Federal Reserve last month decided to reduce the volume of its monthly bond purchases from US$85 billion to US$75 billion from this year.

Valuations for Reits have settled, said Mr Mishra, hence reducing further downside for the sector.

The reputation that the Singapore Exchange (SGX) has burnished as a listing destination for trusts also means more will head this way.

Matthew Song, head of South-east Asian equity capital markets at HSBC, said: "The Singapore Exchange has established itself as the Asian trust listing jurisdiction, and Reits and business trusts will be a dominant volume contributor for the primary listings this year."

Already, OUE Commercial Reit has kickstarted its IPO last Friday. It aims to raise $346.4 million.

At least two other Reits - a data centre Reit by Keppel T&T and one by South Korean retail giant Lotte Shopping - are said to be mulling IPOs here, and are reported to be planning to raise some US$500 million and US$1 billion respectively.

Last year was a banner one for Reit and business trust IPOs, when seven listings contributed US$4.09 billion, or 79 per cent of the total US$5.2 billion raised in the Singapore IPO market, according to Dealogic data. In comparison, the last time the Republic saw so many trust IPOs in 2007, eight listings raised US$1.8 billion.

Investors, however, will be more discerning this year.

"When it comes to demand for yield driven IPOs, investors are probably going to be more focused on the total returns and underlying equity story. Last year, the headline yield was a big draw in itself," said Mr Mishra.

Concurring, Mr Song said: "Investors will focus on two key investment criteria for primary Reit IPOs, namely, the company's growth prospects, either organically or through acquisitions, and the dividend yield on a one-year forward basis."

Besides trusts, oil and gas-related listings are expected to be another strong theme for the IPO market this year. Offshore oil and gas contractor Kim Heng Offshore is said to be the first of many to come, when it starts trading this Wednesday.

Bankers told BT that there are a number of such companies in the pipeline, drawn in part by the established cluster of offshore marine services already on the exchange, and the push by SGX for more upstream mineral, oil and gas listings through the introduction of new mainboard rules for this sector last year.

There is also strong demand for such listings. "The oil & gas sector and its associated support services industries seem to be a favourite amongst investors currently," noted DBS head of capital markets Tan Jeh Wuan. Another source of listings might come from China, especially in the second half of the year.

SGX had in November announced a direct listing framework for Chinese companies, in collaboration with China's stock market regulator China Securities Regulatory Commission.

While IPOs have resumed in China this year after a freeze since November 2012, the large backlog means that companies which want to raise funds quickly might look at overseas exchanges such as Singapore, said Deloitte chief of operations for clients and markets Ernest Kan.

Excluding 50 that are expected to be approved for listing by end January, some 672 companies remain in the IPO queue in China, according to Deloitte.

Investor confidence in Chinese listings remains weak, but "I am hopeful that the SOEs (state-owned enterprises) will be the first line of targets," said Mr Kan. "Those who had problems in the past are not SOEs, they are private companies. The SOEs are different and (they) will come under the care of China."

The first Chinese listings could come in the second half of this year, or early next, he added.

The IPO market has gotten off to a rousing start, with EuroSports Global, the distributor group behind the Lamborghini and Alfa Romeo brands, first off the starting block. The firm saw its shares finish at 31.5 cents in its trading debut on Friday, 12.5 per cent above its offer price of 28 cents.

In all, four IPOs are expected to take place this month, compared with only one by Logistics Holding in January last year.

Mr Kan sees a good outlook for the IPO market this year, as the bond market would eventually become more expensive for companies to raise funds from as interest rates rise. "That is good news for the equity market," he said.