Liquidity key to MY Value Up success

LAST week, the Securities Commission (SC), together with Bursa Malaysia, launched a more detailed programme under the MY Value Up initiative.

Both regulators reckon that Malaysian-listed companies lack compelling narratives that will allow investors to take a long-term view when investing in the local bourse.

Hence, the MY Value Up programme was envisaged to help improve corporate storytelling, strengthen investor buy-in – particularly among foreign investors – and simultaneously shift the mindset of the board of directors towards long-term value creation.

To kick things off, the SC engaged 88 listed companies with market capitalisation in excess of RM4bil each, representing some 82% of Bursa’s total market capitalisation.

While the focus is on this group of companies, regulators should adopt a more holistic approach.

There are almost 100 companies with a market capitalisation of between RM1bil and RM4bil, while almost half of the listed companies have a market capitalisation below RM200mil, accounting for just 2% of the total.

Enhancing all listed companies’ profiles via the holistic programme could better lift market interest and uncover underperforming stocks.

This includes companies trading well below book value, those that are fundamentally strong with low historical price-to-earnings multiples, offer decent dividend yields, and have sufficient liquidity to support investor participation.

Missing IR

The SC also rightly pointed out the role of investor relations (IR) in articulating the right message to the investing public, as some listed companies are not taking IR seriously.

Slightly more than half of all listed companies lack a formal IR function, be it internal or external.

Only 32% of all listed companies have an internal IR team, while among the 88 companies reviewed, it was observed that six had no formal IR team.

In terms of analyst coverage, four companies had zero research coverage, and six others have only one or two analysts covering them.

This lack of coverage suggests either weak institutional investor interest or insufficient IR efforts by the companies themselves.

Board’s role

Regulators’ efforts to enhance market attractiveness, improve valuations and encourage companies to better communicate long-term strategies are laudable, helping to elevate Malaysia’s global standing in terms of index weight and foreign ownership.

The MY Value Up programme largely mirrors similar initiatives in South Korea and Japan that have delivered results.

However, the focus should be more on capital management, rather than selected key ratios.

After all, key financial measurements such as price-to-book ratio and return on equity (ROE), where Malaysia lags regional peers, are ultimately outcomes of how capital is managed.

There is also a missed opportunity on the regulators’ part when it comes to capital management tools and how they are used or deployed by listed companies.

Key incentives should be on encouraging share buybacks, as well as pushing for these shares to be cancelled, which would lift ROE, earnings per share, and book value.

Allowing companies to flood the market again with bought-back shares – either via outright sales, reissuance, or dividends-in-specie, does not boost shareholder returns.

Liquidity issues

Other than capital management, regulators should also address the issue of low market liquidity.

In index construction, one of the key elements is the free float factor of a listed entity.

While the local bourse requires a minimum 25% free float, exceptions have been made for listings below this threshold on the assumption that levels will rise over time.

Even at 25%, however, liquidity may still be insufficient to attract large funds, as lower free float reduces Malaysia’s weighting in global indices such as MSCI, while also limiting index weightings within the FBM KLCI.

This was the case in point for the recently listed Sunway Healthcare Holdings (SHH), with a free float of just 18%.

It was also similar to previous index inclusion at the time of entry into the index on companies like MR DIY Group (M) Bhd and 99 Speed Mart Retail Holdings Bhd, with free floats of 15% and 17%, respectively.

In the case of MR DIY, the liquidity of the stock improved over time to 35% now, as the main shareholders pared down their stakes, post-listing.

For context, although SHH currently ranks as the 25th largest stock by full market capitalisation, its low free float limits its index weight to just 0.61%, the lowest among the 30 FBM KLCI constituents. While this still meets the minimum threshold for index inclusion, limited share availability can inflate valuations upon entry.

As more shares enter the market over time, prices may retreat, potentially dragging on the FBM KLCI.

Raising free float thresholds

The regulators should embark on a medium to long-term mission to improve liquidity among listed companies by gradually raising the current 25% free float threshold to at least 30% within the next three years, 35% within the next five years, and 40% by 2036.

This would help Malaysia improve its weighting in the MSCI Emerging Markets (EM) Index.

There is a need to act proactively rather than wait for index providers such as MSCI or FTSE to tighten definitions of liquidity, as seen in Indonesia, where a number of constituents have been relatively illiquid.

While the MY Value Up programme is a laudable initiative and broadly follows similar efforts in Japan and South Korea, more is needed to regain foreign investor interest.

The focus should extend beyond capital management incentives to include structural improvements in market liquidity, which would in turn lift Malaysia’s MSCI EM weighting.

The numbers do not lie.

At its peak, Malaysia had 46 constituents in the MSCI EM Index in 2017, compared with just 27 today.

Its weighting has also declined from 3.88% to 1.21%.

After all, according to the SC, a 0.1% increase in weighting translates into RM5.7bil in new fund inflows.

Meanwhile, a 10% increase in the Foreign Inclusion Factor – a measure of free float by MSCI – can boost the average daily turnover value by RM1.5bil, driven by a 6.1% increase in turnover velocity.

The push to have more Malaysian-listed companies in the MSCI index could see a 12.8% increase in market capitalisation, showing that inclusion into the MSCI EM Index is indeed crucial.