In an announcement to Bursa Malaysia yesterday, Berjaya Corp Bhd (BCorp) confirmed it is currently in talks with Singapore-based Kim Eng Holdings Ltd for the latter to take up a strategic investment in its stockbroking arm, Inter-Pacific Securities Sdn Bhd (Inter-Pac).
The diversified group said a detailed announcement would be made once the terms of the proposal have been agreed on.
Kim Eng made a similar announcement to the Singapore Exchange yesterday evening, adding that a strategic investment in Inter-Pac may or may not proceed.
The announcements were made in response to an article in The Edge Financial Daily yesterday that BCorp was in advanced negotiations to divest a 70% equity stake in Inter-Pac to Kim Eng, which was believed to be scouting for an acquisition in the local stockbroking industry.
The newspaper reported that the deal would be in the form of cash plus a share swap, with a premium to be paid for the stockbroking licence. Nonetheless, details of the pricing are not known.
The divestment would enable BCorp to tap into Kim Eng, which has a solid reputation in the stockbroking business. The Singaporean broker, on the other hand, would be able to build its clientele in Malaysia.
Apart from Inter-Pac, market talk has it that Kim Eng is also in talks with ECM Libra Financial Group Bhd, which is rumoured to be a potential merger and acquisition (M&A) target, and MUI group’s PM Securities Sdn Bhd, a unit of Pan Malaysia Capital Bhd.
On Bursa Malaysia, there was increased interest in the shares of local stockbroking firms amidst talk that foreign brokers are keen on buying into the companies after the government lifted the cap on foreign ownership.
Most stockbroking counters were up at yesterday’s close. The biggest gainer among them was ECM which rose five sen or 7.3% to 74 sen with a substantial increase in trading volume to 8.48 million shares.
Pan Malaysia Capital added one sen or 9.1% to 12 sen. Other gainers were Apex Equity Holdings Bhd which gained 2.5 sen to 70 sen while HwangDBS (Malaysia) Bhd, HLG Capital Bhd and K&N Kenanga Holdings Bhd rose one sen each to RM1.64, RM1.15 and 78 sen respectively.
Although the industry has become rather quiet on the M&A front after the consolidation in the earlier part of the decade, winds of change may head its way as the government’s liberalisation of foreign ownership in the sector could spur a new wave of M&As.
Since June last year, foreigners are allowed to hold up to 70% interest — up from 49% — in domestic stockbroking companies. Foreign players are already taking advantage of a similar ruling in the insurance industry.
Industry sources say the liberalised ownership rules have triggered the interest of several foreign brokers, notably from across the causeway, which are looking to expand their market reach and clientele.
BCorp’s deal with Kim Eng, if it goes through, could be the first of many in the industry. The deal could set a benchmark for the pricing of future deals as well.
Most stockbroking companies are trading below their net asset values — even for those that have evolved into investment banks, such as K&N Kenanga, Hwang-DBS and OSK Holdings Bhd.
For example, at 74 sen, ECM is trading substantially below its net asset value (NAV) per share of RM1.20 and even net tangible asset per share of 93 sen after deducting goodwill.
Apart from volatile and unexciting earnings prospects, the other reason for the low valuations is likely due to their large intangible assets, which consist of goodwill booked in from the various M&A exercises earlier.
Among them, ECM appears to have the highest value of intangible assets, amounting to RM284.5 million, followed by OSK Holdings with RM208.8 million, HwangDBS with RM162.5 million, K&N Kenanga with RM71.8 million and KAF-Seagroatt & Campbell Bhd with RM7.5 million.
With rising foreign interest in Malaysian stockbrokers, the lacklustre sector could attract investor interest and could well be re-rated. Nonetheless, given the lack of corporate activities in the industry of late, there has yet to be a benchmark for pricing.
This article appeared in The Edge Financial Daily, August 17, 2010.
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