beyondbrics

Petronas, Malaysia’s state owned oil and gas producer, has successfully completed the second of two big initial public offerings in subsidiaries with the listing of its newly formed Petronas Chemicals Group. The chemicals group – an agglomeration of 22 subsidiaries – achieved a 10 per cent rise in its share price on debut on Friday, before falling back a bit. Malaysia Marine & Heavy Engineering Holdings, which raised M$2.03bn a couple of months ago, was 27 times oversubscribed by institutions.

So can investors expect an IPO of the parent group, and what would its valuation look like?

It’s not that these are small deals – the chemicals sale was the biggest ever in south east Asia, and dwarfs the flotation of the domestic operations of the Maxis telecommunications group in November 2009, which raised about US$3.3bn.

That suggests there’s plenty of demand for Petronas stocks- both because these industrial companies are heavily focused on emerging Asia, which makes them a proxy for soaring economic growth, and because of a shortage of big, high quality companies on Bursa Malaysia, the Kuala Lumpur stock exchange.

But could the parent group ever be floated? Yusli Mohamed Yusoff, chief executive of Bursa Malaysia, told the Financial Times in an interview in April that the prospect of the main Petronas group coming to the market was a long term aim that would “transform the capital market landscape of the country, if not the region”.

But there are two huge problems. The first is that Petronas is not a straightforward industrial company. Malaysia’s government – run since independence by coalitions dominated by the United Malays National Organization – has traditionally used the company’s resources as a way of distributing what amounts to disguised aid.

This happens both inside Malaysia, where various arms of Petronas have in the past built social facilities such as hospitals and community centres, and abroad.

If Petronas was to be sold as a single entity, all that would have to stop, because of the transparency that would be demanded of the listed stock. That seems unlikely because the social and political benefits of distributing aid in this way are substantial, even if the economic benefit is hard to measure.

The second problem is the valuation. Working out how much any part of Petronas is worth is difficult, largely because so little detail is available before the stocks come to market. Initial market estimates for Petronas Chemicals, for example, were about half the $4.1bn that the sale of 31 per cent of the company eventually achieved.

But analysts say that on a back of the envelop basis one might apply a trailing price earnings ratio of about 10 to the group’s earnings last year of M$67bn (on revenues of M$216bn). That would give a market value of more than $210bn, which is far too much for the local market to absorb.

A much more likely scenario is that Petronas continues to spin off subsidiaries. That would achieve the government’s aim of getting more quality stocks and greater liquidity onto Bursa Malaysia, while leaving Petronas in direct control of the subsidiaries involved in social work and other non-transparent activities. As with the chemicals arm, the parent group could retain majority stakes as a defence against potential nationalist claims that the family silver was being disposed of.

Petronas has already used this mechanism to list substantial chunks of several subsidiaries, including those running its petrol stations, gas operations, shipping and logistics, heavy engineering, property and chemicals.
Intriguingly, the chemicals arm was the largest yet listed, accounting for about 6 per cent of group revenues.

The next smallest subsidiary is the exploration arm for crude oil and natural gas, which is in many ways the darling of the company.

So will there be a mega listing of Petronas as a single stock? Almost certainly not. But don’t be surprised if the Petronas roadshow starts again next year, perhaps with the juiciest potential flotation of them all.

Related reading:
Petronas Chemicals IPO: $4bn and rising, beyondbrics