Business Finance: A Journey with No End

Starting a business from an idea is never a linear journey.  In fact, it may not even have a final destination.  But for any business it will need finance at all points of its journey.  Some are started on credit cards, overdrafts or help from friends or family.

The first three years is the critical phase.  Many small enterprises fail in this early stage.  But once it is on a growth trajectory, bank finance or other institutional support will be required.  Here, it is good to look at “START”.

Step out – detach yourself and ask the questions for a proper business plan.

Take a position – assess the prospects and challenges at hand.

Analyse opportunities – have a detailed look at prospects.

Reach for the future –  forecast; a vision is now cast – how much new equity/ debt will be required.

Think about finance – assess the financing options available and make clear business proposition.

At MPCA, we have helped companies to “flesh-out” their business plans, and they have then moved-on to funding their projects.  This is the growth phase of their journey.  Invest in good advice and the whole gamut of equity and debt finance becomes available to you.

For more information about START, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Photo source: www.shutterstock.com

Bursa Malaysia Listing Requirements Highlights

Bursa Malaysia has announced a new market namely Leading Entrepreneur Accelerator Platform (LEAP) on 15 June 2017 (Read more here).   The Chief Executive Officer of Bursa Malaysia, Datuk Seri Tajuddin Atan said that the LEAP market complemented both the Main Market and ACE Market by addressing the funding gap faced by small and medium-sized enterprises (SMEs).

As a general rule of thumb, large companies that have paid-up capital more than RM50 million could seek listing on the Main Market, while fast growing companies that have paid-up capital approximately RM5 million to RM10 million may seek for listing on ACE Market.  For a smaller company, based on our understanding, a paid-up capital of RM2 million is suitable for the LEAP Market.

  

Additional listing requirements such as “Profit Test”, “Market Capitalization Test” or “Infrastructure Project Corporation Test” is mandatory for listing on Main Market while there is no strict test requirement for listing on ACE or LEAP Market.  The highlights of the Main Market tests are as follows:

  

There are also Bumiputera Investors participant recommendation on best effort basis as highlighted below.

Additional requirements highlight such as financial position and liquidity, management continuity and capability are as follows:

Companies or entrepreneurs who are interested to list their business on Bursa are required to appoint Advisers or Sponsors as part of the listing process.  For Main Market, Principal Adviser is required while for ACE Market, a Sponsor is required.  For LEAP Market, an Approved Adviser is required during the initial listing activities and/ or post-listing activities.  The company must appoint Continuing Adviser for post-listing activities.

To list your business on Bursa Malaysia, the following documents for pre-admission consultation work are required:

n  Last 5 years audited financial statements;

n  Latest management accounts;

n  Net profit forecast and projection for the next 3 years (rough estimation)

n  Estimated funds size required and expected utilisation of proceeds, e.g. for capital expansion, working capital requirements, details of potential acquisition, etc; and

n  Company profile and its shareholding structure

For more information about listing requirements, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Highlights on Unlisted Capital Market Products Under LOLA Framework

Capital market products in Malaysia can be categorized into “listed” and “unlisted” class.  Securities Commission (SC) has issued guidelines for both categories.  This article will focus on the highlights of “unlisted” capital market products under the Lodge and Launch (LOLA) framework.

The introduction of LOLA framework helps to shorten the time-to-market by enabling wholesale funds, structured products, bonds, sukuk and asset-backed securities to be launched once the required information is lodged with the SC via its online submission system, as compared to the previous 14-21 days approval time frame.

For more information about LOLA, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

India Power Sector Cost of Equity

India attracted USD43 billion in Foreign Direct Investment (FDI) for the period April 2016 to March 2017, according to government statistics (Read more here).     The power sector in India received USD1.15 billion FDI inflows for the same period, accounting for 3% of total FDI inflows in India.

Strong power consumption demand in India and favourable government policy such as allowing 100% FDI under the automatic route in the power segment and renewable energy has attracted global power companies to invest in India (Read more here).  For example, Malaysia’s largest power utility company, Tenaga National Berhad (TNB), acquired 30% of GMR Energy Limited (GEL) power asset for USD300 million in 2016 (Read more here).

For investors who are interested to include India power sector into their portfolio, one of the key questions is the cost of equity, k_e.  The most common methods of estimating the k_e is the capital asset pricing model (CAPM).  The CAPM states that the k_e, is the sum of risk-free rate, R_f, and a premium for bearing market risk, β(R_m – R_f):

                                                            k_e            = R_f + β(R_m – R_f)

where

β             = return sensitivity of stock/ portfolio to changes in the market return

R_m          = expected return on the market

Assuming an investor would like to hold a portfolio of equally weighted top ten largest power generation companies in India (Read more here), the β of the portfolio could be estimated by taking the average β of these ten stocks.  The duration and frequency of the data selection will affect the value of β.  Generally, three years duration of monthly data are common choice.  Using the information from Infinancials (Read more here), the estimated portfolio β is 0.98.

The R_f and R_m information could be obtained freely from financial data providers such as Market Risk Premia (Read more here).  As at April 2017, the R_f and R_m are 6.96% and 8.90% respectively according to Market Risk Premia.

The estimated cost of equity using the above information is 8.86%.  Keep in mind that this number is calculated from local Indian investors perspective, and the investors are able to diversify their portfolio risk.  Foreign investors should add other additional risks premium such as country risk premium, or liquidity risk if investing in non-listed companies.

For more information about India power sector, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my

Project Finance Issues in Malaysia

Malaysia is among the more successful countries in the world using BOT, BOO, BLT and every other alphabet in the “soup”. This activity began in the late 80s and now embraces almost every sector of the economy.

The success in Malaysia is largely due to a forward-thinking Government and civil service, an enabling environment/ecosystem with bankers, regulators, capital markets playing their respective roles. And of course, projects that are deemed feasible/viable are readily available.

However, there are issues that seem to hamper a faster implementation of projects:

(i)               framework (from the Government) that readily sets the concession terms of a project. Each project may have its own peculiar features but on a sectoral basis key requirements may include:

-acceptable shareholders’ return;

-bidding process, if any;

-concession period;

-tariffs/toll rates – market driven or regulated? ;

-track record of promoters;

-minimum equity requirement to mobilise initial works;

-timeline from “ground zero” to financial close; and

-other terms.

(ii)              financiers’ expectations:

-financial returns;

-cash flow models;

-track record of promoters;

-credit score – greenfield/brownfield;

-repayment profile;

-credit support/enhancements required

(iii)            promoters/sponsors requirements:

-timeline to closure and commissioning;

-capital structure that is cost efficient;

-risks involved – currency, interest rate, construction and post constructions;

-sources of funding for new entrants into a sector; and

-margins to be expected.

Greater transparency will generate a higher speed and volume in commissioning productive projects in the country and raise Malaysia’s GDP. That’s the success story we need to hear more about!

Photo source: Unit Perancang Ekonomi Malaysia

For more information about project finance, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Solar Project Finance in Malaysia

The Malaysian government has introduced various incentives and strategies (e.g., Feed in Tariff, Net Energy Metering and Large Scale solar projects) to encourage the growth of renewable energy. The initiative has been driven by the environmental concern of fossil fuels. China being the world largest carbon emitter has resorted to renewable energy in an effort to save the environment (http://www.reuters.com/article/us-china-solar-idUSKBN15J0G7).

Funding is key to implementing a solar project. Shareholders need to be able to decide which type of financing would maximise their return on investment. Choosing the right financing mix is the first step for a successful project.

Key types of financing instruments include: -

1. Debt Financing 

Bank loans offer a simple, inexpensive financing option of up to 80% of the solar asset. Loans for solar project are often easier to procure as it is backed by long term Renewable Power Purchase Agreement and a good-credit off taker (Tenaga Nasional Berhad). Nevertheless, lenders will still require a solid credit rating or a credit-worthy guarantor. In which case, bonds may be considered.

2. Equity Investment

If the shareholders have sufficient cash, then an all equity investment may be a good option.  A well designed solar facility in sunny climates generates enough savings to break even quickly.

3. Operating Lease

This is a flexible finance instrument that allows for the use of the solar asset, with no ownership rights.  Operating leases typically have shorter terms and may provide a fast track to system ownership while substantially reducing capital requirements. Operating lease is still new in Malaysia.

Tax incentives, inexpensive debt and prudent matching strategies help establish a robust and diverse solar project finance environment. 

We welcome the opportunity to help your organization think through solar opportunities and assist in securing project finance, financial modelling and financial advisory for your project. 

For more information, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Photo source: pixabay.com

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This is MY MPCA's first blog.

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