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Feature More M&A among niche brokers?

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Feature More M&A among niche brokers? Empty Feature More M&A among niche brokers?

Post by Cals Wed 20 Nov 2013, 18:49

Feature More M&A among niche brokers?
Business & Markets 2013
Written by Afiq Isa of theedgemalaysia.com   
Wednesday, 20 November 2013 16:41
AS talk of mergers and acquisitions (M&A) involving the country’s remaining independent stockbroking firms intensifies, one wonders whether it is still feasible for them to operate without the backing of an investment bank.

With six high-profile M&A deals concluded over the past two years, the field has narrowed considerably among the non-bank-backed stockbrokers. Moreover, speculation is rife that some of the firms’ parent companies are actively looking for buyers.

According to a high-ranking officer of one non-bank-backed brokerage house, many firms are facing a stagnating client base in spite of greater retail participation in the market throughout this year.

“In the industry, there is a slowdown in new account openings for clients aged 35 and below. This is because they prefer to enter the property market instead, which offers a greater degree of leverage and higher potential returns,” he says.

Without the resources to obtain an investment banking licence, he says smaller brokerage houses will remain vulnerable to larger institutions that are looking to tap into their asset base.

“Consolidation of businesses is simply the easiest way to grow an investment bank’s broker network. They are fully equipped to assume the stockbroker’s liabilities and integrate its network of remisiers and corporate finance specialists,” he adds.

According to a veteran remisier with a standalone brokerage house, the niche stockbrokers cannot compete with the large investment banks in terms of commission rates offered to remisiers, thereby limiting their talent pool. 

Compounding the problem, he says the growing popularity of online trading in the last couple of years has put a dent on their commissions.

“Many remisiers in smaller firms are getting lower earnings due to online trading. They even have to assume the liabilities of their clients. If a client defaults from paying a big loss, the remisier could end up losing his job,” he adds. 
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While noting that there has been a marked increase in trading activity in Malaysia’s equities and derivatives markets this year, the remisier feels that more needs to be done to attract new retail participants. He says many remisiers are finding it tough to expand beyond their core clientele, which typically consists of medium-to-high net worth clients aged 35 and above.

“Bursa Malaysia has to do more to promote investment and trading in local stocks. We have seen higher market volume this year, but it is not as if the younger people are signing up for trading accounts in droves,” he says.

It is notable that these independent brokerage houses are not short of potential suitors. Local investment banks are aggressively expanding their asset base, as evidenced by the recent RHB-OSK merger and Affin Holdings Bhd’s proposed acquisition of Hwang DBS (M) Bhd’s investment banking business. 

They are perfectly willing to pay a premium as well — for instance, RHB Capital Bhd paid RM1.95 billion for OSK Investment Bank Bhd, or 1.77 times the latter’s book value, last year.

Furthermore, Singaporean investment banks are also considered potential purchasers as they seek a Malaysian presence to complement their stockbroking operations. The first bank to adopt this approach was United Overseas Bank Ltd (UOB), which acquired Innosabah Securities Bhd and AA Anthony Securities Sdn Bhd last year.

Innosabah and AA Anthony were classified as a “1+1” stockbroker, which means that they have already merged with at least one company. This status allows the firm to open branches, provide electronic access as well as undertake structured product offerings. 

Following UOB’s acquisitions, there are five “1+1” stockbrokers left, which may still attract M&A interest from the larger investment banks. They are Inter-Pacific Securities Sdn Bhd, Mercury Securities Sdn Bhd, JF Apex Securities Sdn Bhd, M&A Securities Sdn Bhd and TA Securities Sdn Bhd.

Meanwhile, the standalone stockbrokers remaining are FA Securities Sdn Bhd, Jupiter Securities Sdn Bhd, KAF Seagroatt & Campbell Securities Sdn Bhd, SJ Securities Sdn Bhd and Malacca Securities Sdn Bhd. PM Securities is the sole universal stockbroker in Malaysia, which allows it to offer a full range of corporate finance services alongside regular stockbroking activities.

One parent company that may be looking to divest its stockbroking business is TA Enterprise Bhd (TAE). Having refuted speculation on the potential sale of TA Securities to K&N Kenanga Holdings Bhd in June, fresh talk of it going private has put TAE back in the limelight recently.

Non-executive chairman and controlling shareholder Datuk Tony Tiah Thee Kian has upped his stake in TAE to 29.73% as at Nov 7, according to stock exchange filings. Breaking the 33% ownership threshold would trigger a mandatory general offer for TAE’s remaining shares, which could then pave the way for a privatisation exercise by the Tiah family. 

Should a privatisation occur, some say the group’s stockbroking arm may be divested in the process to allow TAE to fully focus on its property development business. When contacted by The Edge, a TAE spokesperson declined to comment on the matter.

A Sept 25 report by HwangDBS Vickers Research highlighted TAE as a potential M&A play. 

“TA Securities is the only independent broker with a strong retail presence — a market share of 6% [trading volume]. In our view, the founding shareholders may warm up to a cash offer of at least 1 times book value, or RM687 million, for the broking, credit and lending businesses,” it says.

According to HwangDBS analyst Hon Seow Mee, previous mergers indicate that investment banks are willing to pay above book value for the stockbroking business.

“There has been consolidation among brokers with price-to-book value multiples of between 1.1 and 1.9 times. Broking income this year has been lifted by the market run-up, with daily market value surging 44% quarter-on-quarter in 2Q2013,” she says.

With the local stock market buoyed by increased trading volume as well as higher valuations, it will not be surprising to see further consolidation among the niche stockbrokers in the near future.


This story first appeared in The Edge Malaysia Weekly Edition, on November 11 - November 17, 2013.
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