Malaysian public companies need to start talking about liquidity

EARLIER this month it emerged that AirAsia plans to restructure US$15.3 billion (RM63.4 bilion) of debt and is considering a rights issue to help raise up to RM2.5 billion in additional capital to strengthen its balance sheet and ensure sufficient liquidity to see it through the ongoing period of economic uncertainty caused by the Covid-19 pandemic.

Falling demand and supply chain disruptions have impacted not only the airlines, but almost all major industries in Malaysia, with profits plunging among companies on Bursa Malaysia in the first half of 2020. As cash flow and liquidity has declined, many companies have initiated plans to try to mitigate the negative impact on their balance sheet and retain as much cash as possible.

Yet, with the outlook for the rest of 2020 and 2021 still uncertain, many companies could still be facing an existential liquidity crisis in the months ahead and look for ways to shore-up their balance sheet and retain the liquidity they need to survive.

For many public companies this plan will involve returning to the equity markets to raise capital, particularly as banks appear reluctant to lend businesses more money.

Since the start of 2020, Bursa Malaysia has seen around 24 companies conduct a rights issue, including SunwayBhd, which earlier this month received 99% shareholder support for a RM1.1 billion equity raise. In comparison, Bursa Malaysia saw around 20 in the whole of 2019.

For companies like AirAsia considering a rights issue, they will need to seek shareholder approval at an extraordinary general meeting (EGM). It is therefore essential that these companies clearly communicate with the market about why a recapitalisation is necessary and how it will benefit the company and its shareholders in the long term.

For companies in some sectors, such as aviation, hospitality or export manufacturing, a decline in operating cash flow can be clearly attributed to the Covid-19 pandemic. However, for others the link may be less obvious and require careful explanation to establish causality. Establishing this link is important to reassure shareholders that a business remains fundamentally sound and the need to raise money is not cause for alarm bells to ring.

For example, the two largest healthcare service providers listed on the Bursa Malaysia, IHH amd KPJ Healthcare, reported declining revenue and profits in first-half 2020 as patient volumes fell during the pandemic rather than increasing as one might have assumed. For hospitals, the postponement of non-urgent treatments and travel restrictions, coupled to the refocusing of their resources on supporting national efforts to combat the virus all contributed to temporary decline in operating cash flow. However, the fundamentals driving the growth of the sector remain and will return once the pandemic is over – a growing, aging and increasingly wealthy population in Asia in need of healthcare.

Once the reason for a company’s immediate liquidity crisis has been established, an issuing company should then set out not only how a recapitalisation will see it through this turbulent period, but also how it will deliver growth and a return on a shareholder’s investment once the economic environment improves.

Prior to a rights issue, companies are required to publish a circular that provides shareholders with detailed information about the recapitalisation, as well as a notice of EGM informing them when their approval for the process will be sought through a vote.

The period between the publication of the circular and the EGM vote is a critical one. During this window the company should implement a comprehensive com-munication and direct engagement strategy to encourage support that encompasses their institutional shareholders, but also other critical stakeholder groups – namely retail shareholders, the media, online investment bloggers, proxy advisers and brokers, among others.

To communicate effectively with retail shareholders companies should consider establishing a dedicated section on their website for relevant information, conducting a dialogue and Q&A session and even setting up a shareholder hotline to address concerns.

As demonstrated by Sunway Bhd, a strong positive shareholder vote is a ringing endorsement of a company’s management and of its strategy to secure the long-term viability of the business. However, for companies such as AirAsia that are about to embark on a rights issue, they should not assume that shareholder support is guaranteed.

How they talk about liquidity and communicate with their shareholders will be a critical factor in determining their success, securing their long-term viability and in positioning them for a return to growth once the economic headwinds subside.

This article was contributed by FTI Strategic Communications managing director Malcolm Robertson.