Another company has hit the public market in Malaysia. Mercury Securities (MS) debuted on 19^th September for RM0.25 and subsequently gained about 8% to RM0.27 on the first day of trading.

This marks a recovery in Initial Public Offers (IPO) for the Malaysian market since the pandemic. Are you an investor then? What should you know about Mercury Securities before deciding to invest?

Here are the 7 main takeaways of Mercury Securities that you need to know!

#1: Mercury Securities provides stockbroking and financial services

While MS calls itself an investment holding company, it is primarily a stockbroking company that also provides corporate finance advisory services.

It also provides nominee and custodian services. If you are unsure of what this means, nominee services enable shareholders or the owners of the business to keep their names off public records. Meanwhile, custodian services handle administration-related matters for its clients.

Through MS, you get access to buy shares from Malaysia, the New York Stock Exchange, the London Stock Exchange and the Stock Exchange of Hong Kong.

In its corporate finance division, MS can help companies list their shares in the market, engage in mergers and acquisitions, raise funds from the market and undergo corporate restructuring.

#2: MS rose to as high as RM0.31

On a positive note, at least its share price is not below its listing price. There are a couple of companies during the pandemic that listed that had that incident happen to them.

MS share price rose to as high as RM0.31 on 20 September 2023, as investors’ interest in it was still strong. After all, they were 66 times oversubscribed before they were listed.

With a share price of RM0.31, MS currently has a market capitalization of RM277 million, taking it close to a medium-cap company. What does that mean in terms of valuation? MS’s price-to-earnings ratio stands at 15.7 times which is in line with the KLCI average of 15 times. It’s neither too expensive nor cheap.

#3: MS raised close to RM40 million from the IPO

With an issuance price of RM0.25 per share, MS raised RM39.3 million from the market, and intends to use the proceeds for the following objective:

1. RM26.9 million: Margin financing facility services
2. RM4.9 million: IPO expenses
3. RM4.6 million: Working capital
4. RM2.9 million: Digitalization program investments

Let’s focus on the biggest component – margin financing facility services. Why is such a big sum allocated for this purpose? You see, margin financing services are composed of interest, processing, roll-over, and commitment fees which are extended to clients to initiate transactions. Sometimes, they need some credit for transactions, hence, MS will charge some fees to it. This segment is pretty big, contributing about 30% to revenue in 2022. But you need a lot of credit to extend these services to clients, hence it makes sense that with a large pool, you can extend services to more clients.

#4: Sales were strong during the pandemic, but have cooled down.

Revenue grew by 80.9% to its peak of RM40.2 million in 2021 from RM22.2 million in 2019, as the pandemic boosted demand for stock broking services across Malaysia. Since MS also had access to U.S. and London markets, this period was seen as the boom for these stock markets’ activities.

The New York Stock Exchange Index rose by 4.4% and 18.2% in 2020 and 2021 respectively, while the FTSE 100 (representing the London Stock Exchange) trended upwards by 14.3% in 2021. With the flurry of activities in both years, it is no surprise that stock buying activities ramped up and MS had record years.

However, revenue in 2022 declined to RM31.3 million as the Federal Reserve raised interest rates sharply to contain inflation. That had the debilitating impact of causing a freefall in many stock prices. Selling activities intensified and buying activities were few and far between.

#5: However, profit margins are much higher now

Well, interestingly enough, profits before tax continued growing to RM21.8 million in 2022 from RM18.9 million in 2021 despite a decline in revenue. Hence, profit margins are much higher now at around 70% compared to an average of 47.2%.

It seems like MS got a better grip on its operations and managed to improve its expense management even more. There might be a reason for this. It seems like MS is letting go of some of its corporate finance team and the accompanying revenue and profit with it.

This revenue contribution came at RM12.0 million, while profits were at RM1.4 million. Hence this corporate finance team’s margin is at 11.7%, which is much lower compared to the other parts of the business.

#6: Kuala Lumpur is still the main contributor to revenue, while publicly listed companies and individuals are still the main clients

In Malaysia, Kuala Lumpur encompassed 84.3% of revenue, followed by Penang (8.0%) and Johor (5.8%). When we compare this breakdown to the type of clients, it makes more sense as publicly listed companies and individuals are their main clients.

Most publicly listed companies are in KL, so they made up about 38.5% of revenue for MS. Meanwhile, individual retail investors’ share is at 39.2%. As KL boasts the highest disposable income in Malaysia, MS’ focus will be on getting more clients in this state.

#7: Prospects for MS remain cloudy with the uncertain market in 2023 and 2024

Here’s my opinion. MS prospects are cloudy moving forward. Here are a few reasons I can think of:

1. Fed interest rate hikes still casting a shadow over the global markets.
2. The war between Russia and Ukraine still wages on.
3. China’s economic outlook remains uncertain at this point.
4. There isn’t much local economic catalyst in Malaysia that could boost trading activities.

As much as I want to say the markets could be better now and in 2024, I don’t see much upside for the global economy.

Conclusion

Mercury Securities represents a new issuance on the Malaysian market and is generally positive for the overall stock market as there haven’t been many initial public offerings during the pandemic.

If you are having a hard time researching the company, you can use this article as a guide to get started on the basics of the company.