Mid and small cap research scheme launched to spur SME market

Mid and small cap research scheme launched to spur SME market

The Mid and Small Cap (MidS) Research Scheme was launched last month to elevate the profile of mid and small-cap listed companies intended to spur investor interest and participation in this potentially high growth market segment of the Malaysian market.

Under the scheme, an inaugural batch of 100 mid and small-cap public listed companies (PLCs) will receive independent research coverage by licensed research houses.

At the launch ceremony Second Finance Minister Datuk Seri Johari Abdul Ghani said, “The MidS Research Scheme is intended to enhance investors’ awareness as well as giving due recognition to the mid and small-cap companies that have been generally under-researched. We are cognizant of the fact that there are many hidden gems among these companies that have yet to be revealed. The research scheme will allow investors to explore opportunities within the mid and small-cap stocks, thus increasing trading interest and liquidity of mid and small-cap companies.”

The MidS Research Scheme was initiated with the primary objective of creating better value recognition of mid and small-cap companies as they form an important segment of the listed equity asset class within the overall capital market.

Securities Commission Malaysia (SC) chairman Tan Sri Dato’Seri Ranjit Ajit Singh said, “The Malaysian capital market plays a key role in facilitating the growth of businesses and the economy as it bridges the funding and investment needs of issuers and investors respectively. This Scheme aims to enable mid and small cap PLCs to substantially realise their growth potential by attracting greater investor participation and thus achieving better value recognition. It is one of many initiatives undertaken to contribute towards a more diverse and dynamic capital market environment and further enhance the overall ecosystem.”

Bursa Malaysia Chairman Tan Sri Amirsham A Aziz said, “There is great potential to be discovered in the mid and small-cap companies. The recent performance by the related indices is testament to this. In the first quarter of this year, the FTSE Small Cap Index grew by 16.0 per cent, while the FTSE Mid Cap Index increased by 11.6 per cent.

“This proves that the mid and small-cap stocks can offer attractive returns to investors. More importantly, they can offer a good alternative investment and ensure diversification strategy for all investors. The MidS Research Scheme will be beneficial to the long-term growth potential of Malaysia’s capital market. This Scheme is only the beginning of many more initiatives that we plan to embark on to remain relevant and appealing to market participants.”

The Scheme has received active industry support and participation. It will commence with 22 research houses that have committed to provide research coverage for eligible PLCs. Each eligible PLC will be assigned two research houses, further improving the dissemination of the research, including to retail investors, so as to attract more investor participation in the segment. Selected PLCs underwent a screening process encompassing both qualitative and quantitative criteria, and represent a market capitalisation range of RM200 million to RM2 billion.

A Task Force chaired by the SC, comprising representatives from Bursa Malaysia Berhad (Bursa Malaysia), Kumpulan Wang Persaraan (Diperbadankan) (KWAP), Malaysian Investment Banking Association (MIBA) and Association of Stockbroking Companies Malaysia (ASCM), was established to oversee the implementation of this Scheme. The Task Force also provides strategic direction to actively promote the small and mid-cap market segment.

Apart from the Task Force’s recommendations on the MidS Research Scheme, other efforts to promote the vibrancy and ensuring the success of this high growth segment have been instituted. To this end, Government-linked investment companies have committed additional allocation towards investing in mid and small-cap PLCs starting with an initial RM3 billion.

In addition, two new indices – the FTSE Bursa Malaysia MidS Cap Index and FTSE Bursa Malaysia MidS Cap Shariah Index – were introduced as part of initiatives to track performance and generate more interest for capital market products from within this segment.

Moving forward, an independent review panel, comprising representatives from the SC, Bursa Malaysia, industry and institutional investors, will meet on a periodic basis to review and ensure the quality of the research reports.

The introduction of the MidS Research Scheme is part of continuing efforts to promote Malaysian small and medium enterprise or SMEs which play an important part in the Malaysian economy but which face limited access to other forms of financing besides banks.

For investors, SMEs offer the opportunity of much higher returns than the broader market but they are stymied by lack of research on smaller companies which makes it difficult for them to make informed investment decisions. Since the research under the Scheme is available to all, even retail investors have access to the research and can invest more wisely in such stocks.

SMEs are a big part of the domestic economy accounting for some 97% of over 645,000 business establishments in Malaysia. Even so they contributed only 36.3% to the GDP (gross domestic product - sum total of goods and services produced), in part because of micro-enterprises which are very small and accounted for 77% of the total number of SMEs.

But in 2015, SMEs contributed the lion’s share of total employment with 65.5% and 17.6% of total exports, underlying their important role in the overall well-being of the country and the uplifting of overall living standards. The Government under its SME Masterplan (2012-2020), is targeting to boost SMEs’ contribution to the GDP to 41% by 2020.

Since 2004, SME GDP growth has consistently outpaced the country’s overall economic growth, offering higher growth and return opportunities for would-be investors. In the period 2005-15, the average compounded annual growth rate (CAGR) of SMEs was 7.0%, which was significantly higher than the 4.9% CAGR of the overall economy. As a result, SME contribution to GDP increased from 29.6% in 2005 to 36.3% in 2015.

Despite the positive showing of SMEs in recent years, shown by outperformance when compared to overall economic growth, the contribution of Malaysian SMEs to the overall economy remains relatively small compared with their counterparts in advanced and other high middle-income countries.

The Government launched the SME Masterplan in 2012 to chart the development of SMEs in line with Malaysia’s aspiration to become a high-income country by 2020, reflecting the importance of SMEs in the overall development of the country.

SMEs are currently defined as firms with turnover of less than RM20 million a year or up to 75 workers for the services sector, and sales not exceeding RM50 million a year and full-time staff of up to 200 workers for the manufacturing sector. The services sector accounts for 90 % of SMEs followed by the manufacturing sector (6%) and construction (3%).

Traditionally SMEs in Malaysia have relied on banks for over 90% of their financing.

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