EYES ON SEC­OND prize

New stock ex­change claims the flood­gates for new list­ings are open­ing, writes Dewald van Rens­burg

CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za

ZAR X, South Africa’s sec­ond li­censed stock ex­change, wel­comed its third list­ing this week – agri­cul­tural group TWK. This fol­lows the launch of the new ex­change in Fe­bru­ary with the list­ing of an­other for­mer agri­cul­tural co­op­er­a­tive, Sen­wes, and its hold­ing com­pany, Sen­wes­bel.

CEO Et­ti­enne Nel claims he has been “in­un­dated with com­pa­nies want­ing to list”.

“Since Sen­wes listed, it is al­most as if there was a ground shift. It is like the mar­ket was wait­ing to see if some­one would ac­tu­ally get an ex­change off the ground – and then get a list­ing off the ground,” Nel told City Press.

“Now it is about demon­strat­ing that ZAR X is a place where qual­ity com­pa­nies list. Both the com­pa­nies we have listed have proper bal­ance sheets, proper as­sets. TWK has R6 bil­lion in turnover. That is a proper com­pany.”

The new ex­change styles it­self as a tech­nol­ogy-driven dis­rup­tor of the JSE’s 120-year monopoly in South Africa.

An­other new­comer, 4AX, is ex­pected to an­nounce its first list­ing soon.

For the time be­ing, com­par­isons be­tween these new ex­changes and the in­cum­bent, the JSE, are lu­di­crously un­fair.

On the ZAR X, TWK has a mar­ket value of around R479 mil­lion while Sen­wes is worth R1.88 bil­lion.

The JSE has hun­dreds of listed com­pa­nies and a mar­ket cap­i­tal­i­sa­tion of R13.5 tril­lion, driven by a num­ber of ma­jor multi­na­tional com­pa­nies.

How­ever, if Nel’s claims about im­mi­nent new list­ings ma­te­ri­alise, the new ex­change could be­come a for­mi­da­ble com­peti­tor to most other ex­changes on the African con­ti­nent, which are vastly smaller than the JSE and also suf­fer from chronic illiq­uid­ity.

NOW WHAT?

Mar­ket value is not the real mea­sure of a suc­cess­ful ex­change. The ma­jor in­ad­e­quacy of small stock ex­changes is their illiq­uid­ity – not enough trad­ing tak­ing place for peo­ple to be sure they could sell or buy at will.

If there are not enough mar­ket par­tic­i­pants, a seller will of­ten be forced to ac­cept a steep dis­count to sell its shares.

In the next year or so, ZAR X wants to see “liq­uid­ity lev­els north of 10%; that would be good”, said Nel.

That means that the value of traded shares is at least 10% of the to­tal value of the shares listed – the mar­ket cap­i­tal­i­sa­tion.

The first two list­ings on ZAR X, Sen­wes and Sen­wes­bel, have re­spec­tively seen 0.1% and 0.17% of their shares trade hands since Fe­bru­ary.

“AltX is sit­ting at that on av­er­age,” he added about the JSE’s board for small com­pa­nies.

“In the full­ness of time I would like to see liq­uid­ity lev­els of 20% or 25%,” said Nel.

By way of com­par­i­son, the JSE had liq­uid­ity of 80% in 2016.

A stock ex­change also re­lies on a layer of in­ter­me­di­aries be­tween it­self and the in­vest­ing pub­lic. ZAR X re­cently cel­e­brated sign­ing up seven bro­kers.

The JSE has over 300, of which 62 are eq­uity bro­kers.

Nel says that ZAR X can play a role in mak­ing the fi­nan­cial mar­kets more ac­ces­si­ble to smaller in­ter­me­di­aries and re­tail in­vestors.

“Ide­ally, I would like to see a lot of medium-sized bro­kers that serve the in­vest­ing pub­lic prop­erly. That drives fi­nan­cial in­clu­sion,” said Nel.

BE­YOND THE OTCS

Nel dearly wants to shake off the per­cep­tion that ZAR X is just a new and im­proved ver­sion of his pre­vi­ous com­pany Eq­ui­ties Ex­press, which ran over-the-counter (OTC) share schemes for a num­ber of com­pa­nies, in­clud­ing Sen­wes and TWK.

An­other large source of, largely un­reg­u­lated, OTC trad­ing has been spe­cial BEE shares only black South Africans could trade cre­ated by com­pa­nies such as Vo­da­com, MTN, Mul­tiChoice and Me­dia24. A di­rec­tive from the Fi­nan­cial Ser­vices Board, how­ever, largely un­der­mined the OTC sys­tems in 2014 by re­quir­ing that OTC ex­changes have stock ex­change li­cences.

In the wake of this, two com­pa­nies ap­plied for ex­change li­cences: ZAR X and 4AX.

The com­pa­nies with ex­ist­ing OTC schemes were ob­vi­ous early clients for the new no-frills, low-cost ex­changes.

“This is not an OTC with an ex­change li­cence sticker on it, that is not the case,” he told City Press.

“We man­aged to get the OTC ones go­ing first be­cause those were the low hang­ing fruit,” he said in re­la­tion to his first two list­ings be­ing com­pa­nies that had OTC sys­tems.

The most likely next two list­ings will not be com­pa­nies trans­fer­ring their pre-ex­ist­ing OTC schemes onto the new ex­change, said Nel.

“They are brand-new list­ings. The one is in fi­nan­cial ser­vices and the other is in the med­i­cal field do­ing an ini­tial pub­lic of­fer­ing-type list­ing.”

“We’ve been talk­ing to a num­ber of com­pa­nies want­ing to trans­fer their list­ing from the JSE,” he said.

Be­yond tra­di­tional shares, Nel said that ZAR X is look­ing at a va­ri­ety of fi­nan­cial in­stru­ments.

“We are look­ing at do­ing some­thing called an in­cu­ba­tor struc­ture, sim­i­lar to a Spac [spe­cial-pur­pose ac­qui­si­tion com­pany], with a few tweaks.”

Spacs are a US in­no­va­tion from the 1990s in which a shell com­pany lists and raises cap­i­tal with the in­ten­tion of mak­ing ac­qui­si­tions. The JSE has al­lowed them since 2014, but only a hand­ful has been listed so far. “That adds prod­ucts to the cap­i­tal mar­ket,” said Nel. “We are look­ing to add ex­change-traded funds (ETFs) with a twist ... an ETF with a dif­fer­ence,” he said with­out elab­o­rat­ing. ETFs are investment ve­hi­cles that own, for in­stance, gold, and then let peo­ple buy shares in the fund in­stead of di­rectly buy­ing gold. There are no tech­ni­cal lim­i­ta­tions to what ZAR X can ac­com­mo­date, said Nel. “Noth­ing stops Naspers from mov­ing its list­ing to us,” he said.

“When we did stress-test­ing on our trad­ing en­gine, it could ac­com­mo­date 2 500 con­cur­rent users per sec­ond. That is a lot. If we ever reach that point, I would be de­lighted to throw money at the prob­lem.”

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