Cau­tious five-year cel­e­bra­tion

Con­sol­i­da­tion and delist­ings could be the trend for 2009

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS

THEY OUGHT TO BE CARE­FUL when they blow out the can­dles for the AltX’s five-year birth­day cel­e­bra­tions. The last thing the rather al­ter­na­tive mar­ket cake – which lists 78 sen­si­tive in­gre­di­ents – needs now is an­other big blow. Mar­ket val­ues of most AltX list­ings have taken a se­ri­ous tum­ble since the beginning of 2008 as mar­ket con­di­tions (glob­ally and lo­cally) took a turn for the worse.

In­vestor sen­ti­ment has been fur­ther eroded by a slew of trad­ing up­dates that show a good num­ber of coun­ters won’t achieve the earn­ings lev­els set out in prelist­ing state­ments.

Fin­week reck­ons the big­gest chal­lenge for the AltX dur­ing this tricky pe­riod will be to re­tain the list­ings it’s worked so hard at at­tract­ing over the last five years. You need to re­call the mar­ket sit­u­a­tion in early 2001, when the JSE’s vi­brant ju­nior boards – the Ven­ture Cap­i­tal Mar­ket and De­vel­op­ment Cap­i­tal Mar­ket – hosted more than 80 list­ings af­ter the heady late Nineties list­ings boom.

Only a few years af­ter the 2001 small cap melt­down there were less than a quar­ter of th­ese stocks still listed (a num­ber that thinned out fur­ther in later years). The mar­ket, jus­ti­fi­ably, lost faith in the hot-to-trot tech­nol­ogy and fi­nan­cial ser­vices start-ups listed on the VCM and DCM. As such the VCM and DCM be­came the JSE’s “grave­yard boards” – where no list­ing will­ingly wanted to ven­ture.

But let’s put things in per­spec­tive. The qual­ity of AltX list­ings is cer­tainly much bet­ter than those hosted on the VCM and DCM. For the most part, AltX list­ings are wellestab­lished busi­nesses with tan­gi­ble op­er­at­ing as­sets and (in many in­stances) ex­pe­ri­enced man­age­ment teams. The AltX cer­tainly doesn’t host coun­ters that would rank with in­fa­mous hot air VCM list­ings, such as Mouldmed, Whet­stone, Jem Tech­nol­ogy, Mi­crologix, CIH, Bryant or Es­sen­tial Bev­er­ages. Ce r t a i n l y, there will be ca­su­al­ties on the AltX, with one or two coun­ters al­ready deep in the dwang, fi­nan­cially speak­ing. That’s par for the course… and part of nor­mal mar­ket pro­cesses. How­ever, there shouldn’t be a rout (touch wood) like we saw on the VCM and DCM be­tween 2001 and end-2003 – mainly thanks to the AltX’s determination (take a bow, Noah Green­hill) to bring the bet­ter qual­ity op­er­at­ing com­pa­nies to the al­ter­na­tive mar­ket.

But the AltX – now worth R20bn col­lec­tively – can still crimp dra­mat­i­cally in terms of num­ber of list­ings in 2009. You only have to look at the around 20 stocks broadly aligned to in­fras­truc­tural de­vel­op­ment (ie, build­ing, construction and en­gi­neer­ing). With many share prices plung­ing past their orig­i­nal is­sue price the sit­u­a­tion screams out “con­sol­i­da­tion”.

For ex­am­ple, a ded­i­cated brick-mak­ing busi­ness en­dur­ing low trad­ing mar­gins in the cur­rent over­sup­ply may well feel “safer” as part of a more di­ver­si­fied build­ing sup­plies and ser­vices group. In turn, a build­ing sup­plies group con­cen­trat­ing on ready-mix ce­ment or ag­gre­gates may feel it’s a great time to buy a brick busi­ness on a very at­trac­tive longer-term for­ward earn­ings mul­ti­ple.

Re­mem­ber­ing that there’s a slew of new construction-aligned list­ings on the JSE’s main board, there’s also a chance of larger con­tenders eye­ing some of the smaller (and mainly fi­nan­cially vul­ner­a­ble) AltX list­ings as takeover tar­gets.

And then there’s the dreaded delist­ings op­tion – a trend bound to emerge as found­ing share­hold­ers and direc­tors ac­cess the longer-term value propo­si­tion in their re­spec­tive com­pa­nies. To para­phrase well-known as­set man­ager Piet Viljoen (from RE:CE): a list­ings boom sees knowl­edge­able sell­ers sell­ing stock to less knowl­edge­able buy­ers, while delist­ings usu­ally en­tail knowl­edge­able buy­ers buy­ing back stock from less knowl­edge­able sell­ers. A list­ing (which is a not in­sub­stan­tial cost) also con­tains few ad­van­tages, with share prices mer­ci­lessly marked down by a cyn­i­cal mar­ket. In­deed, the scope for rais­ing cap­i­tal or mo­bil­is­ing scrip for ac­qui­si­tions is fairly lim­ited.

Fin­week wouldn’t be sur­prised if the first merger/takeover and delist­ing among the AltX’s construction stocks tran­spires be­fore this year-end. The truth is that the AltX is cur­rently largely made up of very small com­pa­nies (ie, mar­ket cap­i­tal­i­sa­tion of less than R300m) with around a third of the mar­ket’s to­tal value com­pris­ing just four list­ings (Blue Fi­nan­cial Ser­vices, Esor, VoxT­ele­com and Acc-Ross).

JSE busi­ness de­vel­op­ment man­ager Lauren Czepek says the AltX hopes delist­ings will be few and far be­tween. “It’s pos­si­ble now that com­pany man­age­ment would view cur­rent share price lev­els as an op­por­tune time to buy back shares. Pri­vate eq­uity play­ers may also see op­por­tu­ni­ties. For com­pa­nies with strong fun­da­men­tals and com­pelling earn­ings po­ten­tial it’s a case of rid­ing out the cur­rent mar­ket storm.”

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