Cautious five-year celebration
Consolidation and delistings could be the trend for 2009
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.”