Worth less than HCI?
Can the JSE’s alternative market take more body blows?
FROM THE OUTSET the AltX, the JSE’s platform for fledgling and smaller companies, stressed quality over quantity. After both previous initiatives to bring smaller counters to the market – the Venture Capital and Development Capital markets – fizzled the JSE could ill afford to launch a junior board that couldn’t withstand the kind of punishment meted out in a bear market.
While the AltX is without question a far more robust platform than either the VCM and DCM ever were, the notion of attracting only top quality companies was always an ideal that would be rattled by the odd corporate setback.
Over recent months the AltX – which has only really seen one official casualty in Country Foods – had a handful of nasty developments among some of its more prominent listings.
For a variety of reasons, large – perhaps even flagship – AltX listings have come a cropper. Those would include Blue Financial Services, African Dawn, Pinnacle Point, Alliance Mining and Queensgate (the last two being suspended amid liquidation proceedings).
Blue and Afdawn were, back in early 2008, two of the biggest listings on the AltX, with market capitalisations of R2,6bn and R1bn respectively. The companies currently carry a market value of R206m and R40m respectively. Then there are a slew of former high flyers, including popular contenders such as Vunani, Wearne, SA French and Dialogue, that have needed to embark on dramatic rescue efforts to pull out of a dangerous decline.
It would be no lie to claim at least 30% of the listings on the AltX are in a squeeze: brittle balance sheets, operating losses and unconvincing cash flows. It would be naïve to believe there won’t be more painful developments among AltX listings this year.
In essence, sentiment for AltX listings has shifted from “wide-eyed and wonderful” to “jaundiced and jittery”. The statistics tell quite a disturbing story. In May 2008 the AltX carried a collective market cap of more than R26bn. This market now holds a collective value of less than R11bn – and that’s if we include the value of suspended counters.
If it wasn’t for the recent listing of Paladin Capital (market cap: R13bn) the ALtX’s collective value could have been less than R10bn. A more than halving of the AltX’s market capitalisation in two years (a period in which the general market has recovered much of the ground lost in the global financial crisis) is an ominous statistic. Put another way, the AltX’s collective capitalisation is roughly equivalent to the market cap of empowerment investment company Hosken Consolidated Investments. You might cynically presume HCI – which comprises a variety of investments – probably attracts more institutional interest than the AltX.
Statistics, of course, can be misleading. While there’s no quibbling that most AltX listings have shed value, it’s worth noting the AltX has also lost a handful of promising companies via “promotion” to the JSE’s main board. Those would include Wescoal, Esor, Pan African, Infrasors, Mazor and Sanyati. Those “graduated” listings would add back around R4,5bn to the AltX’s collective market value.
Thankfully, the AltX has only seen one delisting (Celcom), a trend that hopefully won’t take hold at this delicate juncture (but, judging by relative valuations, could still be an issue).
In the absence of new listings you wonder whether the much diminished AltX can hold on until sentiment turns again for smaller cap companies. It’s a tough question. But at least there are clear indications the JSE is backing the AltX to the hilt.
Of course, building up the last vestiges of vibrancy on the AltX depends on further successes being notched up by the array of quality counters the market is currently overlooking. Because the AltX is currently covered by a blanket of dour sentiment, promising counters such as CIC Holdings, OneLogix, Erbacon, 1time, Chemical Specialities, Myriad, ISA Holdings and Buildworks (among others) are just not catching the eye of market makers. On the other hand, the corporate disasters make the headlines and reinforce prejudices about the sustainability of small cap business models.