Can the ju­nior bourse get rid of its demons?

Finweek English Edition - - Front Page -

WHAT­EVER WAY you look at it, the AltX – the JSE’s ju­nior bourse – ap­pears to be a pickle. Sen­ti­ment – al­ready smeared thin by the mar­ket’s risk-averse at­ti­tude since the on­set of the global fi­nan­cial cri­sis – has all but been spooked by omi­nous de­vel­op­ments at “poster” stocks such as Blue Fi­nan­cial Ser­vices and African Dawn Cap­i­tal.

While the body count on the AltX (Coun­try Foods, KCM) is mer­ci­fully short at this junc­ture, the num­ber of com­pa­nies that would rea­son­ably be deemed to be strug­gling for vi­a­bil­ity is near­ing two dozen. You only have to look at how many AltX list­ings have un­der­taken res­cue rights is­sues (at prices pitched at a frac­tion of the orig­i­nal list­ings price) or opted for des­per­ate fi­nan­cial re­struc­tur­ing to grasp there’s a frag­ile as­pect to more than a few com­pa­nies’ bal­ance sheets.

Of course, cyn­i­cal no­tions that some coun­ters are in above their heads are re­in­forced by re­cent de­vel­op­ments at technology group Beget – a re­cent trans­fer to the AltX. Beget last week asked for a sus­pen­sion of its shares af­ter au­di­tors high­lighted po­ten­tial im­pair­ments that would, to put it plainly, ren­der the group tech­ni­cally in­sol­vent.

Such kinds of nasty sur­prises shouldn’t char­ac­terise the mar­ket, but de­vel­op­ments of that na­ture do rat­tle con­fi­dence about the AltX’s oft-stated quest to har­ness only the best qual­ity emerg­ing com­pa­nies. The big ques­tion is whether the AltX can – bear­ing in mind both pre­vi­ous at­tempts at cre­at­ing a vi­brant ju­nior mar­kets (the VCM and DCM) fiz­zled out – cast out its demons and re­store a sem­blance of en­thu­si­asm?

There are some pos­i­tives. Un­like the very rapid demise of the VCM (af­ter the emerg­ing mar­kets/A2 bank­ing cri­sis) the AltX – even though its col­lec­tive mar­ket cap­i­tal­i­sa­tion has markedly di­min­ished – can still claim crit­i­cal mass in its num­ber of list­ings. While com­pa­nies aren’t run­ning with great rat­ings, there are more than a dozen coun­ters that do hold op­er­a­tional prom­ise – and one or two have even paid gen­er­ous div­i­dends (take a bow, El­lies and Er­ba­con).

Af­ter a lull, M&A ac­tiv­ity is in the air again. Re­cently, lo­gis­tics gi­ant Im­pe­rial swooped on two spe­cial­ist small cap com­pa­nies: Mix Telem­at­ics and CIC Hold­ings (orig­i­nally an AltX list­ing). Last week Cax­ton grabbed a strate­gic slice of Mon­ey­web.

Stan­lib small cap ex­pert Shawn Stock­igt says cor­po­rate ac­tion could be the cat­a­lyst for the in­tro­duc­tion of new vigour to the AltX. “One has to re­mem­ber the pick-up we saw on the mar­ket in 2001 was par­tially sparked by cor­po­rate ac­tion.” A po­ten­tial hitch, reck­ons Stock­igt, is that com­pa­nies that have re­cently been re­stored to sounder fi­nan­cial foot­ings via re­struc­tur­ing or re­cap­i­tal­i­sa­tion may not wish to gear up again by fi­nanc­ing sig­nif­i­cant trans­ac­tions. “There’s also the is­sue of se­cur­ing cap­i­tal for size­able trans­ac­tions… banks aren’t that keen to be lend­ing these days.”

While cor­po­rate ac­tion could at­tract se­ri­ous mar­ket play­ers back to the AltX, the devel­op­ment could be a dou­ble-edged sword. If AltX coun­ters are bought out by main board-listed or un­listed coun­ters there will be a smaller uni­verse of listed stocks on the ju­nior mar­ket. By the same to­ken, merg­ers be­tween AltX com­pa­nies, and there must be a few on the cards in the “in­fra­struc­ture” seg­ment, wouldn’t only re­duce listed num­bers but per­haps also cre­ate en­ti­ties that might crave a main board pres­ence.

AltX listed com­pa­nies such as Litha (for­merly Myr­iad), Wescoal and Build­works (soon to be re­named Con­sol­i­dated In­fra­struc­ture Group) re­cently headed for the JSE’s main board af­ter al­ter­ing their op­er­a­tional pro­files dra­mat­i­cally via cor­po­rate ac­tion.

for new vigour

Cor­po­rate ac­tion cat­a­lyst

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