Can the junior bourse get rid of its demons?
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