ILLIQUID SHARES Not for those in a hurry
Limited scrip can be worth considering, but many institutional players steer clear as upside is limited
Should a scarcity of scrip in listed companies be considered an opportunity or an impediment for great returns?
It stands to reason that if a company with a small free float of issued shares shows great promise there will be an energetic scurrying for the limited amounts of available scrip, and consequently the share price will be pushed up rapidly.
On the other hand, the availability of only small parcels of scrip can curb the enthusiasm of the all-important institutional investors as the quantum of upside potential is limited by the number of shares that can be bought.
Still, there remain a good number of illiquid counters on the JSE for smaller
www.FM.co.za investors to mull. Some have richly rewarded those willing to accumulate available shares slowly. In the past few years shareholders who bided their time with tightly held counters like Assore, Distell, Rex Trueform, Clientèle Life, Excellerate, Crookes Brothers, Hardware Warehouse, Fairvest Property, Italtile, Marshall Monteagle and Nictus had their patience rewarded with either strong capital gains or generous distributions.
But the truth is that share illiquidity in a listed company can often be more of an impediment than an advantage to investors. It can require enormous staying
54 power to accumulate shares in terms of value and quantity — which is probably why institutional investors (who need to buy and sell efficiently to meet client demands) largely steer clear of shares with limited free floats.
Investec Securities stockbroker David Sylvester warns that dabbling in illiquid counters must be tagged to a long-term outlook. “Investors must not expect to be able to bail out of illiquid companies quickly, an action that sometimes requires giving away a chunk of value in a hasty cashing out process. Prices of illiquid shares do move dramatically on small volumes, which can preclude determining a realistic valuation at the best of times.”
Should the JSE, as the custodian of the trading platform, then be more proactive in bolstering company free floats?
Late last year changes were introduced by the London Stock Exchange that required companies on the bourse’s blue chip index to have at least 25% of their shares freely tradable.
Such measures seem unlikely on the JSE, though. At present it stipulates an “entry requirement” that main board listings have a 20% public holding and at least 300 shareholders. The AltX has a minimum entry free float requirement of 10% and 100 shareholders.
But Sylvester believes the JSE should not be more proactive in promoting bigger free floats. “One way or another there will always be illiquid shares on the market. You can’t legislate against the market.”
Andre Visser, GM of issuer services at the JSE, stresses the JSE’s free float levels are entry re-
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> quirements when a company lists. He believes it would be almost impossible to enforce free float requirements as shareholding levels at listed companies change all the time. A company’s free float position could be affected by rescue rights issues underwritten by one large shareholder (as HCI did at Seardel), a share consolidation coupled to an odd-lot offer or a controlling shareholder buying more shares on the open market.
Visser notes: “We do urge companies to use their best endeavours to maintain an appropriate free float. Those that do Opportunity for small investors Patience can be rewarding