Ofex Wants To Challenge Asx With Trans-tasman Market
Sydney Morning Herald
Saturday October 12, 2002
Smaller firms need capital and a way to list, reports Brian Robins.
Wanted: investors to establish a sharemarket alternative to the Australian Stock Exchange.Price: $200,000 for a 10 per cent stake.Expected profit: more than $2 million.Year founded: 2002.Headquarters: Sydney.Region of operation: Asia Pacific.
So reads a summary of the business plan for the launch of a new market by Ofex Pacific.
Fifteen years after the Australian Stock Exchange, or ASX, was formed as a uniform sharemarket nationwide, the interlopers are coming.
In the mid-1990s, the Federal Government put up funds for groups in Tasmania, Bendigo and Newcastle to pursue new markets.
The Tasmanian proposal quickly fell over but, while Newcastle and Bendigo took a long time to gain traction, progress is being made.
Now another group, Ofex Pacific, is to lodge its application for a market licence with the Australian Securities and Investments Commission (ASIC) by mid-October.
Its proposal, for a trans-Tasman equity and debt market, comes as ASIC seems to be dragging its feet on proposals to revamp the Austock exempt market, with its transformation into the Australia Pacific Exchange (APX) stalled. Austock trades equity in only one company, Brumby's Bakeries, which may shift to the ASX.
Over the past few years, following steady marketing by the London Stock Exchange's Alternative Investment Market (AIM), there has been a flow of Australian companies listing on AIM. Most have their primary listing on the ASX, although a number shun local investors completely.
In its wake, Ofex Pacific is targeting smaller companies, at a time when the Newcastle Stock Exchange (NSX) in particular is making some headway, with a queue of smaller companies coming to its market.
Touting itself as the new ``national securities exchange", with lower listing thresholds and especially a much lower cost profile, has allowed NSX to attract public issues by a number of smaller groups, from Murrays Coachlines to Argus Solutions (an iris security technology outfit), Australian Motor Finance and Pisces Marine Aquaculture.
NSX was dormant until the end of 2000 and it is easy to argue it is still virtually dormant, given the negligible trading volumes.
The number of companies going to NSX signals demand for a smaller market, although whether it will be viable for the long haul is open to conjecture.
The pressure on global sharemarkets has crunched the valuations of public companies, as investors increasingly chose to trade only in top 50 stocks. As a result, two-thirds of all companies listed on the Australian Stock Exchange are valued at under $10 million the minimum size sought for new ASX listings.
Nearly 1000 companies listed on the ASX have market values of less than $4 million, for example.
With these smaller stocks unloved and deeply out of favour, few investors have a market.
In turn, almost none of these companies command much of a following, largely due to their small size and limited prospects.
A second-tier market on the ASX was formally wound up in the late 1980s and it has no plans to revive the concept of looser listing requirements to encourage smaller companies to list.
But the view lingers that for smaller companies to thrive, many need access to public markets for capital.
Federal Government funding to assist the development of new markets in Hobart, Bendigo and Newcastle about five years ago was part of efforts to assist rural Australia.
In Hobart, a proposal to develop a market in mutual funds failed to make headway. The Bendigo sharemarket is now pinning its future on trading taxi plates and providing a market for investors in community banks. Neither looks especially enticing, although it is near to announcing additional proposals.
For a company seeking to raise around $2 million from public investors and likely to have a sharemarket capitalisation of around $5 million, it can cost less than $150,000 to go public on NSX and under $200,000 on Ofex Pacific.
Costs to list on the ASX typically run to more than $500,000 regularly eating up more than 10 per cent of the capital raised.
Backers of NSX argue that the hurdle for small companies going to the ASX is too high both the cost of going public and often the need to inflate asset values to meet the minimum $10 million asset value.
``You don't have to overvalue to list," says Warwick Evans, the former stockbroker who is now chief executive officer of NSX.
For investors, putting money into new listings of small companies can be a trap. Confident forecasts and bullish spin all too often turn to tears within the first year. Typically this happens with an earnings upset which prompts investors to bale out and perhaps never return.
Many go public too soon as little more than start-ups leaving them vulnerable to shifts in the markets and industries in which they operate.
Unlike the ASX, which makes no provision for an ongoing role for the sponsoring broker, NSX and Ofex Pacific use the `nominated broker', or `nomad' system, similar to that of London's AIM.
Here, a stockbroking firm takes responsibility for the company, ensuring listing requirements are met along with a higher level of corporate governance.
According to work done by NSX, three quarters of listings of small to mid-sized companies on the ASX fail, in that they are trading below their issue price within 12 months of going public.
The drivers are several, and typically profit warnings within the first year of public trading is a prime culprit.
``The `nomad' system means that they don't want them to `over' promise," says NSX's Evans.
``As with a sponsoring broker, it has to provide liquidity and research on the stock, almost provide a market making mechanism."
To make it worthwhile for the broker, this may mean a retainer is paid by the client company.
``We are adopting a different management model to the ASX or regional exchanges," Ofex Pacific's Davison says. ``The AIM market in London, since its launch in 1995-96, has only had one corporate failure. Why does it manage better?
``We will be adopting the AIM model of a higher level of corporate governance than the Australia or New Zealand stock exchanges, to put confidence back into markets.
``The `nomad' system adds a lot of credibility. It adds a layer to corporate governance."
For an ASX listing, all that is required is a minimum spread of shareholders (400), minimum asset size ($10 million) and earnings history ($1 million over the previous three years).
Among Sydney brokers, lines of stock in unlisted securities such as IMB and Pioneer Permanent are not uncommon, while in Melbourne, Tattersalls, Pivot, Mildura Co-operative Fruit Co and the like are often traded.
Queensland has the Landsdowne Pastoral Co, among others, while in Tasmania there is hardware retailer Kemp & Denning, a regular unlisted public share which trades.
Under the Financial Services Reform Act, exempt markets have been abolished in favour of a single markets regime. This will force companies such as IMB, which operates its own market-making service, to list its securities in a registered market, while other publicly traded but unlisted companies which have regular volumes traded will also have to list publicly.
The saving for unlisted public companies which trade through an authorised market is avoiding the 0.3 per cent stamp duty payable on shares traded.
Second boards have had a less than illustrious history, such as the ASX burying its attempt in the late 1980s. Yet for smaller companies, access to capital can be a constant strain, forcing them to public markets.
``The nature of our industry, being a primary producer, means there is no traditional funding," says Andrew Bald of Pisces Marine, a Port Stephens aquaculture venture.
``Banks won't lend; there is no such thing as venture capital it is mainly mezzanine finance and finding private equity through venture capital is a complete waste of time."
Pisces Marine, and others like it, are not looking to go public to give the founding investors an exit mechanism but to raise the next round of capital needed to maximise financial viability.
Bald, a former investment banker, produces 50 tonnes of snapper a year, and wants to boost that to 500 tonnes in three years. So far, $6 million has been invested, with a further $2.5 million needed to scale up output. It plans to issue a prospectus around mid-October.
While groups such as NSX are believed to have had to raise as much as $3 million before ASIC would approve their launch, the failure of Australian Derivative Exchange, the futures market lookalike to the Sydney Futures Exchange, is believed to have made the regulator more cautious in signing off on new proposals.
© 2002 Sydney Morning Herald