An alternative to the ASX

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    THE AGE October 12 2002

    A new market is proposed to offer companies and investors an alternative to the ASX. Its success is far from certain, Brian Robins reports.

    Wanted: investors to establish a sharemarket alternative to the Australian Stock Exchange. Price: $200,000 for a 10 per cent stake. Expected profit: over $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 and, although Newcastle and Bendigo took a long time to gain traction, progress is being made.
    Now Ofex Pacific is to lodge its application for a market licence with the Australian Securities and Investment Commission by the middle of this month.

    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 stalled. Austock only trades equity in 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, there has been a flow of Australian companies listing on AIM. Most have their primary listing on the ASX, although some shun local investors completely.

    In its wake, Ofex Pacific is targeting smaller companies, at a time when the Newcastle Stock Exchange in particular is finally 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, 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 over the long haul is open to conjecture.

    The pressure on global sharemarkets has crunched valuations of public companies, as investors increasingly chose to trade only in top 50 stocks. As a result, two-thirds of companies on the Australian Stock Exchange are valued at under $10 million, the minimum size sought for new ASX listings.

    With these smaller stocks unloved and 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 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, to thrive, many smaller companies need access to public markets for capital.
    About five years ago, the Federal Government set aside funds to assist the development of new markets in Hobart, Bendigo and Newcastle, as part of efforts to assist rural Australia.

    The Bendigo sharemarket is pinning its future on trading taxi plates and providing a market for investors in community banks. Neither look especially enticing, although it is working on additional proposals to be detailed early October.

    For a company seeking to raise about $2 million from public investors and likely to have a sharemarket capitalisation of about $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 over $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 the chief executive 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 that prompts investors to bail 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, where there is 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 the 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 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 Peter 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).
    Even so, management fumbles and limited investor demand mean that about 1000 of the 1500 companies listed on the ASX are capitalised at less than $4 million each.

    Among Sydney brokers, lines of stock in unlisted securities such as IMB and Pioneer Permanent are not uncommon, while in Melbourne, Tattersalls, Pivot, Mildura Cooperative Fruit Co, and the like are often traded.

    Queensland has Landsdowne Pastoral Co, among others, while in Tasmania hardware retailer Kemp & Denning is 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 that have regular volumes traded will also have to list publicly.
    The saving for unlisted public companies that 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, with 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," says Bald, a former investment banker.
    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. Pisces 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 the middle of this month.

    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 look-alike to Sydney Futures Exchange, is believed to have made the regulator more cautious in signing off on new proposals.

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