by Lauren Czepek, JSE Business Development Manager

Meet with the institutions Following an institutional roadshow the JSE will be taking a select group of AltX companies on a roadshow to see the institutions. Should you be interested in participating please contact Lauren Czepek laurenc@jse.co.za

AltX-listed stocks understandably suffered painfully in 2008 and into 2009 as all stocks tumbled during the financial crisis. However, while the large to mid caps and even the small caps on the main board have recovered since the March 2009 low, the AltX board has continued to fall.

“This lack of recovery in AltX does not reflect the quality of the stocks listed on this platform,” says Lauren Czepek, JSE Business Development Manager. “Many are solid companies, some with cash holdings that equate to their market capitalizations. The problem comes with a lack of liquidity and lack of communication to investors.”

However, despite this, institutional interest in these stocks remains strong. “The feedback from a recent JSE road show to financial institutions which hold over R100bn of funds under management  is that these investors do consider all stocks on the market and will always give due attention to new listings, including those on AltX,” says Czepek.

“Institutions have indicated to us that they will consider well priced and decently sized listings. Those that would hold their interest are companies with a good track record, with particular focus on how they managed and responded to the recent economic downturn. Institutional fund managers also look for a strong management team, and pay keen interest to the size of the shareholding which is offloaded by management at time of listing. Obviously, no management share disposals are preferred. Also, all proceeds raised on listing should be ploughed back into the business, listings are no longer an opportunity for existing shareholders to cash in.”

Czepek says that it is the underlying business, rather than the particular stock exchange listing platform, which is most relevant to institutions; and none of the institutions canvassed were following mandates that precluded AltX investments.

When a company is listed on AltX, Czepek says management must realise that there is now a serious duty regarding regular and transparent communications and investor relations. “These need to be frequent, and face-to-face - not irregular and remote. Communication should be in both good and bad times, and must be completely honest. It is unacceptable to indicate that trading conditions are fine and then a few days later the company issues a poor trading update. Institutional shareholders understand that listed companies are governed by JSE requirements that restrict what information can be given out. They realise they cannot receive preferential and inside information – but what they will not appreciate is being deceived and misled.”

Czepek advises small companies considering a listing to be cognisant of their financial year end. “Many large companies have June and December interim or year ends and reporting season gets extremely hectic when results come through simultaneously. If a small listed company wishes to get the attention it deserves from the financial community, a different year end may be more appropriate, so its results do not get overlooked in the peak reporting seasons. Also, results presentations should never be on the same day as a Top 40 company. Your audience would then be undeservingly small.”

As institutions are starting to see significant inflows again, Czepek says AltX-listed companies will undoubtedly see some of these funds coming their way. “Institutions have told us that they are looking at AltX, seeking out the real bargains that offer high return opportunities.” 

by Irina Gavrilova, Credit Suisse Standard Securities



“The market is finding it exceptionally difficult to forecast construction sector earnings, and hence the significant discount at which these stocks presently trade,” says Credit Suisse Standard Securities analyst Irina Gavrilova.

“Their trailing valuations are at around a 6 to 7 times P/E, which is a 55% discount to the JSE Industrial index. The market is therefore implying that construction earnings over the next eighteen months are expected to halve.”

Gavrilova says the two big market concerns are that order books will not materialise or be replenished, and that current group operating margins of around 8% could fall down to the historic 2002 margins of 3% and even below.

“Many factors are driving this uncertain outlook. Private sector construction spend is weak, as is business capex. Government is finding it difficult to raise funding for its infrastructure projects, and the skills shortage in this sector is a drag on construction activity levels. All of this means increased competition for a reduced pool of work, leading to pressure on margins. After the past seven years of strong growth, the earnings outlook is quite uncertain.”

Highlighting the positives for this sector, Gavrilova says that offshore earnings for some of the local construction stocks can be up to 30-40% of group earnings. “The rest of the world is in a recovery phase with projects available in Africa, Australia, South America and Middle East. These opportunities will help with replenishment of the order books. Furthermore, the resource sector is being supported by rising commodity prices and there are early indications that capex here is expanding.”

Construction sector margins will undoubtedly come down from their current unsustainably high levels, but not back to the lows seen before the recent boom period – and for several reasons. “Activity levels are fundamentally generally much higher than experienced in 2002. Also, SA construction companies have over the past twenty years earned much lower margins than their emerging market peer groups - and should not revert back to this imbalance. Additionally, the public sector has to maintain its infrastructure spend to catch up on a twenty year backlog, and especially so in order to promote GDP growth.

Finally, many construction groups now earn a high proportion of income from their high margin materials divisions – so when the sector begins stabilising, construction groups should benefit from positive operational gearing offered by this particular revenue stream.” 

• Advice and assistance on complying with continuing obligations requirements.
• Advice and assistance with corporate governance requirements.
• Drafting of all public announcements and submissions to the JSE.
• Liaison with the JSE on the client’s behalf.
• Updating clients continuously on regulatory changes.
• Planning and assistance with investor relations and road show presentations.
• Advice and assistance with structuring transactions.
• Identification and initiation of opportunities as part of a broader corporate finance service offering.
• Assistance with cross border transactions including regulatory compliance and debt raising, through its membership of M&A International.

• Jannie Grobbelaar
• Dino Theodorou
• Aris Malliaros
• Yaron Zimbler
• Bev Dalton
• Carey Jeewan

by Humphrey Borkum, Chairman of JSE Limited

Russell Loubser and I recently travelled around the country holding report-back meetings. At these presentations we emphasised the fundamental imbalances that are prevailing in world markets and just how fragile they are. We also pointed out that when the global banking system imploded it was the JSE’s superb surveillance capability which enabled safe short selling and the soundness of our banks that saved our country from severe financial stress. 

One of the questions frequently asked at these meetings was why there has been limited activity on our AltX board for small and medium sized companies. 

In times of recession there is always ‘a flight to safety’ into the big counters where investors feel that risks, inherent in times of financial stress, will not be as drastic.  Yet who would have believed that at the end of 2008 the share price of Anglo American would be down 50% and other JSE stalwarts such as BHP Billiton, Sasol, Anglo Platinum, Standard Bank, Absa, AngloGold and Kumba would have dropped by similar percentages. 

In my early stockbroking days I was personally involved with four businessmen Raymond Ackerman, Donny Gordon, Bill Lynch and Brian Joffe who built companies over the past 30 years that are large by any international standards. All these men had to start somewhere.  Pick n Pay listed at 66 cents in 1968. The issue price equivalent now would be .0039 cents.  Since 1968 the share price has split a cumulative 168 times. The Imperial Group listed in February 1987 at 69 cents per share.

Where would we be if we didn’t have AltX?  Without a platform for over 70 small and medium sized companies to raise capital. These listings also provide the companies with the money to make acquisitions, a higher profile in the media and, through share options, the ability to retain and motivate staff.  The market capitalisation of these companies range from R10 million to over a billion rand. 

Contrary to perception AltX is not biased towards construction shares and in fact mirrors a broad spectrum of the SA economy.  Broken down by the number of companies per sector 21% are telecoms and technology, 18% construction and materials, 16% financials, 13% consumer goods and services and 21% other industrial.  Mining comprises only 8% of the companies on the board. 

I would say that AltX is probably more a barometer of the South African economy than the Top 40 stocks. The smaller stocks accurately represent what is happening on the ground in South Africa.  If South Africa is hurting so is AltX.

An AltX listing is just one step in the evolution of a company. Since AltX opened its doors in October 2003 six companies have successfully made the leap from AltX to the Main Board. The pipeline of aspirant businesses interested in listing on AltX is strong and many are preparing themselves for a listing when the economy improves. Bear in mind that SA equity markets traditionally lag their peers.

When I look at the fundamentals of most of the companies listed on AltX  i.e. the balance sheets, income statements and cash flows there is a great deal of inherent value. There is no doubt in my mind that by carefully selecting and monitoring a number of AltX stocks  an investor has a very good chance of achieving the same sort of gains over the next 10 years as would have been attained by investing in say a Bidvest 10 years ago.

This article first appeared in Business Report