Experts expect to see more delistings from the JSE this year due to SA’s weak business environment, particularly of small and mid-sized companies.
Shares in smaller listed companies are often tightly held by a few large shareholders, and because of this and the fragile economy trade at major discounts to their underlying value — which makes them attractive targets for private equity players or management buyouts.
But while this offers opportunities for the canny private equity player or management team keen on a buyout, delistings also reduce the size and scope of the investment universe for retail investors, who are more likely to buy shares in smaller companies.
Larger institutional investors generally invest in bigger companies, such as those in the top 40 index, because they are more liquid than smaller companies.
The number of companies listed on the JSE has been declining over the past 20 years or so, shrinking from 668 in 1999 to 336 in January this year.
Bell Equipment has indicated it may consider a delisting, while capital equipment provider and engineering group ELB and building materials group Mazor will leave the bourse in February.
The departure of companies from the JSE underlines how the economy is struggling. In a climate of strong GDP growth, more companies are created and the potential for listings increases as they look to raise money in the favourable markets associated with boom times.
The JSE says the “current situation caused by the Covid-19 pandemic is unprecedented and several companies have been undervalued due to the sharp fall in share prices compared with the beginning of 2020".
“This volatility has seen some companies announcing their intention to consider a delisting,” says Samuel Mokorosi, head of origination and deals at the JSE. “While there could be many reasons for delisting, the pandemic has caused an uncertain business environment and market conditions. Founders and controlling shareholders of certain companies which are currently undervalued may find that this is the perfect time to delist.”
Funds raised by listed companies from shareholders in 2020, up 87% from the year before.
— IN NUMBERS: R67bn
Mokorosi says this is a “cyclical trend where founders and controlling shareholders take advantage of current market conditions to make an attractive offer to minority shareholders” but that they lose out on the “ability to raise local equity funding through a public exchange”.
He says 20 companies delisted from the JSE in 2020, compared with the 25 that delisted during the 2009 global financial crisis. The JSE had five listings in 2020.
Mokorosi says that despite the low listing numbers, the current crisis caused by the pandemic has also “reminded companies that the core purpose of a public listing — access to equity finance from long-term shareholders — comes in very handy when you need cash fast”.
“The numbers tell the story. In 2020, a total of R67bn was raised on the secondary market, which is 87% higher than 2019. Most of the 2020 capital raised was during a lockdown economy.”
Michael Treherne, portfolio manager at Vestact, who expects more delistings this year, says: “Delistings generally happen when there is not much excitement around and companies are trading at deep discounts to their value. You see the opposite, with lots of listings, when there is a lot of excitement around shares and investors can’t get enough.”
Treherne says that in the US, stock markets “are on fire” right now, with a listing almost every week, as companies are keen to come to market because “they can achieve good prices when they list”.
“In SA we are down in the dumps and we have not seen great economic growth. These small-cap companies are majority held by insiders, so their liquidity is not great.
When something is very cheap compared to its overall value, that is when you see guys come and do buyouts.
— Michael Treherne, portfolio manager at Vestact
“A lot of your pension funds can't hold these smaller companies because in terms of their mandates there are certain thresholds in terms of the size companies must be before they can buy stock in them. This means there is no demand for these smaller companies and they trade at a very cheap value. When something is very cheap compared to its overall value, that is when you see guys come and do buyouts.”
Treherne says what could also underpin delistings is that there is a “lot of private equity money, both local and global”, looking for cheap companies to buy.
Sasfin Securities' chief global equity strategist David Shapiro, who also expects to see more delistings from the JSE this year, says there are a lot of small and mid-cap stocks on the exchange which “have been trashed” but still offer major comeback potential.
In April last year, Shapiro created a “hypothetical” fund consisting mostly of stocks whose share prices had been hit hard by the lockdown and the many preceding years of a weak economy.
These were companies that Shapiro considers to be takeover targets.
But he says the stocks in the fund, which included Tongaat Hulett, ArcelorMittal SA, PPC and Nampak, saw their share prices rise a collective 69% between April 8 and year-end.
Shapiro says that even with the gains in their share prices, a lot of the companies could still be potential targets.
“There are just no economic growth prospects. If they continue to stay listed they will continue to trade at a discount and pay all these [listings] fees and not get any benefit from paying them.”
He says it is costly to be listed on the JSE, and a lot of smaller companies are not getting the benefit of their share prices going up.
“Because your share price is so discounted you can’t use the scrip, and you can’t issue shares to buy other companies. The old conventional benefits of a listing are just not there. What’s also important is the market has moved to passive investment.
“What happens with passive investment funds is you end up buying the index and what is in the index.
“Everything outside of the top 40 is just neglected.”
Shapiro says the JSE should be doing more to encourage share ownership in smaller to mid-sized South African companies. “I’ve been a member of the JSE for 49 years. When I joined the market, there weren’t passive investments. We used to have a maxim on the JSE of ‘buy a share of SA’, to encourage South African share ownership. We don’t do that any more. Their [the JSE’s] attention has been on where they can get maximum value, which is in the derivative and index trade and larger companies.”
Shapiro says there is a “moral commitment” to support smaller businesses in SA, adding that there are some “lovely companies” listed on the JSE.
Adrian Saville, CEO of Cannon Asset Managers, agrees that there is a “wide raft of really attractively priced medium- and small-sized companies” on the JSE and that insiders — usually management teams — have an “excellent line of sight into these assets”, which increases the potential for buyouts and delistings.
“I think you can anticipate interest from inside investors if outside investors remain missing in action. There are a lot of opportunities for small and medium-sized companies for buyouts,” Saville says.
“I think the disconnect is that very often the perception is ‘oh, it's a small company, and small equals higher risk and small equals specific challenges’. SA has a record of well-established, well-run mid- and small-sized companies. Rather than representing risk, they actually represent quite a spectacular opportunity.”
Mokorosi says as far as listing fees are concerned, the bourse’s research shows that the “JSE annual listing fees for small caps including AltX companies are cheaper than other local exchanges”. He says the AltX’s annual listing fee is about R39,213 including VAT, while the main board fee ranges from about R54,835 to a maximum of about R482,537 including VAT, and is calculated on a sliding scale based on the company’s market cap for the previous year.
He says that in response to last year’s volatility and pressure caused by the pandemic, the JSE has been helping companies on the bourse by lowering capital-raising fees by 25% for all small-cap and AltX counters, and by a further 50% for brokers who trade these stocks.
Mokorosi says this was in response to a “difficult macro climate and to lower the cost of capital for small-cap companies”.
He says the JSE is also “accessing ways” to ease the “ongoing cost of listing”.
“The JSE will continue to look at ways of how we can enhance the listing value proposition for our listed companies and explore suggestions from our market participants to improve liquidity for our small caps.”
And it’s not just the JSE that is experiencing delistings. Mokorosi says international bourses are also facing delistings due to the “growth in venture capital and private equity”, adding that companies are staying private for longer.
“Exchanges have responded by launching private markets offerings for companies to raise private equity and debt.”
With this mind, he says the JSE announced late last year that it was looking to partner with UK fintech group Globacap “to roll out a private markets platform in 2021, subject to final regulatory approval”.
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