Paul Miller of AmaranthCX was recently spoke to Philippa Larkin, Business Report's content editor. The discussion was based on research released by AmaranthCX, which can be accessed here.
The article can be accessed here in the online edition of the Business Report or read below:
Philippa Larkin, Business Report's content editor, speaks to Paul Miller, an ex-banker and mining industry consultant with AmaranthCX. He recently shared some research on the delisting crisis on local markets with BR.
Larkin: What is the basis of your research?
Miller: AmaranthCX maintains a database of all South African (SA) company listings and delistings going back to 1995 - across all SA’s stock exchanges. SA is currently amid a 7-year losing streak averaging about 25 company delistings a year.
Having started off 2022 with 332 listed companies, the year is looking especially bad with 18 companies having already delisted, and at least another 14 delisting processes already underway.
Add to this the 16 or so distressed companies that are suspended from trading and which are almost certain to delist at some point, and the accelerating impact of the delistings crisis can be seen.
This means that more than one in ten listed companies can be anticipated to delist in 2022. The denominator is shrinking rapidly and soon 25 delistings a year will be very significant in percentage terms.
With just 6 new listings so far - 3 on the Johannesburg Stock Exchange (JSE) and 3 on the Cape Town Stock Exchange (CTSE) - new listings appear few and far between.
Larkin: Why are companies delisting?
Miller: You can’t ignore SA’s dire macroeconomic context, ongoing electricity crisis and business unfriendly government policies. However the most often cited reasons are onerous listing requirements and red tape, the cost of maintaining a listing and the cyclical nature of share prices.
These reasons may all be true, but they ignore 30 years of structural change in the way savings in SA are managed. Those savings are now overwhelmingly managed by just 11 institutions, which, by their own admission, invest in only the top 100 or so companies by size and liquidity.
This, coupled with the 40% or so of the local market held by foreign institutional investors, which have the same size and liquidity requirements, and the fact that local stockbrokers have increasingly morphed into wealth managers - moving their retail investors into those same institutions’ funds and model portfolios - means that the smaller end of the market is severely neglected and underrated.
And it is not so much about the absolute number of listings or delistings as the inability of growing companies to raise primary capital in the local market.
Larkin: What is being done about it?
Miller: National Treasury, the policy maker in this context, appears to have very little interest in the problem.
The JSE is trying to address the issue of excessive red tape - which is necessary, but not nearly sufficient, to reverse the trend.
To my mind the JSE board and its executives may have been caught asleep at the wheel. They employ the experts and can afford to commission independent research, so they should have picked up on these structural changes at least a decade ago and adjusted their engagement with policy makers and regulators accordingly, to try and mitigate or reverse the trend.
The JSE has also actively abetted the process of taking the public out of the public market and the consequences are now becoming starkly apparent.
Larkin: Are alternative stock exchanges the answer?
Miller: The CTSE has been like a breath of fresh air and competition is the only free market discipline that the JSE is subject to, as its licence conditions protect it from being taken over by a better market operator.
However, all new stock exchanges operate within the same institutionally dominated savings environment as the JSE does, so time will tell if they can capture the imagination of a new generation of retail investors and perhaps wrest them away from other more popular endeavours like crypto trading and online sports betting.
Larkin: Does EasyEquities change the picture?
Miller: EasyEquities’s success is the best thing to happen to the local markets in a very long time. I’m a client and can’t praise them highly enough.
However, EasyEquities actual amount of assets under administration is still relatively inconsequential in the total scheme of things.
Hopefully they continue to grow and the impact of their over 1 million account holders can start being felt in primary capital raisings and in the re-rating of the smaller end of the stock exchange.
Larkin: Does Piet Mouton, the chief executive of PSG, have a point? (In the firm's latest annual report he raises issues the group has an investment firm being listed on the JSE.)
Miller: If I’m not mistaken Piet complained about the JSE’s red tape stifling deal making; the high costs of maintaining a listing; and the ever-increasing discount at which listed investment holding companies trade, which negates any benefit to remaining listed.
I’m sure these are all true in PSG’s context. What I can say is that both PSG and its older brother Remgro’s founders raised significant amounts of their respective investment holding companies’ early capital from individual investors - teachers, doctors, farmers and small-town businesspeople.
And both PSG and Remgro have served those early investors very well. However, what Jannie Mouton and Dr Anton Rupert did is simply no longer possible in the current context. Those equivalent individual investors no longer have stock broking accounts and no longer invest in individual shares, having moved into institutional funds and wealth management model portfolios.
And today’s institutional asset managers would simply shoo away a new Jannie Mouton or a new Dr Anton Rupert at the door, as their new companies would never meet the minimum size and liquidity requirements to even get a junior analyst’s time of day.
Larkin: What should be done about it?
Miller: The most active and dynamic public markets are those with high levels of direct investment by individuals. Markets like those in the UK, Canada and Australia.
In those jurisdictions individuals can manage a portion of their own retirement savings and small companies are provided with access to a range of tax incentives if they are listed.
What is clear is that if nothing is done about it - at a policy level - then we can expect the number of listed companies in SA to gradually dwindle to just the 100 or so large and liquid enough to attract the attention of the dominant institutional investors.