A RISING tide ought to lift all boats. The recent tentative recovery in the local stock market, however, seems to have left a pool of laggards languishing behind.
Although the benchmark Straits Times Index (STI) climbed over the course of March, the number of mainboard-listed counters that failed to meet the minimum trading price (MTP) of S$0.20 was roughly the same at the end of March as it was at the start, according to the latest figures from the Singapore Exchange (SGX) last week.
A more recent estimate from a study done by NRA Capital for The Business Times also suggests that the number of companies failing to meet the MTP has largely persisted through April or even worsened slightly, going by volume-weighted average price (VWAP) figures for the period from March 1 to April 29. The MTP rule took effect on March 1 this year.
The lack of substantial improvement in MTP compliance may have to do with chronic weakness in the broader market and some companies' belief that their core business is undervalued, market watchers say, adding that others may be reluctant to undergo a share consolidation but cannot straightaway snag suitable acquisitions or reverse takeovers (RTOs).
Still, reluctance to consolidate shares could indicate listed companies now have a better idea of what it takes to successfully comply with the rule, observers add, noting that firms have increasingly determined that share consolidation may be the fastest and easiest option but not necessarily the optimal one for the long term.
There were 125 mainboard-listed companies with a six-month VWAP that did not meet the MTP as at March 31, the SGX said in an email on Friday. That works out to a 0.8 per cent decline from the 126 counters trading below MTP as at March 2. In comparison, the STI went up a marginally more solid 4.2 per cent over the same timeframe, from 2,726.96 points on March 2 to 2,840.9 on March 31.
Data from NRA Capital as at Monday also showed that there were 131 counters with a VWAP less than S$0.20 for the two-month period from March 1 to April 29.
"The market upturn has not helped smaller companies which still face a lot of challenges," NRA Capital research head Liu Jinshu said. "The broad market remains weak ... it would definitely help if Singapore was in a roaring bull market where every stock will go up, but I don't think we're in a bull market right now." The STI ended Friday at 2,838.52 - slightly worse than where it was at the end of March.
He calculated that out of 54 companies not on the SGX watch-list which were granted a six-month extension to meet the MTP, their VWAP during March 1 to April 29 actually fell by an average 13.1 per cent from their six-month VWAP from Sept 1, 2015, to Feb 29, 2016.
And among the 381 stocks with trading data available that had managed to meet the MTP as at March 1, their VWAP dipped by an average 1.5 per cent from the six months ended Feb 29 to the two months ended April 29, he said.
Out of those 381 stocks, there were 15 that saw their VWAP drop to below S$0.20 for the two months ended April 29, he added. "Roughly a third of these 15 companies are in the offshore and marine or resources industry, suggesting that lower interest in riskier industries is causing some companies' share prices to approach or breach the MTP threshold of 20 cents."
Mr Liu said the pool of MTP non-compliant companies may have remained roughly the same size through March and April partly because "for some companies, they're probably a borderline case and the company thinks it's undervalued and doesn't agree with the idea of doing a share consolidation which could potentially erode shareholder value ... there's a general resistance to share consolidations because the general perception is that share consolidation has not benefited the companies that have done it".
"Some may rather not consolidate but go on the SGX watch-list and give themselves three more years to bring up their share price. For some others, liquidity is not high."
He added: "Some companies prefer to be low-priced, to appeal to the investing preference of certain groups of investors, as can be seen by stock splits from time to time at growing companies. A 0.5-cent move in a 10-cent stock increases market capitalisation by 5 per cent, while the same 0.5-cent move in a 25-cent stock changes market capitalisation by only 2 per cent, assuming the same starting market capitalisation. For a company to consolidate its shares and move up to a different trading price range, some of its existing investors may be put off ... For these companies, a better solution would have been to scrutinise stock splits more closely, so that the share prices of growing companies are allowed to move up over time, leading to more gradual changes in target investor bases."
The number of listed companies that have completed share consolidations to comply with the MTP rule was 117 as at Friday, the SGX told BT. That was a marginal increase from the 113 that had done so as at March 2, according to SGX figures in a Straits Times article in early March.
None of these 117 have completed a second share consolidation, although one issuer's second share consolidation exercise has recently been approved by its shareholders. This issuer was A-Sonic Aerospace, which got the green light on April 28.
A request for a second share consolidation from another company - China Taisan Technology - has been turned down by the bourse. China Taisan said in a bourse filing in December last year that it was unable to get SGX approval for round two "as the resulting number of consolidated shares after the proposed share consolidation would be too small, and would give rise to the concern of the possibility of cornering in the company's shares".
Mark Liew, managing director at PrimePartners Corporate Finance which provides Catalist sponsorship services, said the mainboard companies affected by the MTP rule have either already taken steps to address it or have ended up on the SGX's watchlist. "Over time, boards, management and investors are coming to terms with these new requirements."
He said that as the Singapore stock market recovers, "a declining share price after share consolidation is less of an issue" and noted that a "large majority" of affected companies have chosen the consolidation route "with a minority pursuing an RTO, a much larger exercise involving the commitment of significantly more time and resources to complete."
Roger Tan, president of advocacy group Small and Middle Capitalisation Companies Association, echoed this, saying: "The market has come to terms with what needs to be done. Companies are now more worried about overall economic conditions rather than the MTP. At the onset, the introduction of MTP created a lot of questions ... companies are still complaining but from what I see, they are doing something. MTP has kind of woken up a lot of companies to say, let's try to strengthen our company."
He added that share consolidation was "the easiest and fastest way" but redefining the company's core business "is a better direction". "Unfortunately, it's also the hardest ... it's also a question of whether they want to put in the effort to find M&A. Some bosses may be reluctant to because it could be dilutive of their own interest and that's something that's slowing down M&A activities."
Moving to the junior Catalist board is another option. Of the 125 companies that did not meet the MTP as at March 31, 11 have announced transfers to Catalist, SGX noted.
Not all attempts to move have come to fruition. One recent example is Innopac Holdings, which said in a bourse filing on Friday night that its board has "decided and resolved not to proceed with the proposed application" to SGX to transfer its listing from the mainboard to the Catalist board. It did not say why. Another is Blumont Group, which said in May 2015 that it wanted to transfer to Catalist but has not managed to so far. In February 2016, it said it had been granted a six-month extension to comply with the MTP.
Mr Liu said some Catalist sponsors may be selective and would prefer to only take on clients in growing industries.
Other companies may not even want to contemplate a move to Catalist "as their investors, bankers and stakeholders (such as MNC suppliers or customers) may be limited by their mandates to only deal with mainboard-listed companies, or provide preferential financial and business treatment to mainboard-listed companies", he added.
Mr Tan noted that there was no formula to bring up a stock's price, pointing out: "Sometimes investors have lost interest in the company not because it's no good."
"SGX could allow some form of 'comply and explain' where if company has made an effort but yet its share price doesn't move, it can explain, rather than directly go to the watch-list," he said. "Once you go to the watch-list, the concern is that it becomes a vicious cycle where investors stay away."
He added that the general impression among mainboard-listed firms was that "as long as the company has done something and made an effort, SGX is not going to be too harsh" and said he hoped regulators would "tweak MTP" further "such that it's relevant to the company".
Tan Boon Gin, chief regulatory officer at SGX, said in an email on Friday: "We recognise that complying with the MTP rule may be more challenging in a volatile market which is why SGX extended the MTP review for companies affected by the January volatility to September 2016.
"Share prices over the longer term should reflect the fundamentals of the company. Any company which is adversely affected by a bearish market and which becomes non-compliant with MTP will have three years for a share price recovery. Given that just two months have passed since MTP companies joined the watch-list, and that actions to comply take some time to implement, it is premature to draw any conclusions."
He added that the bourse was "monitoring market feedback on the existence of the two different sets of criteria for the watch-list" and would "make adjustments if doing so better achieves our objective to reduce excessive speculation and manipulation". "Should we consider a change in the criteria or the watch-list, we will conduct a public consultation."