Victoria Young: Do small caps need a hand up or just harden up?

Future Mobility Solutions, aka Sealegs, is abandoning the NZX. Photo / File

COMMENT:

Nobody likes a whinger, especially here in New Zealand where we prefer to just get stuff done.

So your correspondent felt little sympathy for Future Mobility Solutions director Mark Broadley as he went on a Michael Cheika-esque tirade about the NZ stock exchange at his company's annual meeting last month.

The owner of amphibious boat maker Sealegs has barely kept its head above water and will leave the NZX priced with its shares priced at 4.5 cents apiece, or $8 million in total, having lost about 59 per cent of their value since the start of the year.

Sealegs raised about $2 million when it went public in 2005.

Broadley told shareholders that, "given the absolute paucity of liquidity on the main board, we might as well delist". He said being on the NZX cost too much and wasn't worth it.

The former investment banker said FMS was "absolutely convinced we are not the only company going this way", and said the boat-maker had also looked at London's AIM sub-market but felt it was no better.

"It is not just a New Zealand issue as regulators get more involved. It has acted to the detriment of retail investors that there's not enough companies getting covered [by analysts]. If there's no research reports then small companies are just caught in the middle," he said, suggesting that a lack of coverage meant fewer people invest in a company.

Burger Fuel, led by founder Josef Roberts, is also weighing up leaving the domestic exchange. Photo / File

One might have just said goodbye and good riddance to FMS had Burger Fuel Group chief executive Josef Roberts not addressed exactly the same issue the very same week.

The burger chain is also weighing up leaving the domestic exchange and Roberts' annual meeting address also lamented a lack of analyst coverage, saying there was no sign of the situation changing.

"In summary, the listed environment in New Zealand at present seems bleak for small, thinly-traded stocks like ours and today there are new ways of raising capital for smaller enterprises and as a result, we are seeing less companies willing to IPO in NZ."

These complainers are not alone.

The recent NZX and Financial Markets Authority-sponsored report on capital markets said a lack of research has also been raised by market participants.

The EY-authored report released last month says meaningful coverage – defined as research by three or more leading research firms – is limited to the top 50 or so companies, with another 28 companies covered by at least one leading research firm.

That leaves a lot uncovered given there are 130 or so companies on the main board.

The report identifies that part of the change in New Zealand stems from a drift from broking to wealth management models and "this has been beneficial for those who get this advice and service but has been at the cost of smaller-cap companies and those not covered by research".

"The economics of providing high-quality research remains challenging," the report says.
The report notes the problem and that fact that anything that reduces the availability of broker research may reduce participation in the market.

The recent NZX and Financial Markets Authority-sponsored report on capital markets said a lack of research has also been raised by market participants.

Part of this comes back to rules introduced in 2010 which made advisers hesitant to recommend shares where the research was not readily available. A conservative approach to the rules meant the FMA had to clarify in 2011 that research did not necessarily have to be available.

The report says the industry response to regulation has "created significantly lower levels of interest and liquidity in smaller stocks".

While acknowledging the problem, there is no recommendation about what to do about it, although the report notes Shareclarity has an online subscription-based research platform and that is potentially a feasible model for research expansion.

NZX has in the past sponsored coverage with Edison Research working with the NXT market but the initiative appears to have died with the junior exchange.

CM Partners principal Tim Preston, who specialises in smaller companies, said it is a vicious circle where people don't buy shares and brokers don't research them. He says although it is a shame to see small companies go, there are others like QEX Logistics and Cannasouth that buck the trend.

However, Preston believes more support from the investment community is required and queried why Cannasouth was panned by analysts.

"Cannasouth is the start of a big mega trend but all it got was criticism from the bulk of the investment community."

Mark Lister from Craigs Investment Partners says small companies have always battled to get analyst coverage. Photo / File

Mark Lister, head of private wealth research at Craigs Investment Partners, says brokers simply have limited resources, and clients are broadly conservative and just want to follow big stocks.

"This has been a perennial issue. It's always been small companies battling to get coverage."

But Lister cites Sanford, NZ King Salmon and Vista Group as examples of companies Craigs has covered which have graduated from small to the big time.

"Some of the onus is on these businesses needing to focus on their own businesses, chase opportunities, and deliver on them. And then the share price will look after itself.

"If you haven't grown your earnings, why are people going to take you seriously because of analyst coverage?"