Business

Saturday November 14, 2009

Still enchanted with Main Board

By ERROL OH


Is the ACE Market just a stepping stone to the big time?

EVERY now and then, people fret about the diminishing appeal of the ACE Market, Bursa Malaysia’s alternative market for emerging companies, previously known as the Mesdaq Market. Based on the listing numbers, it may be time for the hand-wringing to start again.

As a result of the jittery investor sentiment following the global financial crisis, initial public offerings (IPOs) are few and far between this year.

The Main Market, the product of a merger of the main and second boards on Aug 3, has had nine new listings in 2009 so far, and two more are slated for later this month. The two boards had a total 15 new listings last year and 23 in 2007.

The ACE Market statistics are more worrying. It looks like we may end the year with just one fresh name. Kelington Group Bhd, an engineering company that provides ultra-high purity systems, is tentatively scheduled to make its Bursa debut on Nov 25.

This continues the trend of dwindling Mesdaq/ACE Market listings since the peak of 46 IPOs in 2005.

It also means that for the third year running, the number of companies that exited the ACE/Mesdaq Market (either by transferring to the Main Board/Main Market or via delisting) is more than or equal to the number that made their debuts.

This year, six Ace Market companies have graduated to the Main Market. Half of them – Daya Materials Bhd, Fibon Bhd and Vitrox Corp Bhd – made the transition early this month. Does this suggest a possible flight from the ACE Market to Bursa’s top tier because the criteria for a transfer to the Main Market have been lowered?

Prior to the revamp of Bursa’s board structure in August, the profit test for a company seeking a main board listing required the company to have an aggregate after-tax profit of RM30mil over its last three to five financial years (FYs), with at least RM8mil in after-tax profit for the most recent FY.

Now, the aggregate after-tax profit required is RM20mil over the last three to five FYs, with at least RM6mil for the latest FY.

Profit test

Vitrox has qualified for a transfer based on the superseded profit test, presumably because it had applied for approval of the exercise prior to the new criteria coming into effect. On the other hand, Daya Materials and Fibon both moved up to the Main Market based on them passing the new profit test.

However, Daya Materials executive vice-chairman Datuk Mazlin Md Junid told StarBizWeek that the company would qualify for a transfer even if the previous profit test was the benchmark.

Therefore, it appears that it was a coincidence that all three companies moved up to the Main Market at around the same time. Nevertheless, there is little doubt that most of the ACE Market companies are likely to make the jump as soon as they are eligible to do so.

This fits the positioning of the ACE Market as a stepping stone for the not-ready-for-the-primetime companies. The question is, can it attract a steady flow of new listings?

The Mesdaq Market was modelled on Nasdaq in the United States, in the sense that both were meant to provide young companies in high-growth, high-technology sectors, which otherwise could not be listed because they did not have a profit track record, with access to the capital market.

However, Nasdaq boasts names such as Microsoft, Apple, Cisco, Intel, Oracle, Yahoo, Amazon, Dell, eBay, Google and Starbucks. These companies have not leapt to other exchanges although they are light years away from their start-up days.

It is not a fair comparison, of course, because Nasdaq has been around a lot longer and it is not quite a junior exchange to say, the New York Stock Exchange.

Lack of enthusiasm

Following the restructuring of Bursa’s boards, the ACE Market is now open to businesses from all industries. That should deepen the ACE Market’s offering. Nevertheless, there is still the need to address the fact that investors are unenthusiastic about its counters.

This is a major factor in motivating companies to seek a move to the Main Market. Grand-Flo Solutions Bhd is one of them. It has yet to submit an application but it is already looking forward to making that jump.

Says group president and managing director Derrick Tan: “The perception of the ACE Market companies is quite bad. It’s very difficult to get the attention of investors, especially the institutional funds. They don’t even want to look at you if you’re an ACE Market company.

“And you can’t blame them because a large majority – maybe 80% to 90% – of the ACE Market companies are not doing well. With a transfer, hopefully people will start to better value our shares and the trading liquidity will increase.”

Mazlin of Daya Materials says this has indeed been the company’s experience although it has only been a week since its transfer to the Main Market. “We can see that the stock is more actively traded, and we understand that a couple of fund managers have picked up a sizeable number of shares,” he adds.

Like Grand-Flo, a key reason for Daya Material’s transfer was to hopefully be in a better position to gain the attention of institutional investors, many of whom do not have the mandate to buy ACE Market securities.

“Ace Market companies are not on the radar screens of these investors. We want to attract a wider band of investors,” Mazlin explains.

When a company is largely invisible to big investors, its ability to tap the capital market is also limited. For many ACE Market companies, graduation to the Main Market is the only way to realise their ambitions.

Says Green Packet Bhd chief executive officer Puan Chan Cheong: “We want to be a leading global player and an MNC (multinational corporation). With these big goals, I can say staying put in Mesdaq was never an option for us.

“As soon as we met the more stringent requirements for the main board, we moved up. It’s a different league altogether, and we needed for our planned growth, the recognition and the confidence that it accorded.”

He adds that the Main Market status has boosted the company’s credibility and recognition when it ventures abroad.

Jimmy Piong, the managing director of Kotra Industries Bhd, one of the first companies to be listed on Mesdaq, has a contrarian view, although Kotra was transferred to the main board in July 2007.

When asked about the effect of the move, he says: “Absolutely no difference at all. I can’t see what I can do with Kotra as a Main Market company that I can’t do if it were an ACE Market company. As long as you’re listed, it shouldn’t be a problem.”

He concedes, however, that there may be some “feel-good factor” to being a Main Market company. Sometimes, that alone is enough to make a difference.

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