Share consolidation not sustainable solution to meeting MTP rules: Analysts55 companies recently announced plans to consolidate their shares. They want to bring their share price above the minimum of 20 cents required under new rules. But market analysts say these firms should also consider measures to boost business fundamentals.
8 May 2015
Share consolidation is not a sustainable solution to meeting new rules on minimum trading price (MTP). There has been a slew of firms planning to consolidate their shares, to take their counters above the minimum of 20 cents. But market analysts have said these companies should also consider measures to boost business fundamentals.
Fifty-five companies listed on the mainboard of Singapore Exchange (SGX) recently announced plans to consolidate their shares. They want to bring their share price above the minimum of 20 cents required under new rules that kicked in this year.
Those with their six month average share price still below the minimum trading price by Mar 1, 2016 will be placed on the SGX watchlist for three years.
While the plans by the 55 companies will help prevent them from being placed on the watchlist, some market watchers have warned that such a move may not be in the best interest of investors. They said share consolidation will result in reduced liquidity and does not guarantee against future declines in the share price.
Instead, they said alternatives - such as moving to the Catalist board - are likely to be more sustainable.
"In a Catalist regime, I think there is a lot more flexibility, because they have deregulated and appointed a sponsor to watch over, ensure compliance and proper disclosure,” said Mr Robson Lee, a partner at Gibson, Dunn & Crutcher LLP. “So it is an easier regime, and it does not mean you can't upgrade subsequently if the business fundamentals improve."
But it is more costly to move to the second board. Some lawyers estimate legal costs of S$15,000 for shifting to the Catalist board, compared to up to S$5,000 for share consolidation.
This does not include the costs of getting a sponsor, which can be as much as S$100,000 a year.
STRENGTHENING FUNDAMENTALSBesides share consolidation, analysts said firms should also look at how they can strengthen their fundamentals. Some market watchers said the performance of a business is better reflected by indicators such as earnings per share and price-to-book ratios.
A spokesperson from the Small and Middle Capitalisation Companies Association said: "For example, a listco can have a 20 cents share price with 100 million shares outstanding, while another can have a S$2 share price with 10 million shares outstanding. Both have the same market capitalisation, though they have a different share price.
“To see which is the better performing listco, we have to look at their earnings per share, understand their price-to-earnings and price-to-book ratio against their peers to conclude whether or not the listco is performing.
“The other key to the performance of a listco is liquidity and this means market liquidity. MTP is likely to have a negative effect on liquidity.”
Looking beyond financials, observers said firms can improve their business outlook to boost value for investors.
Said Mr David Gerald, president and CEO of Securities Investors Association (Singapore): "Investors who're invested in a company with share consolidation, they must ask the company, 'What else do you intend to do? Do you intend to inject a new business? Do you intend to do a reverse takeover? Are you planning to bring in some investments? What are the plans of the company to improve the bottomline and profit margins?’
"They need to look at the future prospects of the company."
As of April 2015, there are 614 companies listed on the SGX mainboard, of which, 216 have a six month volume weighted average price of less than 20 cents as at Mar 31.
In response to queries from Channel NewsAsia, SGX said: "The MTP is only one of several initiatives SGX is introducing to continually improve and strengthen the stock market. There could be challenges in the short term but working with customers and stakeholders, over the longer term, transforming our capital market will benefit all stakeholders.”
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Odd lots from share consolidation shouldn't be a worry: SGXShould share consolidation result in odd lots of less than 100 shares, companies can request that Singapore Exchange create a temporary odd lot counter, says SGX.8 May 2015
Investors should not be concerned about being stuck with odd lots arising from share consolidation by mainboard-listed companies that need to meet the Singapore Exchange's (SGX) minimum trading price (MTP) requirement.
This was one of the points raised by the Singapore Exchange (SGX) on Friday (May 8) in response to concerns about the MTP. The Securities Investors Association (Singapore) had earlier said share consolidation to meet SGX's minimum trading price might not work to the interest of minority shareholders.
"Should share consolidation result in odd lots of less than 100 shares, companies can request SGX create a temporary odd lot counter for say, two months post-consolidation, so that shareholders with odd lots can manage their shares," SGX said in a note to Channel NewsAsia. Most SGX-listed shares are traded in lots of 100 shares.
Under SGX rules, companies have until Mar 1, 2016 to raise the six month volume-weighted average price of their shares to at least 20 cents a piece.
Based on six-month volume weighted average price of less than 20 cents as at Mar 31, 216 mainboard-listed companies were affected by this new requirement. Of these, 55 have proposed consolidating their shares.
Apart from SGX, the New York Stock Exchange and Nasdaq also have similar MTP requirements.
SGX reiterated in its note that having mainboard shares trade at an MTP of 20 cents was one of several initiatives aimed at improving the quality of the Singapore stock market and promoting fair, orderly and transparent trading. This is because shares with higher prices are less susceptible to excessive speculation.
SGX added that besides encouraging companies to consoldate their shares, it has also asked companies affected by the MTP to look into improving their business fundamentals.
"The MTP is only one of several initiatives SGX is introducing to continually improve and strengthen the stock market. There could be challenges in the short term working with customers and stakeholders, (but) over the longer term, transforming our capital market will benefit all stakeholders," SGX said.
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Be wary of share consolidationBy Martin Lee
29 Dec 2008
Share consolidation is an exercise whereby the shares of existing shareholders are combined. For example, in a 10 to 1 consolidation, 10,000 shares that you own will become 1000 shares.
Even though the number of shares has been reduced, nothing has changed in terms of the percentage of shareholdings. Theoretically, the price of the shares should increase by the same multiple in which the share was consolidated.
For example, if the price of a share was trading at $0.10 and there’s a consolidation of 10 is to 1, it should trade at $1 after the consolidation exercise.
Recently, there had been a number of share consolidations. Chasen, whose share was trading at $0.005 to $0.01, did a 100 is to 1 consolidation. If the valuation remains unchanged (big if), the price should trade at $0.50 to $1 post consolidation.
Apparently, there were many shareholders who were not aware of this consolidation and happily sold their shares at $0.13-0.20 post consolidation. On the other side, directors and the company were buying up the shares, driving up the price to $0.30.
The sellers would have gotten a rude shock (and big loss) when they later realised they had unknowing shorted the shares as the number of shares they owned had actually reduced. They would be subjected to SGX’s compulsory buyback and a check of SGX’s annoucements confirmed that indeed there were many short sellers for several days after consolidation (even up to today!).
Two other companies which also had share consolidations, STX Pan Ocean and Anwell, did not seem to have much of this “short selling” problems taking place.
If you are a shareholder of any company, this highlights the importance of reading the documents that they send to you. Know what is happening to your company, and do not be caught off guard just because you didn’t know what is happening.
