Plenty of SMEs are seeing the upside of alternative listing in international markets.
By Giles Parkinson
When the Sydney-based wave-energy producer Oceanlinx needed to raise money to bring its new technology into commercial production, it had little hesitation in heading to the Alternative Investment Market (AIM) in London.
Oceanlinx CFO Bill Day says the company could have chosen a private placement, or listing on the Australian Securities Exchange. But the search for liquidity from its 100 or so private backers and the lure of an international market that could get excited about its growth prospects clinched the decision to list on the AIM.
'We have aspirations of significant international growth,' Day says of the company which, having proved its technology, now needs money to fund the construction of floating power generators for Victoria, the UK, Namibia, Rhode Island and Hawaii.
'London is an international financial centre and has unrivalled access to liquidity,' Day says. 'We wouldn't have been guaranteed to get on the ASX, or that anyone would have been interested. [The] AIM matched our profile as a renewable energycompany in an international arena. It pushed all our buttons.'
Oceanlinx is just one of dozens of small-to-medium-sized Australian companies that are seeking alternative listings in international markets either as a primary listing base in the case of Oceanlinx, or as a secondary listing in the case of many others, particularly miners.
Some have headed to the AIM, some to the Nasdaq, and many miners are drawn to the Toronto Stock Exchange (TSX), where they feel they can gain higher valuations on their projects. Some companies go even further afield.
The ASX-listed Vulcan Resources has a collection of copper, nickel and cobalt projects in Finland, but found it was difficult to get recognition of the value of its assets from investors in Australia.
'One of the reasons you go to an alternative market is that in Australia there is a view that Kalgoorlie is the centre of the universe,' says Vulcan managing director Alistair Cowden. 'Investors want to see it [a project], smell it and touch it. If you are operating in another country, you don't get the recognition.'
Vulcan completed a compliance listing in Frankfurt in August and studied the possibility of listing on London's AIM. Cowden decided that while the AIM is good for companies raising money for the first time, and works well in bullish markets, it has insufficient liquidity as a strong secondary market.
So they looked at Oslo instead. The appeal there was that the Oslo Stock Exchange was the strongest in the Nordic countries, and its investors were familiar with nearby Finland.
'Oslo has bought the Australian trading platform. It has around 10 times the liquidity of AIM, and strong institutional and retail trade,' Cowden says.
What's more, it only has a handful of mining companies. 'So we stand out a bit,' he says. 'Everyone there under-stands Finland, and knows that they are experts in mining and mining equipment and metallurgy. Time will tell whether it works, but I think it is important to be [listed] in the part of the world you are operating in.'
This was the same motivation that took another Australian mining group, Azure Minerals, to Toronto, where it applied for a listing on that city's venture exchange.
Azure, which has been listed on the ASX for four years, has about a dozen silver, lead and zinc projects in Mexico, and suffered the same indifference from Australian investors as Vulcan. 'The Australian investing public is not as familiar or comfortable with operations in Mexico as they would be in Australia,' says managing director Tony Rovira. 'Canadians are much more comfortable with it. It's in their time zone, and they go there for holidays.'
That translates into higher valuations. 'We could have stayed in Australia and done a capital raising there,' Rovira explains. 'But it would have been a lower share price than what we are getting out of Canada.' Azure also considered the AIM, but the timezone issue and the valuation multiples led it to decide on Toronto.
Elliott Rowton, a director of Oceanic Asset Management, a funds manager that specialises in the resource industry, agrees that better multiples are on offer for companies that list on the TSX. 'Australians don't really under-stand how to value resource companies,' he says.
'I don't know why Australians don't get it. It's an anomaly. But look at Rio Tinto. Australian fund managers valued it at A$90 a share before BHP offered A$130. It was the same for WMC. It was trading at A$2.50, and 12 months later BHP bought it for A$9.
'If you can go over [to Toronto] and get the share price up in Canada, then the share price in Australia will follow,' Rowton says. 'It's another source of capital, and it's a much more sophisticated market.'
Rowton agrees that the AIM is a good facility for companies wishing to raise money, but admits that it is illiquid and dominated by just a few market makers. Part of the problem is its growing size, and the concern that it could become dominated by large-cap companies, an issue identified in a recent review conducted by the London School of Economics (LSE).
The LSE noted that although it is little more than half the size of the Nasdaq in terms of the number of companies listed, smaller companies received too little attention from analysts and had too little visibility among investors.
There are currently around 1650 companies listed on the AIM, with a combined market capitalisation of more than £100B. Australia is represented by 48 companies with a combined market cap of £4B.
After recovering from the collapse of the dot.com boom, since 2002 the AIM has been targeting more foreign-based companies. It has particularly focused on companies that could not raise funds in their own country or who were seeking a greater international profile.
Of the 480 international companies now listed on the exchange, food is the largest component with 26.5 per cent, followed by mining (22.4 per cent), real estate (12.3 per cent), and oil and gas (11.7 per cent). Financial, software and electrical companies make up the rest, along with some specialty equity instruments.
Australian companies have shown a preference for the Nasdaq, AIM or the TSX but there are, in theory, a number of other options, and some in their own time zone.
In the Asian region, the fastest growing alternative market is the Growth Enterprise Market (GEM), which was established in May 2006 by the Hong Kong Stock Exchange.
Peter Lee, the executive director of NIF SMBC Ventures, the Hong Kong arm of a Japanese venture capital firm, says the GEM was established to provide a platform for companies in their early stage of development typically IT or biotech outfits.
The GEM appeals to new and developing companies because it has high turnover and liquidity, and does not require any track record on profits. The GEM has attracted 193 companies in its first 18 months, although none from Australia. Most are from mainland China.
Average daily turnover has increased four-fold in the 12 months to October 2007 to HK$642M. The market capi-talisation of the exchange is now at HK$164B, and it has a bullish average P / E ratio of around 45 times, up from 17 times a year ago.
'It's also a good alternative exit for venture capitalists,' says Lee, whose company is yet to list one of its own investment companies on that market.
Meanwhile, the companies mentioned in this report continue to prepare for the listings in their respective target exchanges.
Azure will go onto the venture exchange at Toronto, which is reserved for junior companies, those that are starting up, have relatively low market caps, or inexperienced management.
Azure currently has a market cap of around A$30M. Once it gets to A$50M and can prove it can operate successfully, it will likely move to the main board. That's its ambition.
Rovira says that the legal and accounting requirements are drawn out but manageable. Companies need to have the accounts for the past three years audited and signed off, and answer an 'intense' questionnaire on all directors and executives. 'It's a long process but not necessarily onerous,' he says.
The listing will cost around A$500,000. That compares to around A$200,000 in Australia. The difference is largely due to the extra due diligence required on the TSX.
Rovira recommends companies seeking a Canadian listing hire a legal firm that has experience with Australian companies. 'You need to choose your broker very carefully, and your legal counsel very carefully,' he advises. 'And talk to others who have been down that road.'
Vulcan, which has been listed on the ASX for five years and has a market capitalisation of around A$100M, is taking advice from a Norwegian broker. It is already listed on the over-the-counter market in Oslo and hopes to list on the main exchange early this year.
Companies intending to list on the AIM need to have a nominated adviser (known as a Nomad) to help them through the process. Oceanlinx, which reportedly is looking for more than A$35m, retained Libertas Capital as its Nomad.
The main exchanges
Alternative Investment Market (AIM) Launched by the London Stock Exchange in 1995, the AIM has raised more than £34bn from more than 2500 companies mostly in the early stage of development.
It is widely regarded as the world's leading exchange for young, growing companies. A particular financial track record or trading history are not required. There is also no minimum requirement in terms of size or number of shareholders.
Growth Enterprise Market (GEM) Launched by the Hong Kong Stock Exchange in May 2006, the GEM appeals to new and developing companies, mostly from China.
Nearly 200 companies have listed on the exchange, and its market capitalisation in October 2007 stood at around HK$164B.
Toronto Stock Exchange (TSX) The TSX is the most senior equities market in Canada, with about 1500 issuers across a broad section of industries. The TSX Venture Exchange was created to serve the public-venture equity market, and provides access to capital for companies at the early stages of their growth.
The venture market has more than 2200 issuers, with a market capitalisation of more than C$35B.
Reference: February 2008, volume 78:01, p. 42 45
