Press Release

BABY STEPS Author: Story Leo D'Angelo Fisher Date: 01/02/2007 Words: 1480 Source: BRW Publication: BRW Section: News and Features Page: 28 Going public on an alternative stock exchange allows emerging companies to fund expansion and manage growth. For many small and medium-size companies listing on Australia's alternative stock exchanges - the National Stock Exchange of Australia, the Bendigo Stock Exchange and the Australia Pacific Exchange - the attraction is transitory. Once listed on a baby bourse, junior leaguers' thoughts often turn to the main prize: a listing on the Australian Securities Exchange. But the operators of small-business exchanges remain convinced that they fulfil a vital role in meeting the needs of growing companies that are too small or ill-prepared to list on the mainstream ASX. Springing up over the past decade, the three exchanges have shrugged off the sceptics to create a $1 billion-plus equity market for emerging growth companies. NSX chief executive Richard Symon is pragmatic about his exchange's stepping-stone role. "We've got to compliment ourselves in assisting companies in that process but I'm also hopeful that in future the viability [of the NSX] as an exchange for smaller businesses will be recognised." The junior exchanges encourage - or, in the case of the NSX, mandate - companies to appoint and retain a "nominated adviser" prior to admission and while listed to ensure compliance with listing rules and regulatory requirements. The "nomad" concept is modelled on the London Stock Exchange's market for smaller growth companies, the Alternative Investment Market. (Australian growth companies that do most of their business in Europe often look to AIM as an alternative to the ASX.) While the nomad system is designed to give investors confidence in the fledgling exchanges, inevitably it also sets up the junior boards as finishing schools for ASX-aspiring companies. Sydney hair-care products supplier Soda Brands listed on the NSX in January following a $5 million initial public offer. Managing director Nicholas Ghattas is already contemplating the transition to the ASX. Soda will make the move "once we have the track record and history as a public company", he says. For now, with sales of $1.8 million in 2006, it is simply too small to list on the ASX. Soda distributes the Salon Only hair-care range to 700 salons nationally. The range was originally developed and marketed by a group of 33 salons. The funds will be used to acquire the range from the salons, introduce new product lines and expand distribution channels. Eight per cent of the company's stock will be set aside for a loyalty program which will reward its biggest customers with equity in the company. Andrew Fairfull, general manager of the ASX-listed Souls Private Equity, the largest shareholder in Soda, is also its chairman. He believes the NSX listing will provide the management and corporate governance disciplines of a public company "without the expense of being listed on the ASX". The timing of Soda's migration to the ASX will be dictated by its market capitalisation, he says. "If you haven't got a market cap of $40-50 million, it's not worth being on the ASX. You can't afford it and you're not going to get any institutional interest." Soda has a market capitalisation of $10 million. Qualifying for a junior exchange berth is less demanding than listing on the ASX. Companies on the ASX, for example, must have a market capitalisation of $10 million and a minimum of 400 shareholders, compared with a market capitalisation of $500,000 for the NSX ($1 million for the BSX, $2 million for the APX) and a minimum of 50 shareholders on the junior exchanges. For the APX - the runt of the junior pack - the lure of public-company status has failed to ignite interest. Established in 2005, the exchange - 36 per cent owned by Melbourne financial services group Austock - has just two listings. A third, property developer Becton Development, transferred to the ASX shortly after listing in 2005. It's a far cry from projections of 30 companies in its first year. Managing director Martin Ryan admits the APX is one of the investment community's best-kept secrets. The allure of the ASX is based partly on culture and perception as well as the promise of greater liquidity and access to larger sources of capital. But the junior exchanges don't have a monopoly on thinly traded stocks. Many small caps listed on the monolithic ASX, home to 1930 companies, are destined for obscurity. "There's an awful number of shares listed on the ASX that shouldn't be," Symon says. But he understands the power of perception and the importance of credibility. In December, the then Newcastle Stock Exchange won federal government approval to change its name to the National Stock Exchange, providing it with new gravitas. The exchange, established in 1937 but long dormant, was revived in 2000. After an uncertain start, it has refined its offering as a diverse small-business board focusing on SMEs, community and co-operative enterprises, and compliance listings for businesses wanting to provide existing shareholders with a mechanism for trading their shares. The NSX's operator, NSX Ltd, is listed on the ASX and also owns the BSX, which it acquired in 2005. The BSX traces its origins to an exchange set up in provincial Bendigo in the 1860s to service the proliferation of mining companies during the Victorian goldrush. It closed in 1954 but was revived in 1999 with the support of Bendigo Bank and local businesses. Today, most of its 62 listings are Bendigo Bank community branches throughout Australia. The BSX pioneered an exchange for buying, selling and leasing Victorian taxi licences. Symon plans to extend the concept to other tradeable or transferable licences and permits, such as water rights and carbon credits. "There are any number of systems based on [transferable] permits, rights, grants or licences that would benefit from the openness and transparency of an exchange," he says. Despite the name change, the NSX remains committed to its regional roots. In 2005, it launched the Wollongong Exchange - not a stock exchange in its own right but a submarket of the NSX - to provide a mechanism for listing businesses in the Illawarra region of New South Wales. The exchange was established with the support of Wollongong City Council and the NSX is in talks with other regional councils. Symon expects to have six regional submarkets on the NSX by June 30. Since 2000, 10 NSX-listed companies have transferred to the ASX or are in the process of doing so. Sydney boutique brewer Brewtopia listed on the NSX last February, and co-founder and chief executive Liam Mulhall has his eye on the ASX. "The goal for us is to expand to the point where we can list on the ASX in our own right," he says. "It's something we'd like to do in the next two to five years." Brewtopia was formed in 2002 as an online business specialising in the custom labelling of beer (the company brews its own, which it also markets under its Blowfly brand), wine and bottled water for corporate clients such as American Express, Telstra and Sony. Brewtopia's IPO raised $727,250 - more than double its sales of $300,585 for 2005. It was a substantial fillip for a little business with big plans. As well as being able to fund expansion, Mulhall says listing will equip Brewtopia with the organisational disciplines to promote and manage growth. He describes listing as "absolutely the best thing we ever did for the business" but admits the process has been a big adjustment. "The compliance side has been a huge cultural change for us, but I'm glad we've done it. It enables us to analyse the business a lot better and it's made us more conscious of the decisions we make in the business. We're a better company, there's no doubt about that." Compliance comes at a cost. Mulhall says listing has added $50,000 a year in fees for lawyers and accountants as well as $2000 a month for retaining a nomad. Brewtopia's increased turnover - $1.1 million in 2006 - makes up for it. Queensland mineral explorer Diatreme Resources has made the transition from the NSX to the ASX. It listed on the junior exchange in 2003 - too small to list on the ASX but needing capital to fund promising gold and diamond exploration projects. Diatreme raised $500,000 when it floated on the NSX. Two years later, it transferred to the ASX after a $3.7 million capital raising. Executive chairman and chief executive Tony Fawdon acknowledges his debt. "The NSX was a great way for a little group not ready for the ASX but which needed to get up to speed on the management and governance disciplines of being a public company. When [a potential investor] looks at a mining company, it's not just at their projects, it's the management and track record of the company as well. You've got to get that grounding somewhere and we got it on the NSX." However, the head of corporate finance at HLB Mann Judd, Justin Audcent, wonders whether the junior exchanges really are filling a market niche. He observes that between them the three junior exchanges have fewer than 100 companies on their boards. "Something's not working," he says, admitting the alternative exchanges do not figure prominently when advising clients. "If the client is able to list on the ASX, I would recommend they do so."