ZAR X: Eyes on second prize

Jun 18 2017 06:08
Dewald Van Rensburg

Johannesburg - ZAR X, South Africa’s second licensed stock exchange, welcomed its third listing this week – agricultural group TWK. This follows the launch of the new exchange in February with the listing of another former agricultural cooperative, Senwes, and its holding company, Senwesbel.

CEO Ettienne Nel claims he has been “inundated with companies wanting to list”.

“Since Senwes listed, it is almost as if there was a ground shift. It is like the market was waiting to see if someone would actually get an exchange off the ground – and then get a listing off the ground,” Nel told City Press.

“Now it is about demonstrating that ZAR X is a place where quality companies list. Both the companies we have listed have proper balance sheets, proper assets. TWK has R6 billion in turnover. That is a proper company.”

The new exchange styles itself as a technology-driven disruptor of the JSE’s 120-year monopoly in South Africa.

Another newcomer, 4AX, is expected to announce its first listing soon.

For the time being, comparisons between these new exchanges and the incumbent, the JSE, are ludicrously unfair.

On the ZAR X, TWK has a market value of around R479 million while Senwes is worth R1.88 billion.

The JSE has hundreds of listed companies and a market capitalisation of R13.5 trillion, driven by a number of major multinational companies.

However, if Nel’s claims about imminent new listings materialise, the new exchange could become a formidable competitor to most other exchanges on the African continent, which are vastly smaller than the JSE and also suffer from chronic illiquidity.

Now what?

Market value is not the real measure of a successful exchange. The major inadequacy of small stock exchanges is their illiquidity – not enough trading taking place for people to be sure they could sell or buy at will.

If there are not enough market participants, a seller will often be forced to accept a steep discount to sell its shares.

In the next year or so, ZAR X wants to see “liquidity levels north of 10%; that would be good”, said Nel.

That means that the value of traded shares is at least 10% of the total value of the shares listed – the market capitalisation.

The first two listings on ZAR X, Senwes and Senwesbel, have respectively seen 0.1% and 0.17% of their shares trade hands since February.

“AltX is sitting at that on average,” he added about the JSE’s board for small companies.

“In the fullness of time I would like to see liquidity levels of 20% or 25%,” said Nel.

By way of comparison, the JSE had liquidity of 80% in 2016.

A stock exchange also relies on a layer of intermediaries between itself and the investing public. ZAR X recently celebrated signing up seven brokers.

The JSE has over 300, of which 62 are equity brokers.

Nel says that ZAR X can play a role in making the financial markets more accessible to smaller intermediaries and retail investors.

“Ideally, I would like to see a lot of medium-sized brokers that serve the investing public properly. That drives financial inclusion,” said Nel.

Beyond the OTCs

Nel dearly wants to shake off the perception that ZAR X is just a new and improved version of his previous company Equities Express, which ran over-the-counter (OTC) share schemes for a number of companies, including Senwes and TWK.

Another large source of, largely unregulated, OTC trading has been special BEE shares only black South Africans could trade created by companies such as Vodacom, MTN, MultiChoice and Media24. A directive from the Financial Services Board, however, largely undermined the OTC systems in 2014 by requiring that OTC exchanges have stock exchange licences.

In the wake of this, two companies applied for exchange licences: ZAR X and 4AX.

The companies with existing OTC schemes were obvious early clients for the new no-frills,
low-cost exchanges.

“This is not an OTC with an exchange licence sticker on it, that is not the case,” he told City Press.

“We managed to get the OTC ones going first because those were the low hanging fruit,” he said in relation to his first two listings being companies that had OTC systems.

The most likely next two listings will not be companies transferring their pre-existing OTC schemes onto the new exchange, said Nel.

“They are brand-new listings. The one is in financial services and the other is in the medical field doing an initial public offering-type listing.”

“We’ve been talking to a number of companies wanting to transfer their listing from the JSE,” he said.

Beyond traditional shares, Nel said that ZAR X is looking at a variety of financial instruments.

“We are looking at doing something called an incubator structure, similar to a Spac [special-purpose acquisition company], with a few tweaks.”

Spacs are a US innovation from the 1990s in which a shell company lists and raises capital with the intention of making acquisitions. The JSE has allowed them since 2014, but only a handful has been listed so far.

“That adds products to the capital market,” said Nel.

“We are looking to add exchange-traded funds (ETFs) with a twist ... an ETF with a difference,” he said without elaborating. ETFs are investment vehicles that own, for instance, gold, and then let people buy shares in the fund instead of directly buying gold. There are no technical limitations to what ZAR X can accommodate, said Nel. “Nothing stops Naspers from moving its listing to us,” he said.

“When we did stress-testing on our trading engine, it could accommodate 2 500 concurrent users per second. That is a lot. If we ever reach that point, I would be delighted to throw money at the problem.”

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