Another junior migrating; share cap change in limbo

Another junior market company has announced its intention to graduate to the main market of the Jamaica Stock Exchange, saying its business has matured enough over the past decade to handle the more stringent requirements.

General Accident Insurance Company, which is controlled by the Musson Group, will become the fourth junior company and the second general insurer to make the leap, behind investment company Eppley Limited, which is also a member of the Musson Group; Key Insurance Company Limited, which is owned by GraceKennedy Group; and Caribbean Producers Jamaica Limited. Those migrations happened between December 2018 and June 2021.

Caribbean Producers, which is controlled by Mark Hart and partner Tom Tyler, migrated from the junior market after breaching the $500-million share capital limit imposed on companies listed on that market.

General Accident, however, was still in compliance with $470 million in share capital as at June. The decision to migrate “reflects its growth, increasing scope and ability to comply with the applicable governance standards,” it said in a statement.

The transfer of the GENAC stock and its over 1.03 billion share units will take effect in two weeks.

Its migration comes at a time when JSE Group Managing Director Marlene Street Forrest is aiming to stir up new business for the declining market, and more than a year into disclosures that the junior market share cap was to be raised by half to $750 million. The aim is to entice new listings in that tier of the market, which was specifically designed fifteen years ago to make it easier for small and medium businesses to access equity capital.

On Monday, Street Forrest said the plan to raise the fundraising limit has got a favourable response from the government.

However, the Ministry of Finance is yet to say when the new $750-million cap will take effect; neither has it said whether it supports the proposed limit or have ideas of its own.

Since the start-up of the junior stock market in 2009, the listings have grown to rival the numbers on the main market. Today, junior companies account for 48 of the 100 ordinary listings.

But the Jamaica Stock Exchange believes it could spur other SMEs to enter the market where the level of fundraising allowed to be raised from the current ceiling of $500 million.

Companies that qualify for junior listings are allowed 10 years of tax waivers, the first five at 100 per cent and the rest at 50 per cent. However, the company has to remain listed for at least 15 years, otherwise the government will claw back the unpaid taxes.

Those waivers represent an opportunity cost for the government in the form of taxes foregone with each new listing. On the plus side, however, the companies have poured some of the equity raised into expansion of their businesses, leading to the creation of new jobs in the economy.

More recently, Street Forrest has also been touting the fact that around half of the junior companies are engaged in export activity.

In an update on the cap, she told the Financial Gleaner on Monday that “The recommended change to $750 million, which we believe will stimulate the market, was submitted to the minister of finance, where the authority is vested to increase the threshold. While the recommendation to the minister of finance was favourably received, the government is yet to inform on the effective date of this change,” she said.

“The request to raise the cap from $500 million to $750 million is simply to return the market to the value previously approved but which would have been eroded by inflation,” she added

JMMB Group’s Assistant General Manager of Trading & Treasury, Greig Lindo, sees two positive outcomes from raising the cap: companies will be able to raise more capital for their expansion programmes and thereby take advantage of larger growth opportunities; and the market’s shareholder or investor base is likely to expand.

“For companies that want to raise close to the maximum of $750 million, they will likely have higher allotments, which is an adjustment that the market participants, namely retail investors, will have to adjust to,” said Lindo.

“Of course, this allows for a wider shareholder base, which is a positive outcome,” he said.

At last estimate at the end of August, the combined value of junior companies on the exchange was more than $193 billion. Although almost equal in number to the main market stocks, when it comes to market capitalisation, the juniors are worth only about one-eighth the $1.6 trillion value estimated for main market companies. The latter includes two cross-listed Trinidadian stocks.

Street Forrest says a comparison of the periods 2017 to 2019 and 2020 to present time shows a trajectory of growth for the junior market.

In the earlier pre-pandemic period, there were 13 junior IPOs which raised capital of $3.64 billion.

In the pandemic era up to August, there have been 11 IPOs which raised $3.57 billion in equity capital.

“While the period 2017-2019 represents 36 months, the comparative data for 2020 to August 2023 represents 32 months, and we expect by the end of the year, the number of junior market IPOs will be at least equal to the period 2017-2019. This could increase depending on when the ceiling is raised,” she said.

During the pre-pandemic years, a total of 79,480 new accounts were created, while 110,353 accounts were generated in the latter period.

So far in 2023, there was one listing in January, that is, medical diagnostics company Image Plus Consultants Limited, which trades as Apex Radiology; and a second, for digital marketer One Great Studio Limited, is pending after a successful IPO.

The GENAC stock traded flat on Tuesday at $4.90 on the news of its migration, maintaining the company’s market value at $5.05 billion. It will make the transition to the main market on September 27. Otherwise, nothing else will change.

The general insurance company, which first listed in September 2011, has assured shareholders that its income tax bill won’t be a factor as it had already used up its 10 years of tax breaks. The company resorted to the full corporate rate of 33.33 per cent paid by regulated companies two years ago.

There are at least three junior market companies that are currently in breach of the share capital limit. Trading in one of them, iCreate Limited, has been suspended, not for the breach, but for failing to file its financial reports in a timely manner. The other two, affiliate companies Lasco Distributor Limited and Lasco Manufacturing Limited, have said their individual boards would determine what action to take later.

A fourth company, Derrimon Trading Company, also has share capital above $500 million, but it received a special waiver from the JSE when it acquired another listed junior market company.

Currently, both the junior and main markets of the JSE are in decline due to the impact of high interest rates, which often drives competition between equities and bonds and other fixed-income investments, as well as other economic impacts. The JSE Combined Index, which also includes the USD market, is down 10 per cent year-to-date.

In order to keep interest alive in the stock market amid the decline beyond its pandemic lows, Street Forrest said the exchange would continue its outreach at various levels.

“The JSE maintains the broad strategy of market education in groups and by individual visits, and dialogue with companies on the benefits of accessing equity capital, which is patient capital, especially in an environment of high interest rate,” she said.

The Ministry of Finance did not respond to requests for comment on the junior market cap up to press time.

avia.collinder@gleanerjm.com