Tuesday 24 October 2017

ISEQ stampede in danger of becoming a rout

THE exodus from the Irish Stock Exchange of very successful and large, established Irish companies is in danger of becoming a stampede. Builders' merchants and DIY group Grafton has become the latest to announce that it is decamping its stock market listing to London. It may not be the last.

The list of companies to drift away from the Dublin market through a pragmatic relisting decision or through collapse, takeover or MBO has grown pretty lengthy since the financial crash began in 2008.

There is nothing anybody can do about Dublin-listed companies just going bust or being bought out. And in truth, there isn't a whole lot that can be done to stop the tide of companies opting for London.

The companies that opted for a primary London listing recently include CRH, ICON, DCC, Greencore, United Drug and now Grafton.

All the Irish exchange can do is continue to offer the best, most efficient liquid market for stock that it can.

In its defence, the Irish Stock Exchange can point out that companies switching to a London listing do the vast amount of their business outside Ireland, have a substantial international institutional shareholder base and, in many cases, do most of their business in the UK.

This becomes a no-brainer for the companies involved. They get a better profile in a bigger international market, with greater liquidity and therefore a better opportunity for share price appreciation when things go well. Some of them can make the FTSE 250 and have their shares bought by passive investors who only buy the indices.

The big question is where will it end?

One would have thought that those interested in making the switch would have done so already. But it can be a self-fulfilling thing because the fewer the stocks in the Irish exchange, the lower the liquidity and hence the greater the attraction of listing elsewhere.

In truth, it doesn't really matter a hell of a lot for larger companies that are switching. They already have a reasonable number of overseas shareholders. But it may diminish the attractiveness of an Irish flotation for companies that hope to make up the next generation of publicly traded Irish success stories.

What does Ireland give these companies? It gives them a regulated, respected listing in a relatively cheap market. But it is a small and increasingly regional market, given the globalisation of equity investment.

The flight to London affects the supporting apparatus around the industry here in Ireland. Brokers will need fewer Irish-based analysts delivering good-quality localised analysis because there are fewer Irish stocks.

Lower trading volumes mean lower commissions for brokers, forcing them away from institutional share-dealing and towards more targeted private clients' business.

The stockbroking scene in Dublin has already changed considerably, with the high-profile purchases of NCB by Investec, Goodbody by Fexco and Dolmen by Cantor Fitzgerald. This is also resulting in a greater focus on the private clients' business.

The exchange recently lost the executive hired to promote listings when she moved to Investec after only a year-and-a-half in the job.

The Irish Stock Exchange itself is looking at demutualising, which will ensure a good, multi-million euro pay day for its broker members, but also could lead to a buyout of the exchange.

Share investment is becoming more global. Successful Irish companies have done very well in broadening their institutional shareholder base to reflect the wider markets in which they operate.

Even retail investors are looking at a much broader range of international stocks in which to put their money.

These trends don't just affect the Irish Stock Exchange and the broking community. The exchange makes more money from listing traded funds anyway, an area in which it has been very successful. Brokers have already downsized and refocused on where they think the business will be in the future.

The real losers could be expanding Irish companies themselves.

Where will they get the funding to take things to the next level? Banks say they are lending to the right businesses, but clearly we are seeing a decrease in banking competition.

Bank loans can only take you so far. Companies need to build their balance sheet and capital if they want access to big bank funding anyway.

Small Irish companies have often opted to list in London on the AIM market as a route to flotation. Many have benefited from this, but there aren't many Irish companies that went for AIM and successfully grew big enough to progress to full listings there.

They tend to be bought out or go under in some cases. So AIM has its uses, but it hasn't been the preferred route for long-term growth. Dublin just isn't big enough to develop a vibrant small companies listing.

Perhaps the financial crash, combined with the growing globalisation of stock market investment, is accelerating something that seemed likely to happen a long time ago.

Dublin would have become more peripheral with the arrival of the single currency if it hadn't been for the Celtic Tiger boom.

A single European currency should have and did open up pan-European investment opportunities. But the Dublin market partied on while the good times of cheap debt rolled on.

The party ended in 2007. We have even got over the hangover. And now it is time for making cold, rational decisions.

Wouldn't it be ironic if the primary new listing activity on the Irish Stock Exchange came from the property sector, through the listing of Real Estate Investment Trusts (REITs)? They seem like a good idea and they have tax breaks to match.

It is already starting with the Green REIT and more are likely to follow. Property was the poison and it ends up being the cure – hopefully not.

Irish Independent

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