Sunday 17 December 2017

More listings needed if a pillar of Irish finance is to grow and prosper

Peter Flanagan

Peter Flanagan

Low numbers of new listings have hit revenues at the ISE, but the exchange is profitable and getting ready for the inevitable recovery

PICTURE the scene. You are a successful Irish businessman and the company you run now employs several hundred people.

The business, which you built from scratch, has been highly successful and you have weathered the recession fairly well. Profits may have dipped slightly but you are still comfortably in the black, and you haven't had to cut staff since the bust.

There is a problem, however. You want to grow the business but with the downturn and the banking crisis, lenders don't want to know you when you tell them you want to expand your business.

Besides, you might want to take a little bit of money off the table yourself and your employees, most of whom have options in the company, want to cash in.

The answer, it would seem, is to go public. The obvious place to float is the Irish Stock Exchange.

After all, you are an Irish company and although you do a lot of your business overseas, the vast majority of your staff are based here and this is where your business is incorporated.

There is a problem, however.

The ISE has been hammered in the downturn, and has lost some of its biggest companies either through delisting or collapse.

Volumes are up, but many of the fund managers that would have actively traded and promoted the ISE are now passive investors, using tracking indices rather than trading specific shares.

Given those circumstances, why list here when you can join the London Stock Exchange and have far greater access to liquidity and attention?

It's a question that has been confronting Irish executives in recent years as the apparent decline of the Dublin exchange seems to accelerate every year.

Greencore delisted from the ISE last month to pursue the London market while CRH switched its main listing to London last year.

McInerney builders are gone, while Readymix is expected to delist as well, while we all know what has happened to the banks.

Faced with a shrinking number of companies listed, and with little prospect of new companies joining, what does the future hold for the Irish Stock Exchange? Does it even have a future?

A glance at the numbers illustrates how far the index has fallen in recent years. Driven by the banks and the construction sector, the ISE was a powerhouse of growth five years ago. Not so today.

In February 2007, the ISEQ Overall Index topped 9,968. On Tuesday night, the index closed at 3,004.26.

AIB was worth €23.95 a share back then; it is now trading at 8c. Anglo Irish Bank was trading at €16.48 two years before it was delisted while Bank of Ireland topped €11.76, more than 99pc above its current level.

Primary listing

On the construction side, it is a similar tale. CRH, which shifted its primary listing to London last year, has halved in value to €15.15.

Grafton shares are worth less than a quarter of the €11.35 they were worth then while shares in Kingspan can now be had at a 65pc discount to its 2007 value of €20.85.

Now, however, the situation may be beginning to turn critical. The construction company McInerney went bust last year, depriving the index of a stalwart that had traded over €3 at one time.

That was followed by Greencore announcing plans to delist from Dublin, at least temporarily, as it seeks a full listing on the FTSE 600 in London.

Finally, in probably the biggest blow of all, CRH, which makes up about a third of the ISEQ Overall Index, shifted its primary listing to London.

The Greencore and CRH decisions were deemed especially damaging for the exchange, because in truth there was little the ISE could do to retain their listing.

According to CRH, less than 20pc of its shares are now traded in Dublin, with the remainder largely dealt in London. Not only that, but getting a primary listing in London would in theory increase the level of liquidity in the stock greatly.

Many of the big institutional investors don't invest in specific companies, rather they run funds that track the major indices such as the FTSE, Germany's Dax and the big US and Asian exchanges. Comparatively, there are not many funds tracking the ISEQ.

CRH made it clear when they announced their move that it should not be taken as a reflection on the Irish exchange and it wasn't motivated by any problem with the ISE or its management.

But in a way that was worse than if they had taken a shot at the exchange or its chief executive Deirdre Somers for her handling of the business. In essence, it suggested there were better places for CRH to operate.

Ms Somers's tenure as CEO has coincided with the decline of the exchange, but few in the financial industry believe she could have done anything about it.

When she took over the top job in the summer of 2007, the cycle was already turning from boom to bust and the problems in the banks and construction sector were already ingrained.

The consensus among the stock broking industry at least is that by then nobody could have halted the precipitous decline in value that has since occurred.

There does, however, seem to be a general consensus about the way forward.

Stockbrokers are notoriously difficult to get to speak on the record (the shadowy world of share dealing does not lend itself to frank conversations in the open), but when they are honest about the state of the exchange and what needs to be done to get the ISE back on its feet, there is an unusual amount of consensus on the solutions.

Most want stamp duty on trades cut in half to 0.5pc which would bring it in line with the London Stock Exchange (LSE) rate while some feel the ISE should be out promoting the market as a place for companies to list both domestically and overseas.

Paul Coulson's Ardagh has delayed plans to float in the US, but the ISE should be targeting companies like that to have its IPO at home, so the thinking goes.

In the words of one broker, "the Irish Stock Exchange needs to make a decision. Is it going to aggressively try to attract new listings and grow again? Or is it content to remain the back water exchange it is becoming.

"If it's the latter, then the infrastructure around it, including the broking industry, is way, way too big and needs to be cut back fairly drastically."

Ronan Reid is chief executive of Dolmen Securities and a board member of the ISE.

All financial services businesses need to get "back to basics" as it were and the ISE is no different, he says

"The listings and trading parts of the business fell a lot during 2009 and 2010 but it was good to see Xetra [a trading platform] volumes up 10pc in 2011 and listings stabilise.

"The ISE is price competitive but having said that, though, we need to be more proactive and get back to having more capital raisings. The ISE can play a role in the raising of capital for Ireland. Its membership is diverse and international; we need to tap into this.

"We need to list more companies; it is as simple as that," he says.

Mr Reid makes it sound like a straightforward task but he is adamant there is scope for the ISE to grow.

"There is a lot of speculation about the future of the semi-states, and that's one area where there will be room to expand the market. There is a huge domestic environment here, regardless of what some people may think, and we need to tap into that," he says.

There is a danger of overreacting to the loss of certain companies from the exchange, and the ISE is still a suitable home for the likes of Ryanair and Paddy Power -- two of the biggest companies in their sectors in Europe -- while the food sector is surging now, but the danger signs seem to be there.

Brand recognition

While the ISE doesn't try to play down the loss of the likes of Greencore and CRH, it does however, point to the parts of the business that may not have the profile or brand recognition that the main exchange has.

"The number of new listings has been low but that is a product of the state of the economy. When businesses aren't doing well, they're not likely to want to go public," says a spokesman.

"It's also easy to forget that the Irish Stock Exchange is much more than just the ISEQ Overall Index and it is still a leader in debt and security listings. Some 80pc of the exchange's business is overseas now," he adds.

He's right about that. The myriad of financial products catered for by the ISE are still doing well. The problem for the exchange, though, is that while trading volume is higher than in 2007, the falling share prices have hit revenue hard.

The Irish Stock Exchange company's 2010 turnover [the most recent accounts available] was down a third on 2007 but importantly the company remains profitable.

Still, there is a feeling that the company may have missed out in not being able to bring an Irish company like Ardagh to the market in Dublin. Another firm the ISE seems to have missed is Liam Casey's PCH, which is expected to go public in Hong Kong.

Flotations like those would bring badly needed positive publicity to the exchange and could encourage others who are unsure about whether to go public or not.

Survival

Ultimately, though, any exchange depends on its members for survival, and if more established firms shift their listings away from Dublin and aren't replaced by a new generation of companies then the whispers about the ISE's future will really ramp up.

With such a huge financial sector in Ireland, the shrinking of the Irish Stock Exchange would deprive the country of a key part of its financial architecture.

That doesn't mean the exchange has a divine right to exist, though. Both the Dutch and Portuguese stock exchanges existed for centuries before being subsumed into the giant Euronext trading firm.

There seems to be a long road ahead for the Irish Stock Exchange as it seeks to regain relevance on the world stage and attract growing Irish companies who want to take their business to the public market.

There was some good news last week, though, when Investec Ireland paid €32.35m for NCB Stockbrokers. That was seen as a vote of confidence in the Irish stock broking industry and, by extension, in the Irish Stock Exchange. At the time, Investec Ireland boss Michael Cullen said the acquisition hadn't been made with a view to a fast profit.

"This is for when an economic recovery arrives," he said.

That sort of confidence is very welcome in the business, and may point the way to the future.

Indo Business

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