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Management consultant Dr William Lawrence, has found equity financing to be highly underutilised by local businesses, particularly among operators outside of the financial sector.
Although there are more 12,000 large and mid-sized companies contributing to government taxes annually, less than one per cent of local companies are unlocking equity capital and tax credit benefits through the stock market, he said at a forum hosted by the Jamaica Stock Exchange.
Small and medium sized companies are allowed to raise between $50 million and $500 million in equity through the junior market of the stock exchange, in return for which they get 10 years of tax breaks. For the first five years they pay no corporate income tax, and for the rest of the period they get a 50 per cent waiver.
Since its inception on April 1, 2009, over 40 companies have been listed on the junior market. Access Financial Services was the pioneer listing in October 2009.
But Lawrence, who is also the director of the Professional Services Unit at Mona School of Business and Management, noted that the majority of the junior listed companies have not exploited other equity options for raising capital, such as preference share offerings and rights issues, after their initial public offerings.
“Ironically, while financing is often stated as a major problem for businesses in Jamaica, very few companies make preparations to access this affordable and patient capital, even though the steps are listing are prominent on the JSE’s website,” he said.
“My research shows that this neglect not only constrains company profitability, but also slows Jamaica’s recovery from the COVID-19 pandemic,” he told the forum on ‘Raising and Deploying Equity Capital’, whose panellists also included investor Michael Lee-Chin and Sygnus CEO Berisford Gray.
JSE records indicate that just about four companies on the junior exchange have issued preference shares over time: CAC 2000 Limited; Derrimon Trading Company Limited; Eppley Limited; and Paramount Trading Limited. Eppley also did a rights issue around 2016. The investment company, which has four prefs on the market, migrated from the junior index to the main index at the end of 2019.
Derrimon Trading meanwhile is the only junior company to have executed an additional public offering, which it did successfully in January, raising around $4 billion. In the wake of that transaction, the distribution company redeemed its one preference stock early on March 5.
Between 2010 and 2020, only 44 per cent of listed financial firms listed issued preference share offers, and even fewer had additional public offerings and rights issue. Lawrence says his research shows that only 18 per cent of listed companies have issued preference stock on the market, only five per cent have conducted rights issues and two per cent moved on to additional public offerings, or APO.
“Consider this: a bank that has an equity ratio of 15 per cent is considered by the regulators to be adequately capitalised but a manufacturing company with twice that equity ratio runs the risk of encountering cashflow problems or financial distress. It’s clear that the listed non-financial companies need to take a hard look at utilising more of the JSE avenues for additional capital,” he said.
For Lawrence, the model company that has been tapping the stock market continuously for capital is the JMMB Group, which currently has about eight preference shares on the market, and last year executed an additional public offering of ordinary shares. JMMB is currently seeking another $6 billion from two fixed rate prefs now on the market.
“JMMB is one company that frequently utilises fresh equity capital on the JSE to drive profit and expansion. Both its organic and inorganic growth has been funded by equity capital. When you look at the period 1995 to 2020, it shows that JMMB has an 88 per cent correlation between shareholder equity at the start of each year, and the profit that is obtained at the end of the year,” Lawrence said.
“Despite strong evidence that equity capital is a driver of profitability and GDP growth, very few of the listed companies have exploited this capital source after an IPO. This neglect is more chronic for non-financial firms listed on the JSE,” he added.
The JSE has more than 100 ordinary and preference listings. Companies trading on the stock market are currently valued at more than $1.7 trillion.
karena.bennett@gleanerjm.com
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