South Africa simplifies listing rules to breathe life into capital markets

South Africa is simplifying rules around listings as it looks to breathe life into its equity capital market where activity has been anemic for years.

There have been just $6.9 billion of completed equity offerings on the Johannesburg Stock Exchange (JSE) since 2017, with only four IPOs and a spate of delistings, compared to $158.5 billion and 324 IPOs across other Middle East and Africa exchanges, data from S&P Global Market Intelligence shows.

A multipart simplification project announced by the JSE in September, whereby it will examine every listing requirement and test them for relevance, will help attract new listings and make it easier for companies already listed to meet regulations cost-effectively, Andre Visser, director of issuer regulation at the stock exchange, told Market Intelligence. The stock exchange has implemented other changes so far in 2023, such as permitting dual-class shares, lowering the minimum free float and improving rules around special purpose acquisition vehicles.

"Making that framework more attractive, giving participants more options to consider — more listings, instruments — will over time play a significant role in getting companies back onto the JSE," Visser said. Standards will be maintained, he said.

The changes will lower initial listing costs and ongoing expenses of remaining a public company, Adrian Saville, a professor at Johannesburg's Gordon Institute of Business Science and an investment specialist at Genera Capital, told Market Intelligence.

So far in 2023, there have been two IPOs on the JSE with an aggregate amount offered of $203.9 million — packaged food company Premier Group Ltd. in March and mining firm Copper 360 Ltd. in April. Rand Merchant Bank, The Standard Bank of South Africa Ltd. and Investec Bank PLC served as underwriters on the Premier Group deal.

Exchanges in the United Arab Emirates and Saudi Arabia, meanwhile, hosted 25 listings between January and September, with some $5.43 billion in aggregate amount. The transactions include the IPO of Abu Dhabi National Oil Co. division ADNOC Gas PLC for $2.48 billion in March, which attracted international underwriters including Deutsche Bank AG London Branch and BNP Paribas SA.

To find an IPO in South Africa that topped $1 billion one must look back to 2017 to the listing of retailer Pepkor Holdings Ltd.

Private market shift

The JSE also saw an average of 25 companies delisting annually from 2015 to 2022, according to the Johannesburg-based Mail & Guardian.

This may partly be due to the savings market being dominated by institutional investors, which tend to only invest in large and liquid companies, Paul Miller, the CEO of mining consultancy AmaranthCX told the newspaper. Recent delistings include those of Imperial Logistics and Massmart after their acquisition by Dubai's DP World and Walmart, respectively.

A shift from public to private markets is not unique to South Africa, but the phenomenon has been more pronounced in Africa's third-largest economy than elsewhere. Saville attributes this to prolonged economic woes, onerous regulations, a shrinking research community and declining interest among institutional and retail investors in the broader Johannesburg bourse — specifically mid- and small-cap stocks.

"Twenty years ago, there was a much more vibrant investor base that has now dissipated, with little analyst coverage beyond the heavyweight stocks," Saville said.

"If you want a thriving mid- and small-cap sector on the stock market, you need an active research community and more engaged investors. It's a permanent challenge to try to convince institutional investors to look beyond the usual suspects when it comes to stocks."

"It is that kind of activity that allows companies to put themselves in the shop window and establish a transparent valuation that facilitates that type of corporate activity," Richard Stout, head of equity capital markets at Standard Bank, told Market Intelligence.

Eight to 10 institutions account for the bulk of domestic assets under management. These funds must invest at least 55% of their money domestically and as they have grown, so too has the size — rather than the breadth — of their investments.

"These institutions have reached a size where the minimum liquidity for them to invest is at a level that's quite demanding," Stout said.

Generally, for the larger funds to participate, an IPO must sell at least 3 billion rand of shares, he said. The lack of liquidity beyond the heavyweight stocks also increases the price volatility in smaller stocks.

"The lack of broad-based ownership means these companies are at risk of being undervalued and, in certain cases, they may also struggle to raise fresh capital," Stout said. Often, management teams deliver strong profits on a consistent basis, but their companies' share prices fail to reflect this performance.

"All the effort they're putting into these businesses is not yielding sufficient reward for any stakeholder, including the management teams," he added.

Not a cure-all

The listing simplification project is not a cure-all and will not in itself dramatically reinvigorate South Africa's IPO market, but having a clear, concise set of rules will help, Visser said.

The country's equity capital markets are experiencing a secular dip, where there is more focus on recapitalizing balance sheets and selling noncore assets than on growth financings, Stout said.

"But it won't be long before activity picks up again," he said. "There will always be a baseline level of [equity capital markets] activity throughout the cycle."

As of Oct. 20, US$1 was equivalent to 18.95 South African rand.