ASX must crack down on ‘oversubscribed’ capital raises, ‘worthless’ non-binding agreements
The market continues to be strong for capital raisings and many ASX companies are going back to the well for some of that sweet, sweet cash.
This is good for the stockbrokers, but it is not always good for pre-existing shareholders, says Far East Capital analyst Warwick Grigor.
“We are seeing many instances of underperformance of share prices once the raisings have been completed,” he says.
“In fact, it seems that the best strategy may to be sell when there is a raising, and coming back later, after it has been digested.
“For those who are not shareholders, buying opportunities may come along later, at cheaper prices.”
But when a placement is being undertaken brokers love to tell investors how there is strong demand, forcing them to impose heavy cutbacks. The process can be quite deceptive, Grigor says.
“The ASX should stop companies announcing that placements are ‘heavily oversubscribed’ because that is both meaningless and misleading owing to the process whereby brokers encourage overbidding,” he says.
Meanwhile, the flood of IPOs is continuing.
“The successful ones will be those where effective salesmanship creates demand rather than a relative valuation approach,” Grigor says.
“It is FOMO that gets these over the line and that is more about perception than fundamentals.”
The ASX is cracking down on what it claims are ‘ramping’ announcements designed to get a share price higher without it being materially significant, but it is doing a very inconsistent job, Grigor says.
The whole issue is very subjective. One type of ‘ramping’ announcement could be the memorandum of understanding, or MOU. For resources companies this could include offtake agreements, for example.
Normally an MoU agreement between companies isn’t cause for excitement: sometimes they go somewhere, sometimes they don’t. They’re not binding nor are they (usually) financial commitments.
“When is an ‘agreement’ not really an ‘agreement’? When it is a non-binding MoU,” Grigor says.
“No matter how many times a company calls it an agreement, its unenforcability means that it is not worth the paper it is written on.
“An announcement based on a non-binding MoU is little more than name-dropping.
“So, should the ASX start to crack down on announcements that cover non-binding MoUs, classifying them as not material?”