A material drop-off in ‘backdoor’ listings, coupled with ongoing weakness in the IPO market, means the ASX now has its lowest number of listed domestic entities since 2007.

In April, domestic listed entities fell to 1916. That’s a 5.7 per cent fall from its early 2018 peak and the lowest level since June 2007.

The total number of new entities admitted to the ASX in the 2020 financial year so far is 77, down from 92 in the prior corresponding period.

Meanwhile, the number of delistings has increased from 109 to 138 over the same period.


Trimming the dead wood

In 2016, the ASX brought in a rule for long term suspended entities – or shell companies.

The original 2016 rule saw these ‘zombie’ shell companies which had been suspended for three continuous years delisted from the ASX. That was subsequently tightened to two years at the end of 2019.

That has no doubt had an impact in “cleaning up” dormant companies on the exchange, says Max Cunningham, executive general manager of Issuer Services and Investment Products at the ASX.

“When the rule first came in, we had one company that was heading for 15 years [suspended],” he told Stockhead.

“The reality is, when you become long-term suspended, the prospects for the rehabilitation of that business are low.

“We are of the view ‘use it or lose it’. Get the company revitalised or delist and come back when you have sorted out your mess.”

These dormant companies also went to the ASX’s total number of listed companies count.

“So when you talk about number of listed companies dropping, I think we have actually been relatively stable because we have been culling [these dormant listings over the past few years],” Cunningham says.

Companies recently delisted include failed Brazil-focused gold miner Orinoco Gold (ASX:OGX),which went into administration due to production issues and allegations of poor operating procedures, gold thefts, and conflicts of interest.

This delisting rule has, in turn, triggered a material drop-off in the number of reverse takeover (RTO) or ‘backdoor’ listings. An RTO is the acquisition of a ‘shell’ by shareholders in a private company.

The two-year delisting rule discourages listed ‘shell’ companies like Orinoco from becoming vehicles for ‘backdoor’ listings or RTOs, historically considered a low-cost and speedy way to list on the ASX.

“There was definitely a perception that a back-door listing was quicker, easier and therefore cheaper than a traditional IPO,” Cunningham says.

“And there was a perception that because the company was already listed it would automatically stay listed. That is not necessarily the case.

“A backdoor has to meet every criteria of an IPO. I don’t think that perception is, generally speaking, widespread in the market anymore and we are definitely seeing that in the falling number of backdoor listings.”


‘Cause for optimism’ in weak IPO market

An anaemic IPO market over the past few years has also contributed to the record low number of ASX listings.

The ASX had enjoyed quite a few strong years in the IPO space — about 140 total listings a year — which then ‘normalised’ at around 120 a year.

Then, in 2019, extreme volatility in global markets in the first and fourth quarters saw a number of deals pulled or delayed. That volatility has been compounded by the current coronavirus crisis.

According to the ASX, a few players have pulled the pin on their listing aspirations, like Tassie-based pot stock 13 Seeds and high-profile copper explorer Virgo Resources. 

In April, rapid disease test maker Atomo Diagnostics (ASX:AT1) became the first company to list on the bourse since February 27, having successfully raised $30m.

READ: IPOing during the pandemic: an inside story

Added to this, the resources sector — which forms the ‘bedrock’ of the ASX with about 650 listed companies — has been ‘stop start’ since the peak of the mining boom, Cunningham says.

“Last year we only saw a handful of resources listings; the two years prior to that we had around 30-odd listings which is closer to the long-term [trend],” he says.

“But definitely it’s been a tough market for resources companies, particularly in junior exploration, and I think that’s got a bit to do with the fall in IPOs.”

Australia and the ASX aren’t alone here. Like the ASX, the Toronto Stock Exchange is a ‘mining heavy’ bourse.

“The Toronto exchange has seen a similar material drop-off in demand for [early stage explorer] listings,” Cunningham says.

The IPO market is going to continue to be subdued for a period of time, but there is light at the the end of the tunnel.

“We are continuing to see very good engagement from domestic and foreign tech companies in the tech franchise we have built down here,” Cunningham says.

“It’s too early to be predicting the return of the IPO market in the next few months, [but] our engagement with the technology sector and the banks suggest that later on in the year there may be some cause for optimism.

“The pleasing thing for us from a pipeline point of view, is that companies that were considering or were close to pulling the trigger [on an IPO] have simply deferred due to market conditions as opposed to pulling out altogether.

“We feel very comfortable that the pipeline of companies that were looking at the ASX as an IPO market have deferred rather than cancelled.”

Also reassuring is the huge amount of capital that has been raised in the last two months — $13.8bn in April alone.

That’s a massive 138 per cent increase on April 2019.

“[This] shows that the market is working and that there is a genuine appetite to support these businesses,” Cunningham says.

“And resources is still the biggest sector by number of raises, which goes to show that it remains the bedrock of the ASX.”