Small caps suffer in silence

Investors, guided by the advice of stockbrokers and investment banks, treat most small listed stock as if they had leprosy. Virtually nothing outside the top 300 is to be touched.

In fact, some big broking firms are so worried about ASIC-enforced laws known as "know your client, and know your product" that they have a blanket rule of instant dismissal should an employee give advice on a stock not researched by the firm. For 1,900 of the 2,205 companies listed on the Australian Securities Exchange that means they disappear from the view of the big brokers and most investors, even though the cut-off market capitalisation for admission to the top 300 is $235 million.

Little wonder then that Kim Lindsay, managing director of the Queensland-based trucking and logistics company, Lindsay Australia, reckons listing his business seven years ago was a bad decision.

"It wasn't a good idea, not so much because of the cost but because you keep showing everyone your underpants," Lindsay said after a "micro equities" conference in Sydney.

"It's hard to get big investors to take an interest in us, and if you do really well your customers believe you're making too much money and think that maybe they should start looking around."

Despite his unhappiness Lindsay said he maintain his ASX listing "because we've gone too far down the track".

His views, put somewhat less earthily, were echoed by directors of two other companies which presented at the 2009 Rising Stars Micro Cap Conference which, hardly surprisingly, received micro coverage in the mainstream news media, and an attendance of less than 50 people - a true micro conference for micro caps.

Ian Brown, chief executive of food ingredients maker, Clover Corporation, said on the sidelines of the event that being heard was a major challenge.

"It's really a case of getting your story out to potential investors, and building confidence in the company," Dr Brown said.

"You have to start communicating, attending conferences like this one, and doing the hard work talking to brokers and investment banks.

"Recently, it's been a little easier because some brokers have been looking deeper into the market to find companies which are getting the basics right of making a profit, paying a dividend and growing the business."

Ross Norgard, chairman of the intellectual property investor, ipernica, said the one of the key challenges for a small-cap stock to be heard was to "have a product which is exciting to an investment banker".

"The good news is that investment bankers in today's climate, where they're looking for business, is that they will sit with you for a big future transaction. They don't need to take fees today, but if you're going to sell to an international institution further down the track, then that's when they pick up their fees.

"That's what ipernica will do in the next three months. We'll appoint a Macquarie or a UBS to take us to the next stage."

Norgard said it was easier for a small listed company to get the ear of an investment banker if it was not asking for money. "They'll come in if they like the story."

All of the companies at the conference fitted the small-cap description with market values ranging from as low as $9 million for the online lotteries and publishing business, Manaccom, to $109 million for the IT services company, DWS.

Their common challenge is being heard against the overpowering noise generated by the top 300 stocks, especially at a time in the market when investors (and banks) prefer safety over the potential of above-average return by backing a small company.

The distraction of noise at the top, plus the lack of broker research, and the lack of investment bank following, means that small listed companies struggle to raise either capital or debt - and will continue to do so until uncertainty abates further in the investment community.

While all companies were hit hard in last year's market crash, small caps were crushed and will be the last sector to recover.

Clover, for example, could reasonably expect a stronger following after posting a healthy profit in 2008 of $4.1 million from sales of $21.6 million, but is only valued on the market at $34.7 million.

Lindsay made $2 million from revenue of $196 million but is valued at a lowly $28.4 million, and ipernica made $15.2 million from revenue of $45.2 million, but is valued at just $22.9 million.

Lindsay said it was very tough for a small business to compete for media time against much bigger national companies.

"They're out in front all the time," Lindsay said of his bigger rivals. "We've just got to keep knocking on the door, until we find someone who recognises the good story that we're telling, and acknowledge that we're going somewhere."

Lindsay said one of the biggest challenges was waiting to be discovered.

"You have to wait until the good times hit your sector and your sector becomes the darling of the market."

Brown said one factor which had caused investment funds to take notice of Clover was a decision to pay a 1c a share dividend last November.

"The dividend triggered a few calls after some fund managers realised that while we're small we are making profits, we are paying a dividend, and have a growth plan," Brown said. "It helped put us on a few radar screens."

There is, however, a difference between being small and being infinitesimal. At the bottom of the 2,205-member ASX list of quoted stocks are companies where management must ask on a regular basis "why bother".

These are companies capitalised at less than $5 million, and in some cases, less than $1 million which, to not stretch the point very far, is a lesser value than some suburban newsagencies.

E-Com Multi, an e-commerce and telecommunications company, has a stock market value of $1.4 million. Anteo Diagnostics, a medical products firm, is valued at $1.6 million, and Australian Wine Holdings is capitalised at $1.8 million.

However, the prize for smallest in the pond goes to the Perth-based clothing business, Costarella Design, which is valued at $263,697 - less than the price of a luxury car.

Raising capital and attracting the higher valuations normally associated with being listed are the major reasons for joining the ASX.

But when the stockmarket is down, listing becomes an expensive drag on a small company. Annual listing fees for most small companies are between $10,000 and $20,000 a year, and that's before routine compliance costs - and the public airing of the corporation's underpants, as Kim Lindsay describes the public prying into a company's affairs.