Philippines push to list SMEs

A drive to highlight the benefits of listing on the Philippines Stock Exchange (PSE) to small and medium-sized enterprises (SMEs) is gaining pace.

Officials will be hoping that the push to persuade more SMEs to list sets the scene for heightened activity on the exchange in 2016, after fewer than expected initial public offerings (IPOs) were carried out this year.

Realising potential

While micro and SMEs account for 99% of businesses operating in the Philippines and almost two-thirds of employment, only a handful of SMEs have listed on the PSE’s restructured Small, Medium and Emerging Board (SMEB) since it was first launched in 2001.

Officials attribute the lack of participation to insufficient awareness about the procedures and benefits associated with listing on the exchange, which were the subject of a one-day seminar for SME managers, organised in mid-November by the PSE and the state-owned Development Bank of the Philippines (DBP). The event, which forms part of a wider programme to expand the domestic capital market, attracted more than 100 SME operators.

The DBP, together with the PSE, has been tasked with developing financing facilities for the SME sector, which has traditionally had difficulty gaining access to long-term credit. Equity financing is seen as a key alternative to conventional lending, and an avenue to transform SMEs into larger engines for growth and job creation.

Just one year after listing on the SMEB, DoubleDragon Properties was approved in June to move up to the PSE’s main board, which authorities hope will be the success story needed to encourage other SMEs to follow a similar path.

Regulatory path

To help encourage smaller firms to join the board, the PSE simplified its listing structure in 2013. Requirements now include minimum capital stock of P100m ($2.1m), at least 25% of which must be subscribed and fully paid.

Firms are also required to meet certain accounting benchmarks, with at least P15m ($320,000) worth of earnings before interest, taxes, depreciation and amortisation, excluding non-recurring items, for three consecutive fiscal years preceding the application for listing.

In addition, the rules stipulate that companies must have a sound managerial record and be able to demonstrate their prospects for continued growth in an approved, five-year business plan.

Early gains

The PSE’s efforts have already produced an uptick in IPO activity, with approval given in mid-November for three listings before the end of the year.

One of the firms planning to list is real estate developer Italpinas Development Corporation (IDC), which announced plans in mid-November to offer 57.66m shares, or 26% of its total outstanding capital stock.

The company hopes to raise around P240m ($5.1m) through the listing, which will be used to finance new projects, increase its land bank and pay down existing debts, according to statements from the company.

While IDC will initially list on the SMEB, the company is also expected to move up to the main board in the coming years, thanks to an ambitious project agenda through to 2017.

After developing the $11m Primavera Residences project in 2010, IDC is currently moving ahead with two larger mixed-use projects, to be developed at a cost of nearly P1.4bn ($26.7m).

The company plans to break ground on one of the projects, Primavera City, in the fourth quarter of this year. Located in Cagayan de Oro, in the south of the country, the project will include seven residential and commercial buildings, which will be constructed over four phases.

Liquidity concerns

While IDC’s IPO plans signal good news for the PSE’s SME strategy, a recent high-profile deferral has raised concerns about the health of the exchange’s main board, which hosts more than 300 companies.

In late November construction firm Datem announced plans to shelve its P4.66bn ($98.8m) IPO, hinting that it might also revise the terms of the listing. The firm had initially planned to finalise its listing in December, after staging its offering at the end of November.

While the company has yet to give further details on the decision, some analysts have suggested that weaker year-end trading on the PSE could be behind Datem’s decision. The benchmark index was trading down 4.1% year-to-date in late November.

“Most of our construction companies are trading at a very low price-to-earnings ratio,” Alexander Adrian Tiu, senior equity analyst at Manila-based AB Capital Securities, told media in late November. “The deferral of Datem signalled that the company sees the market as too weak to accommodate its entry.”

With this deferral, the PSE will record just five IPOs in 2015, half the number expected going into the year, according to statements from Hans Sicat, president and CEO of the PSE, in December 2014.

While there may have been concerns about appetite for larger-scale IPOs, IDC’s smaller offering – combined with its prospect to gain entry to the PSE’s main board in the coming years – could still help encourage other businesses to follow in its footsteps.

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