News analysis

Trading price alone doesn't reflect firm's health, say observers

Industry observers have reacted strongly to news that 41 mainboard-listed firms are entering the Singapore Exchange's watch list today after the minimum trading price (MTP) rule kicked in on Tuesday.

Some say the criteria for inclusion should be directed more at financial weakness rather than an arbitrary 20-cent trading price.

Of 33 companies already on the list for breaching profitability and market value criteria, 16 have also breached the MTP criteria.

Being on the MTP watch list does not necessarily mean the company is in financial trouble.

But lawyer Stefanie Yuen Thio of TSMP Law Corp said it would be "unfortunate if managements of listed companies focus their attention on the trading price, and not devote all resources to improving their business".

"I've never been convinced that MTP is what ails a company. The trading price is just a number and even where you do a consolidation, as has happened in some cases, the stock price could still fall below MTP. This can be due to a general market downturn, (but) that may not point to the company being in bad shape," she said.

"If MTP is a good gauge of bad financial health, then wouldn't more companies on the financial criteria watch list be trading below MTP?" Ms Thio asked.

Industry observers are split over suggestions to merge the MTP and financial criteria. One possible option is that companies enter the watch list only if they violate both the MTP and financial criteria.

While the 76 firms now on the watch list may not account for much of the overall market capitalisation of listed firms here, it is a significant number and may send the wrong message about the health of the firms, she said.

Of 607 mainboard-listed stocks, 126 firms are still trading below a 20-cent, six-month, volume-weighted average trading price - that is, one-fifth of all mainboard-listed firms. But SGX said they account for only 1.1 per cent of market cap and 1.5 per cent of turnover. The 41 MTP entrants account for 0.3 per cent of market cap and 0.4 per cent of turnover.

But critics question the use of current turnover and market cap as reference benchmarks as these have shrunk since the penny stock crash in 2013 and the introduction of the MTP rule.

"It is not clear how SGX arrived at those low percentages. Some low-priced counters have been suspended. So they have no turnover. Were those companies included?" veteran investor Mano Sabnani noted.

"The calculations should be transparent. As it stands, one cannot accept the calculations at face value as details are not there of the counters involved and the reference time frame," he said.

SGX chief regulatory officer Tan Boon Gin said three years is a long cure period and gives "ample opportunity" for companies to exit the watch list.

Mr Sabnani acknowledged that the rule is intended to improve market quality. "But most on the watch list will suffer further erosion in market cap and turnover, unless they do something to reverse their fortune.

"Some may opt to delist, while some may see shareholders making an offer to buy out minority shareholders. It's not good for market sentiment and retail investors will bear the brunt of it," he said.

Industry observers are split over suggestions to merge the MTP and financial criteria. One possible option is that companies enter the watch list only if they violate both the MTP and financial criteria.

"It doesn't matter if the stock is trading at 20 cents or $2. The absolute price is not critical. What is important is the company's market cap, corporate governance and whether it is well run and profitable," Mr Sabnani said. "A good company can have its stock price below 20 cents because of general business downturn."

He added: "MTP should be something companies are coaxed to comply with, and not be severely punished or threatened with delisting for not complying."

A version of this article appeared in the print edition of The Straits Times on March 03, 2016, with the headline 'Trading price alone doesn't reflect firm's health, say observers'. Print Edition | Subscribe