Tuesday, 17 February 2009

Phillip’s OTC unit to review business model

Cost structure is one issue, says head of OTC Capital

1 comment:

Guanyu said...

Phillip’s OTC unit to review business model

Cost structure is one issue, says head of OTC Capital

By JAMIE LEE
17 February 2009

Phillip Securities’ over-the-counter (OTC) unit is reviewing its business model, including the cost structure, during this lull market period, head of OTC Capital Ong Teong Hoon told BT in an interview.

This comes as the payment to get quoted on the OTC platform has risen to as much as $250,000 now from the initial cost of $100,000 when OTC was started about two years ago due to higher fees paid to external advisers.

‘We are reviewing what we have done over the last two years,’ said Mr. Ong. ‘We’ve identified certain issues, cost is one.’

Ideas for an OTC platform came about in 2003, when there were calls from small-and-medium enterprises for more ways to raise funds. Following the amendment in the Securities and Futures Act in 2005 to allow for fund-raising of under $5 million without a prospectus, Phillip launched the OTC.

Companies that want to be quoted on OTC must pay at least $15,000 upfront to Phillip Securities, with $5,000 each for admission, application and quotation fees. This excludes due diligence and other service fees paid to corporate advisers. OTC-quoted companies then subsequently pay $5,000 each year for quotation fees.

Mr. Ong noted that several deals have fallen through as companies are now shying from expansion plans.

He added that none of the 10 companies that OTC were in talks with earlier last year have been quoted.

But listing on the OTC platform is cheaper than listing through an initial public offering and is more suitable for firms that are typically smaller than those listed on the stock exchange in terms of turnover and do not meet listing criteria set by Singapore Exchange (SGX), said Mr. Ong.

‘We cater to a niche,’ said Mr. Ong. ‘It’s a stepping stone for those who are not ready for IPO yet.’

And not everyone can invest on the thinly traded OTC - investors on the OTC platform are qualified by brokerage to have a typically higher risk appetite, which Phillip Securities determines through a series of questions. ‘When we pre-qualify an investor, it’s not on his asset backing. It’s on his risk profiling,’ said Mr. Ong. ‘He’s got to be aggressive.’

This is because Phillip acknowledges that the OTC companies have a higher risk of folding up, but could also be ‘the next big thing’ and present much higher returns than those listed on the stock exchange.

A company is set to be quoted in March, joining the four existing companies quoted on OTC. These include pub operator Harry’s Holdings, which has raised $4.6 million since its OTC quotation. It makes up the lion’s share of the $12.5 million that has been raised through OTC thus far, said Mr. Ong. One company Alphomega was recently de-quoted and its directors are locked in a legal wrangle at the moment.

With the exception of Harry’s Holdings, most of the companies on OTC post annual turnovers ranging from $5-10 million. The pub operator makes about double that amount.

The companies are typically recommended by government agencies such as Spring Singapore and angel funding organisations.

Because of the type of companies that the OTC platform attracts, quoting criteria tend to be loose, said Mr. Ong.

In deciding which businesses pose good prospects, the OTC team relies on its in-house private equity arm to assess proposals from potential clients.

‘We want it to be a simplified form of IPO. We don’t want it to be so rigid that at the end of it, it becomes another small-time SGX,’ he added.

Still, out of the proposals that they’ve received, just 5 per cent of these warrant a closer look because many come with ‘unrealistic valuations’, said Mr. Ong, adding that OTC does not accept companies at seed stage funding.

But Mr. Ong said it does not feel that OTC is receiving the rejects from the various funding outlets. ‘There are people who got rejected from private equity or venture capital funding and they come to us as a last resort but not many,’ he said.