Catalist stocks underperforming, says study co-authored by Prof Mak

THREE quarters of the stocks that stay listed on Singapore Exchange (SGX)'s Catalist board for more than seven years have underperformed, a fresh study revealed.

The study - co-authored by associate professor Mak Yuen Teen of the NUS Business School and Chew Yi Hong, an active investor and researcher - looked at Catalist issuers with fiscal year 2019 net income available.

The report showed that out of 214 companies, 56.5 per cent or 121 companies made losses for FY2019. Among those listed fewer than 7 years, 37 per cent are making losses. Among those that have been listed for more than 7 years, 71 per cent are making losses.

"While not conclusive, this is contrary to expectations as one would expect growth companies to start as relatively unprofitable companies and become more profitable over time,'' the authors said, urging that a review of the Catalist board be undertaken.

The report also highlighted the conflicts of interest in the sponsorship regime, due to business relationships between sponsors and the companies they sponsor.

Prof Mak and Mr Chew argued that sponsors might hesitate to report disclosure or compliance breaches by issuers because the sponsors do not want to lose revenue from the issuers.

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Issuers are free to change sponsors after three years of listing on Catalist, and issuers may for instance choose to drop sponsors that the issuers do not see eye to eye with.

"A change in sponsor is a potential warning sign for Catalist companies, and multiple changes/short relationships between a company and sponsor are more likely to indicate problems with the issuer,'' they wrote.

As of May 2020, there were 215 companies listed on Catalist and 20 sponsors. Of the latter, 16 are full sponsors and four are continuing sponsors. The top three sponsors are PrimePartners Corporate Finance (PPCF), SAC Capital (SACC) and RHT Capital (RHTC), sponsoring 55 companies (25 per cent), 35 (16 per cent) and 25 (about 12 per cent), respectively.

Nearly a fifth or 38 issuers disclosed that they paid non-sponsor fees to their sponsor for the financial year covered, including one that disclosed non-sponsor fees paid to an affiliate. Another five issuers disclosed other fees paid to an affiliate of the sponsor that are not included in non-sponsor fees.

PPCF was most commonly paid fees for non-sponsor services by companies they sponsor. About 30 per cent, or 17, of their companies did so just for the one year studied. In most cases, the nature of the advisory services was not disclosed and even where they were, there was little specific information provided.