Why ASX microcaps should consider a share consolidation
A share consolidation can help improve investor perception, reduce volatility and improve liquidity for small companies.
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Mentioned
KEY POINTS
- Share price denominations can significantly impact how microcaps trade
- Stocks trading around 10-20 cents experience large price swings as the stocks move in 0.5 cent increments
- A share consolidation can improve investor perception, reduce volatility and improve liquidity
The ASX microcap cap space is notoriously challenging, with its volatile share prices, endless jargon and complex announcements (not to mention the occasional and unexpected capital raise).
If there's one thing these companies could consider to make it easier for investors and traders. It's a share consolidation.
Understanding Denominations
There are two key denominations to consider.
Stocks that trade above 10 cents
Stocks that trade below 10 cents
When trading below 10 cents, stocks move in 0.1 cent increments, resulting in roughly 1% price changes per tick. However, at 10 cents and above, the increment jumps to 0.5 cents – creating significant 5% swings with each tick.
Why this matters
The larger tick size at 10 cents creates several challenges
Substantial price movements with each tick
If you want to buy the stock right now, you'd have to jump the spread (e.g. buying at 10.5 cents when bids are at 10 cents), starting positions at an immediate 5% loss
Increased opportunity for traders (e.g. buying at 10 cents, selling at 10.5 cents)
Larger tick size results in concentrated volume at each price level
These factors often trap stocks in a trading pattern of back-and-forth movement until a major catalyst emerges.
Pros and Cons
A few general reasons why a low price stock might consider a share consolidation:
Improved perception: A higher share price can improve the stock's perception among investors. Many institutional investors and funds have minimum share price requirements, and a higher price may attract more serious investors.
Reduced volatility: A consolidation may help stabilise the stock price and reduce excessive short-term fluctuations due to small denominations.
There are also reasons why a company might hesitate to do so:
Reduced liquidity: If the company a relatively small amount of shares on issue or a tightly held register, then the consolidation could make the stock less accessible.
Shareholder approval: A consolidation requires shareholder approval. If management believe shareholders won't support the move, they may hesitate to propose it
Costs: There are administrative and legal costs associated with the consolidation. This may prove costly for a small company
Recent Consolidators
Peninsula Energy (ASX: PEN) is one of the latest small cap to proposed a 20-to-1 share consolidation. The stock trades around the 10 cent level with approximately 3.2 billion shares on issue.
"The consolidation is proposed to reduce Peninsula’s shares on issue to a more appropriate and effective capital structure for the company and translate to a share price that is more appealing to a wider range of investors," the company said in the announcement.
"As Peninsula completes the development works to recommence uranium production later this year, the company expects to access more diverse pools of capital and these investors are expected to be attracted to a smaller issued capital structure."
Overall, 10-20 cent stocks can be incredibly frustrating. When I look at buying stocks around this price level – I know full well that they may turn into a very draining and tiresome hold.
A share price consolidation may alleviate some of these issues. But its not applicable for everyone and more suited for the microcaps with earnings or some form of fundamental backing (as opposed to early-stage explorers).
