The downside of an ASX listing

Listing on the ASX has its disadvantages, particularly if you have powerful customers.

Does listing on the ASX signal you've made it? The ASX wants you to think so. It outlines no fewer than nine advantages on its 'Is listing for you?' page.

There are downsides though and even the ASX acknowledges them. Its website euphemistically provides a list of 'considerations' that companies and their management teams should consider before making the leap.

But I'd suggest there's one particular disadvantage that companies – and their shareholders – should focus on. It's the downside that comes with your company's financials being open to public scrutiny.

True, you don't need to be ASX-listed for your financials to become public knowledge. A search of ASIC's database will turn up financial information for many unlisted companies.

Powerful suppliers

But being listed on the ASX can be a bit like placing a target on your back, particularly when your suppliers or customers are powerful. Take Sonic Healthcare, Australia's largest pathology company.

Sonic's main source of revenue in Australia are the fees paid by Medicare for pathology tests. Its primary customer – the Australian government – is the very definition of powerful.

With the Australian government trying to rein in health spending, which is growing at a faster rate than the economy overall, companies like Sonic are an easy target. The government can point to how much profit Sonic makes because its accounts are on the public record.

On behalf of taxpayers, the government has essentially said 'we'll have some of your profits, thanks'. Sonic estimates the most recent fee cuts will shave 5-6% from its 2017 earnings before interest, tax, depreciation and amortisation (EBITDA).

Secretive

It's perhaps no surprise, then, that Sonic is rather secretive about just how profitable its Australian pathology division is. It doesn't disclose its Australian profits – or indeed the profit generated in any country. It prefers to aggregate profits in one global pathology segment, which produced an operating margin of 14.4% in 2015.

As an analyst and shareholder, this isn't particularly useful. Management must know exactly how profitable each country is; it simply chooses not to disclose it. Whenever I'm analysing a company, I always take notice of how management classifies its divisions for 'segment reporting' purposes. It can reveal a lot about what management wishes to prevent suppliers or competitors knowing.

Powerful suppliers were another reason why I wasn't keen on the Costa Group initial public offering (IPO) last year. While the fruit supply company has some advantages that protect it, Coles, Woolworths, Aldi and IGA account for around 67% of sales. If Costa becomes 'too' profitable, its supermarket customers will say 'we'll have some of your profits, thanks'.

Next time you're looking at a company's divisional reporting (or 'segment reporting'), take note of what management chooses to disclose. If it's less useful than you think it should be, consider who might be holding the purse strings.

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Disclosure: The author owns shares in Sonic Healthcare. This is not a recommendation.

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