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MARKET COMMENT
By
Weetabix, Shepherd Neame and Arsenal are among the famous names that inhabit OFEX (LSE: OFX), the 'off exchange' market for what are technically 'unlisted' and 'unquoted' companies. Formed only in 1995, today saw OFEX itself come to market, albeit with its shares trading on the Alternative Investment Market operated by the London Stock Exchange (LSE: LSE). For those investors with a hankering for small companies, OFEX could prove a winner. OFEX has served fledgling companies well. Providing capital for over 450 different firms, over £1b has been raised on its market since inception. At the moment, the market is home for around 170 companies, most of which are valued under £10m. Income comes from listing fees and the sale of market information and data. In terms of future growth, OFEX points to the 10,000 or so public UK companies that do not have their shares traded on any equity market. There are also around 500 firms with sub-£5m valuations on the LSE that could find OFEX a more suitable home. In addition, OFEX is exempt from forthcoming EU legislation that will further increase the red tape on the LSE. Admittedly, OFEX's accounts aren't great. The bear market has left sales flat at around £1m since 2000, with losses being recorded during each of the last three years. Yet operating margins of 36% at the LSE does show the potential. Using the 25p per share issue price (equating to a market value of £3.9m), OFEX is valued on a price to sales ratio of 4. Not an obvious bargain, but currently in line with the LSE. Though current stock market conditions aren't ideal, the real attraction to OFEX is that competition remains limited. To list their shares, UK companies either have to go to it or the LSE. With no sign of any new exchanges on the horizon, OFEX should easily prosper when market bulls reappear. Indeed, assuming there are no regulatory issues, OFEX could even attract the predatory attention of the cash-rich LSE. More: OFEX website | Profiting From The Bear Market The author owns shares in London Stock Exchange.