Good re­cov­ery, but still with a long way to go

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

Over the past few years fi­nan­cial ser­vices group Vu­nani has been qui­etly re-plot­ting its course.

The one-time dar­ling of the JSE’s ju­nior ex­change, AltX, it has been find­ing its feet af­ter it had the stuff­ing knocked out of it by the 2008 fi­nan­cial cri­sis.

Formed in 2004, when man­agers at African Har­vest Cap­i­tal bought it from then par­ent com­pany African Har­vest, un­der CEO Ethan Dube’s guid­ance it quickly de­vel­oped a reputation for tak­ing siz­able stakes in emerg­ing com­pa­nies.

The pe­riod prior to the cri­sis was a boom time for up-and-com­ing com­pa­nies, and am­bi­tious in­vest­ment firms such as Vu­nani saw an op­por­tu­nity to tap into rapidly grow­ing busi­nesses. This led to it tak­ing hold­ings in com­pa­nies like BSi Steel, Alert Steel and prop­erty group JHI.

In those pre-cri­sis days, its in­vest­ments looked solid and its prospects seemed promis­ing.

The prob­lem with in­vest­ing in rel­a­tively small com­pa­nies is that they tend to strug­gle when times get tough. This is ex­actly what hap­pened when the 2008 fi­nan­cial cri­sis hit. Many of Vu­nani’s un­der­ly­ing in­vest­ments took a knock. Alert Steel was liq­ui­dated, putting pres­sure on Vu­nani’s abil­ity to gen­er­ate cash and drag­ging down val­u­a­tions.

In late 2009 the com­pany turned to its share­hold­ers to keep it afloat. It told them if they did not re­cap­i­talise it through a claw­back of­fer, its abil­ity to con­tinue as a go­ing con­cern would be un­der­mined, as re­cap­i­tal­i­sa­tion was key to re­struc­tur­ing its debt.

At the time it had more than R1.52bn in li­a­bil­i­ties and only R193.5m in eq­uity.

Share­hold­ers came through and contributed R313.6m to its re­cap­i­tal­i­sa­tion. This move kept it go­ing and for the next few years it steadily went about re­struc­tur­ing it­self. It sold off its hold­ings in some of its most val­ued in­vest­ments, like BSi Steel, and moved out of prop­erty.

It also went into other di­rec­tions through sev­eral small ac­qui­si­tions.

It took a con­trol­ling in­ter­est in the Jala Group (now Vu­nani Tech­nol­ogy Ven­tures) for an undis­closed amount in May 2010.

What has re­ally paid off has been its R210m takeover of Fair­heads In­ter­na­tional, a provider of ad­min­is­tra­tion ser­vices to ben­e­fi­ciary and re­tire­ment funds, in early 2015.

Though it is still rel­a­tively early days, the ad­di­tion of Fair­heads has al­ready had a no­tice­able im­pact. It was one of the main rea­sons profit from con­tin­u­ing op­er­a­tions rose from a R25.3m loss to a R8.6m profit for the year to end De­cem­ber.

Fair­heads has made wel­come con­tri­bu­tion, but over­all, Vu­nani still has a long way to go.

Its as­set man­age­ment op­er­a­tions Vu­nani Fund Man­agers and Pur­pose Vu­nani As­set Man­age­ment, for in­stance, in­creased rev­enue 31% to R50.1m but in­curred a R0.6m loss.

“Ar­du­ous mar­ket con­di­tions” were blamed for its ad­vi­sory ser­vices in­cur­ring a R1.9m loss. Its pri­vate eq­uity divi­sion re­ported a small R0.3m loss and its pri­vate wealth and in­vest­ments ac­tiv­i­ties also suf­fered a loss.

Its re­struc­tur­ing is not com­plete. It is still in the process of sell­ing off part of its listed in­vest­ment port­fo­lio, like its re­main­ing hold­ing in BSi and Work­force Hold­ings.

Con­sid­er­ing how much trou­ble it was in only a few years ago, Vu­nani has done re­mark­ably well. It is car­ry­ing less debt and has a tight con­trol over cost.

But well as it has done, a ques­tion lingers over how much up­side there is.

From the out­side Fair­heads looks like a good buy, but it is still too soon to judge how big a con­tri­bu­tion it will make.

The group noted that de­spite “sub­dued mar­ket con­di­tions” it had seen some promis­ing op­por­tu­ni­ties and had a rea­son­able deal- flow.

Even so, for the time be­ing its en­ergy will be on the “de­vel­op­ment and growth of the [ex­ist­ing] op­er­at­ing busi­nesses”.

This ap­proach is un­der­stand­able. It is un­likely that SA will be re­turn­ing to the hey­day of the pre-cri­sis boom any time soon, so a mea­sure of cau­tion is not with­out rea­son.

When judged on its val­u­a­tion, Vu­nani’s in­vest­ment case is not com­pelling. It trades at R1.60/share, which is sub­stan­tially lower than its net as­set value of R2.33/share.

In­vestors on the look­out for a group that pays out de­cent div­i­dends, how­ever, might want to take a sec­ond look. It de­clared a gross ordinary div­i­dend of 5.5c/share (5c/share) and a spe­cial div­i­dend of 25c/share.

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