Good recovery, but still with a long way to go

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.