It seems plain crazy
There must be a dozen better ways to invest R60m
BLACK EMPOWERMENT GROUP Sekunjalo Investments could invest an amount of as much as 20% of its market capitalisation into its long-suffering healthcare subsidiary. Sekunjalo last week confirmed it could inject as much as R60m to underwrite a rights offer for Sekunjalo Health (SH) – a rights offer that might not draw too much interest from other SH shareholders (including institutions such as Old Mutual, with 20,88%, and Sanlam, with 12,56%).
At face value Sekunjalo’s decision seems plain crazy. SH, which is 35% owned by Sekunjalo but 100% funded by the empowerment group, has performed dismally over the past few years. Some cynical observers feel its health business has become an emotional issue, being the anchor business when chairman Iqbal Survé co-founded Sekunjalo in the mid-Nineties.
The financial year to end-August 2007 saw revenue of R37m turned into an operational loss of R40m, while the interim period saw turnover of R15m crash R20m into the red. Looking at those figures, SH doesn’t look a viable proposition by any stretch of the imagination.
SH’s balance sheet makes it abundantly clear why a rights offer has been proposed. Basically, without fresh capital SH won’t stay afloat and, understandably, Sekunjalo was probably not keen to continue its funding obligations with just a 35% shareholding. As at end-February this year, liabilities of nearly R200m dwarfed assets of R56m (including pharmaceutical dossiers of R21m). Even after stripping out R130m in borrowings owed to Sekunjalo, SH finds itself in a serious pinch, with current assets of R21m not even covering its bank overdraft of R24m (never mind the other R20m in current liabilities). Its net liability count is R137m, which is ridiculous for a company that didn’t even generate R40m in turnover in its past financial year.
Sekunjalo has based its operational comeback on cash-generative investments
in fishing and technology and in that regard shareholders may wonder if underwriting the SH rights issue isn’t a costly distraction. It’s certainly worth asking whether it would not be better for Sekunjalo to close up or sell off SH – removing a major drag on the group’s other operational assets.
It will also be interesting to see if institutional shareholders such as Old Mutual and Sanlam follow their rights. It might be difficult to justify to clients that SH is a business worth throwing more money at. The rights offer closes this Wednesday, so the position of Old Mutual and Sanlam will be known by latest Friday.
It seems Sekunjalo’s decision to back the rights issue to the hilt is based on hopes of an operational turnaround at SH. According to the circular, SH’s pharmaceutical division is looking at new distribution channels and increasing its product portfolio to build critical mass and, hopefully, meaningful profits. Its manufacturing division, which has been smacked by competitive imported goods, has recently been awarded a number of new tenders.
The biggest short-term gain for SH could be from its IT business, which provides a variety of health-related technology services, mainly to Government. Talk is that division will be “sold” to Sekunjalo’s profitable informatics divi- sion, which has indicated willingness to list shortly. Hopefully, the windfall of such a sale (assuming it’s a cash-based deal) could further shore up SH’s balance sheet post the rights issue.
But can SH’s pharmaceutical and manufacturing businesses really generate the kind of returns that would justify Sekunjalo sticking in as much as R60m? At this juncture you can’t help feeling – even with new distribution channels and new tenders – its health businesses look a tad lightweight.
It may be worrying to note that after the rights issue the financial effects applied as at end-February this year would still have seen SH operating at a serious loss and showing a negative net asset value.
The only advantage of pitching in R60m is that Sekunjalo – presuming most shareholders don’t follow their rights – will gain outright control of SH. That should allow Sekunjalo to work more effectively with SH, not having to revert strategic decisions back to other large shareholders. In that regard Sekunjalo may well be able to pursue corporate action, which may well be the only way to build up SH into a meaningful and profitable entity.
But the bottom line is that to most objective observers there would probably be a dozen better ways to invest R60m than propping up an undersized, ailing and unconvincing healthcare business. Sekunjalo, which earns R1,5m from an underwriting fee, will have a lot to prove at SH over the next few years…
An emotional issue. Iqbal Survé