Bar­gain buys

But be­ware toxic hedges and those suf­fer­ing ter­mi­nal de­cline

Finweek English Edition - - The Company You Keep - MICHAEL COUL­SON coul­sonmh@gmail.com

THE SLUMP in the re­sources sec­tor has brought the over­all in­dices more in line with in­vest­ments out­side the hand­ful of stocks that dom­i­nate the all-share in­dex. Though the mar­ket is now down 20% over the past year, in the na­ture of things that masks much steeper de­clines by many in­di­vid­ual shares. So I thought it would be in­ter­est­ing to look at some stocks that have fallen by 50% or more, on the off chance those may out­per­form when the mar­ket ral­lies. But re­mem­ber while some may sim­ply have been over­sold oth­ers may be suf­fer­ing from spe­cific – even ter­mi­nal – prob­lems.

Go­ing down through the mar­ket, the first on the list – Pamodzi Gold – falls into the lat­ter cat­e­gory. At 115c/share that’s a stag­ger­ing 93,6% down on the past year, with a mar­ket cap of only R108m. Not only does it have fi­nanc­ing dif­fi­cul­ties, it also has a toxic hedge and has just re­leased an ap­palling quar­terly re­port – to June, no­gal. The 30m shares is­sued to Har­mony for its Orkney busi­ness are now worth just R34,5m, ex­actly one-tenth of the nom­i­nal R345m price paid.

The next to catch my eye is Me­torex, down 53,2% at 1300c/share. It has a good port­fo­lio of min­ing op­er­a­tions and projects. Fears about its min­ing rights in Congo (Kin­shasa) have been al­layed and of 130c head­line earn­ings per share for the year to June about 75c came in the sec­ond half, so prof­its are hold­ing up well – so far.

Worst per­former in the build­ing ma­te­ri­als sec­tor is AGI, the old African Glass, off 83,7% at 63c/share with a mar­ket cap of only R130m. It’s also just pub­lished shock­ing re­sults, driven into the red by ma­jor prob­lems at a new fac­tory, which it claims it’s over­com­ing.

Plas­tic packaging firm As­tra­pak is an­other with set­backs that led to the de­par­ture of founder Ray Crewe-Brown. At 610c/share, it’s 50,1% off over 12 months.

Ca­ble maker and light fit­tings firm South Ocean is 54,9% off at 320c/share. Its in­terim re­sults to June were sound and its his­toric earn­ings mul­ti­ple is just three, though it’s warned the sec­ond half will be tougher.

At 335c/share, 74,1% less than a year ago, is Su­per Group a re­cov­ery stock? A share price so close to its 12-month low of 300c sug­gests the mar­ket wasn’t im­pressed by CEO Larry Lip­s­chitz’s explanations at the re­cent re­sults brief­ing of the fraud and other dis­as­ters at its in­dus­trial prod­ucts divi­sion.

Su­per Group is in the mid­dle of a 50for-100 rights is­sue at 400c/share. There are cur­rently 418m shares in is­sue, so the­o­ret­i­cally that should raise R835m or so gross. How­ever, its lat­est an­nounce­ment im­plies only R487m may ac­crue – from share­hold­ers

Worst per­former in the build­ing ma­te­ri­als sec­tor is AGI,

the old African Glass.

who’ve pro­vided ir­rev­o­ca­ble com­mit­ments to sub­scribe. In­deed, it’s hard to imag­ine why any­body else should want to take up shares so deep un­der wa­ter.

Iliad has been crit­i­cised for not tak­ing full ben­e­fit of the boom (or is it now ex­boom?) in the build­ing sec­tor and is an­other where a CEO stepped down un­ex­pect­edly. It’s 50,1% off at 850c/share, with a his­toric earn­ings mul­ti­ple of five.

By con­trast, Dis­tri­bu­tion and Ware­hous­ing Net­work (Dawn) is 33,5% off with a mul­ti­ple of 8,8. And Cash­build 14,1%, with a mul­ti­ple of 7,8 (con­fus­ingly, those close com­peti­tors are listed in three dif­fer­ent JSE sec­tions).

Of broiler com­pa­nies, Sov­er­eign is worst hit, with a 71% de­cline to 500c, closely fol­lowed by Coun­try Bird’s 69,1% to 156c. The back­ground is well known: a squeeze on prof­its from higher feed costs that couldn’t be passed on as over­sup­ply crimped prices. But chick­ens re­main a sta­ple food.

A cou­ple of dis­as­ter ar­eas to note in pass­ing are Amal­ga­mated Ap­pli­ance Hold­ings (down 69,0% at 117c) and Seardel (down 89,3% at 75c/share). Let’s also skip over Verimark (76,0% to 30c/share).

More in­ter­est­ing, re­flect­ing col­laps­ing new ve­hi­cle sales, is Com­bined Mo­tor Hold­ings, down 58,8% at 700c/share. Its 12-month low was 475c, so you’d have made al­most a 50% turn if you’d been brave enough to go in at the bot­tom.

Though Gold Reef Re­sorts has had ma­jor cor­po­rate gov­er­nance is­sues, do those jus­tify a 53,4% dip to 1510c/share? It may be de­plorable but gam­bling will al­ways be with us.

In the spe­cialty fi­nance sec­tor, Con­duit is 76,7% off at 50c. Lat­est stated tan­gi­ble NAV is 68c/share. In in­vest­ment ser­vices, Pur­ple – an­other com­pany hold­ing a rights is­sue whose suc­cess de­pends on the com­mit­ment of ma­jor share­hold­ers – is 84,0% off at 28c, and Cape Empowerment – linked to Pur­ple through a cross-share­hold­ing – 70,9% off at 80c/share.

Sur­pris­ingly, al­most the only IT share off more than 50% is Faritec, down 67,5% at 39c/share, though I for one found its re­cent re­sults pre­sen­ta­tion fairly pos­i­tive.

Well, there’s a baker’s dozen or so. It’s not an ex­haus­tive list. And if I ex­tended it to the DCM, VCM and AltX there’d be an­other 30 to choose from.

I’m not sug­gest­ing it’s any sort of port­fo­lio rec­om­men­da­tion. World eq­uity mar­kets are far from sta­bil­is­ing and there are dis­parate rea­sons for those shares’ un­der­per­for­mance. Some may well not be around this time next year. But if you be­lieve in buy­ing re­cov­ery stocks, you may find oth­ers worth a closer look.

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