Along with BAT, Rem­gro’s share price also fell sharply

Finweek English Edition - - Creating Wealth - VIC DE KLERK vicd@fin­

THE MAS­SIVE FLUC­TU­A­TIONS and sharp fall in JSE share prices over the past fort­night wreaked havoc among the in­stal­ment shares is­sued by In­vestec. Ex­cel­lent in­vest­ments in in­stal­ment shares such as An­glo, BHP Bil­li­ton and even Sa­sol sud­denly evap­o­rated be­cause the un­der­ly­ing share prices fell, for just a day or two, to be­low the so­called stop-loss lev­els ap­pli­ca­ble to all or­di­nary and “hot” in­stal­ment shares is­sued by In­vestec.

Just last week we again had the heart­break­ing ex­am­ple of Sa­sol’s price drop­ping to be­low R260,48/share. That meant in­vestors who had taken a chance on In­vestec’s Sa­sol in­stal­ment share (JSE code SOLIDE) had to stand by and see their in­vest­ment be­ing knocked out. At least In­vestec is pay­ing R68,66 per in­stal­ment share.

But that’s not much con­so­la­tion com­pared with the ap­prox­i­mately R200 the share was worth as re­cently as Septem­ber, when Sa­sol signed its big black empowerment deal.

The his­tory of the share un­folded as fol­lows: At the beginning of Septem­ber, Sa­sol’s or­di­nary shares were trad­ing at R382,04 each. In­vestec bought a few or­di­nary Sa­sol shares and gave in­vestors the op­por­tu­nity to buy the shares with 50% credit. The or­di­nary share’s price of R382,20 was split into a first in­stal­ment of R191,02 and a fi­nal in­stal­ment pay­ment of R191,02 in Septem­ber next year.

In­vestec would, of course, like to earn in­ter­est on the R191,02 fi­nal pay­ment due in Septem­ber 2009. In­ter­est on this at 15% is R28,65, and that’s added to the price of the first in­stal­ment, which is also R191,02. That pushes the price of the first in­stal­ment up to about R220.

At that stage it wasn’t con­sid­ered a deadly sin to buy Sa­sol shares on credit. Thou­sands of blacks were in fact en­cour­aged to do ex­actly that via Sa­sol’s In­zalo empowerment pro­gramme.

Nat­u­rally, In­vestec wanted to pro­tect it­self against the pos­si­bil­ity of a very sharp fall in share prices, which sub­se­quently hap­pened. In­vestec sets stop-loss lev­els on ev­ery in­stal­ment share it cre­ates. In the case of or­di­nary in­stal­ment shares, where the first in­stal­ment is 50% of the rul­ing share price, the stop-loss level is usu­ally set at 68% of the price of the or­di­nary share, which was R382 when In­vestec is­sued the in­stal­ment share. The stop loss level for SOLIDE was there­fore R260,48.

On Wed­nes­day, 8 Oc­to­ber the unimag­in­able hap­pened: Sa­sol fell to be­low R260,48/share and In­vestec told in­vestors their in­stal­ment shares had been can­celled. At least In­vestec is pay­ing a con­so­la­tion prize of R68,66 to in­vestors who had bought the in­stal­ment shares up un­til Septem­ber at more than R200 each on the JSE. That was a mas­sive shock – proof once again of how cir­cum­spectly in­vestors must treat in­stal­ment shares.

In­ci­den­tally, Sa­sol is cur­rently trad­ing at R280. How­ever, that’s too late for in­vestors in SOLIDE. Their shares have been wiped out. If the knock­out price of R260,48 hadn’t been reached, the shares would now have been worth about R120, ver­sus the con­so­la­tion prize of R68,66 be­ing paid by In­vestec.

Among SA’s ma­jor banks that is­sue in­stal­ment shares, In­vestec is the only one that uses the knock­out mech­a­nism. In­vestec’s knock­out mech­a­nism means their shares at the same lev­els are cheaper than those of the other banks. But In­vestec’s de­mand much more care­ful at­ten­tion and in­vestors must al­ways try to sell their shares be­fore the knock­out level is reached.

In­vestec’s so-called HotEDS on or­di­nary shares re­quire even more care­ful at­ten­tion and dis­ci­pline on the part of in­vestors. Take the HotEDS Remihc on Rem­gro as an ex­am­ple. In the case of HotEDS the ini­tial de­posit is only 25% of the rul­ing share price, but the knock­out level is a mas­sive 87,5% of the share price.

The con­di­tions ap­ply­ing to In­vestec’s HotEDS Remihc are as fol­lows: In­vestors can now buy Remihc at R48, which is the equiv­a­lent of buy­ing an or­di­nary Rem­gro share for R176. If there’s an­other R10/share profit to be made from the un­bundling, the in­vestor in Remihc will also get that R10 profit. And R10 on R48 is a lot more than R10 on R176.

But there’s a sting in the tail – a bad one. The knock­out price on the in­stal­ment share is R160,99. That may look like a long way from the R176 at which Rem­gro is cur­rently trad­ing at. How­ever, Rem­gro’s price fell to be­low R165 on oc­ca­sion last week and the in­stal­ment shares nearly came to the same sticky end as SOLIDE.

In­stal­ment shares must be han­dled with kid gloves. Man­age them ac­tively and look out at all times for the knock­out prices on In­vestec’s in­stal­ment shares. It will be nerve-rack­ing, you can be sure of that.

Vic de Klerk holds shares in Remihc.

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