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