Dark­est hour?

Spe­cial­ist lender’s share price sug­gests its fu­ture’s less bright

Finweek English Edition - - Companies & Markets -

THE MAR­KET CUR­RENTLY presents some re­ally cap­ti­vat­ing rat­ings on small cap stocks, with earn­ings mul­ti­ples in many in­stances grind­ing down to un­der five times. Of course, the prob­lem in scan­ning those “mod­est” earn­ings mul­ti­ples is that pre­vail­ing eco­nomic con­di­tions have dras­ti­cally ad­justed the earn­ings power and po­ten­tial of so many small cap con­tenders.

A his­tor­i­cal earn­ings mul­ti­ple of five times may very well be a far more de­mand- ing for­ward earn­ings mul­ti­ple of 16 to 20 times if rev­enues and mar­gins are rapidly crimp­ing un­der tighter trad­ing con­di­tions. Al­ready a num­ber of small cap coun­ters have low­ered share­hold­ers’ ex­pec­ta­tions about short-term earn­ings growth. Some com­pa­nies – Di­a­logue Group springs to mind – have even seen dras­tic swings into the red be­tween in­terim and fi­nal trad­ing pe­ri­ods.

Be­cause there’s an over­rid­ing sense that smaller cap com­pa­nies will see earn­ings short­falls there aren’t too many coun­ters where share prices have not fallen by any­thing less than 30% over the past 12 months. That would in­clude com­pa­nies – such as spe­cial­ist lender African Dawn Cap­i­tal (Af­dawn) – that are still con­fi­dently pre­dict­ing short-term boosts to their bot­tom lines.

Fin­week has over the past few weeks re­ceived nu­mer­ous en­quiries about Af­dawn – which is un­der­stand­able, since the group’s shares have buck­led markedly of late de­spite con­fi­dent ut­ter­ances from its ex­ec­u­tives.

Last year in May, Af­dawn was one of the few AltX coun­ters still hold­ing its ground. In May its price was hold­ing steady at around 540c/share but has since started on a rather pre­car­i­ous down­ward spi­ral and was trad­ing at just above 200c at the time of writ­ing. And it’s not Mickey Mouse trade ei­ther. Last Tues­day more than 3,7m shares changed hands in a ro­bust 108 trades, which sug­gested the hands of both pen­ny­s­tock pun­ters and a cou­ple of larger pro­fes­sional trad­ing out­fits.

To be per­fectly frank, Af­dawn’s drib­bling share price is hardly an anom­aly. Sig­nif­i­cantly, the same share price trend is ev­i­dent at an­other spe­cial­ist lender Blue Fi­nan­cial Ser­vices, which has weak­ened markedly of late. Shares in Capitec Bank – which is now closer to a tra­di­tional bank­ing op­er­a­tion – have held up slightly bet­ter, but still trade well off their 12-month high.

In fact, Af­dawn’s share price has dropped be­low the lev­els at which it raised cap­i­tal from share­hold­ers: is­su­ing 20m shares at 490c/share in June 2008 and 25m shares at 290c/share in Au­gust 2007.

Put an­other way, the funds that Af­dawn raised from its last two shares-for-cash is­sues topped R160m – rep­re­sent­ing more than a third of the group’s cur­rent mar­ket cap­i­tal­i­sa­tion of R468m. Nor­mally, you’d as­sume such a crunch in share value an­tic­i­pates a se­ri­ous op­er­a­tional or strate­gic set­back. But in­for­ma­tion re­leased by Af­dawn sug­gests oth­er­wise…

In Septem­ber last year – at the release of some strong in­terim num­bers – Af­dawn CEO Mar­ius van Ton­der con­fi­dently de­clared the cur­rent eco­nomic con­di­tions didn’t neg­a­tively im­pact the busi­ness. He ar­gued there was plenty scope for growth in Af­dawn’s spe­cial­ist lend­ing to lower in­come groups and that the loan to se­cu­rity value ra­tio in its short-term se­cured fi­nance divi­sion en­sured the group was ad­e­quately pro­tected against po­ten­tial im­pair­ments.

Most sig­nif­i­cantly, Van Ton­der noted: “Deal flow con­tin­ues to grow, with the num­ber of applications re­ceived hav­ing in­creased by more than 100%, with 45% of such applications be­ing ap­proved.”

In Oc­to­ber last year Af­dawn also ad­dressed the prickly is­sue of its cost of cap­i­tal, which had pre­vi­ously been seen as a po­ten­tial hitch as the group had sought loans from non-tra­di­tional fund­ing par­ties at rates a tad higher than the norm. It ad­vised that ad­di­tional fund­ing of R185m had been se­cured at prime-linked over­draft rates, while its home im­prove­ment divi­sion had se­cured ad­di­tional fund­ing of R68m at “rates not ex­ceed­ing the prime lend­ing rate”.

Of course, one in­ci­dent that might have spooked sen­ti­ment was the well-doc­u­mented sin­gle stock fu­tures bail-out, where a num­ber of Af­dawn direc­tors – as part of a con­sor­tium – opted to chip in vast sums to close out ex­posed po­si­tions. The fact Af­dawn’s di­rec­tor­ship was will­ing to pump in a vast sum to ef­fec­tively in­crease its ex­po­sure to the group could well be con­strued as a step that largely af­firms prospects. But since that deal – which was struck at an ef­fec­tive 358c – Af­dawn’s shares have con­tin­ued to drift un­con­vinc­ingly down­wards.

Could that pos­si­bly af­fect ex­ec­u­tive man­age­ment, who by now have also re­alised op­tions for rais­ing fresh cap­i­tal from the mar­ket (Af­dawn re­cently al­luded to

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.