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