Danger­ous af­flic­tion

An al­most stub­born and mis­placed faith in his own com­pany’s share price

Finweek English Edition - - Companies & Markets - VIC DE KLERK vicd@fin­week.co.za

EX­CES­SIVE TRAD­ING in a com­pany’s listed shares, es­pe­cially by its CEO or main share­hold­ers, could be a dan­ger sig­nal that in­vestors should take care­ful note of. If, in ad­di­tion, the trans­ac­tions are largely done in sin­gle stock fu­tures (SSFs), an in­stru­ment cre­ated by Safex, the warn­ing lights should flicker even brighter.

The large num­ber of trans­ac­tions in SSFs of Pere­grine Hold­ings shares by ex­ec­u­tive chair­man Seal Mel­nick dur­ing the past 18 months is a good ex­am­ple. In­ci­den­tally, Pere­grine cau­tioned last week that its head­line earn­ings for the year to 31 March 2009 could be as much as 87% lower than in the pre­vi­ous fi­nan­cial year.

Ex­ces­sive trad­ing in SSFs by the CEO of a com­pany, es­pe­cially one in the fi­nan­cial sec­tor, is a se­ri­ous warn­ing to in­vestors and clients of the com­pany.

It doesn’t mat­ter whether the direc­tors are buy­ing or sell­ing shares. In the case of Pere­grine, Mel­nick was con­sis­tently a net buyer of the com­pany’s shares. And this was while the share price was fall­ing from around R20 to be­low R5, be­fore it re­cov­ered re­cently to the cur­rent R6/share. In fact, direc­tors are, in gen­eral, pretty naïve about the price of their com­pa­nies’ shares on the JSE. They al­ways be­lieve that their shares are priced too low, that the mar­ket is wrong and that there’s a won­der­ful op­por­tu­nity to buy the shares and make a quick buck. The SSF, which some­times re­quires an ini­tial de­posit of as lit­tle as 10%, mis­leads the owner/direc­tors even more. The les­son for in­vestors is clear: don’t fol­low greedy direc­tors who stub­bornly be­lieve the price of their shares is too low.

In the case of Pere­grine, an as­set man­ager or wealth cre­ator of about R40bn, which de­scribes its ob­jec­tives on its web­site by say­ing “The Pere­grine Group is a lead­ing provider of wealth and al­ter­na­tive as­set man­age­ment so­lu­tions”, the trad­ing in its own shares by Mel­nick over the past year demon­strates an al­most stub­born and mis­placed faith in his own com­pany’s share price. That’s a danger­ous af­flic­tion among as­set man­agers, es­pe­cially when they are manag­ing other peo­ple’s money. Clients of Pere­grine and its sub­sidiary Ci­tadel would be well ad­vised to study Mel­nick’s trans­ac­tions as set out in the graph and to al­lo­cate points for as­set-man­age­ment and tim­ing skills.

Fin­week tracked down the fol­low­ing trans­ac­tions by Mel­nick through the JSE’s Sens an­nounce­ments. Th­ese aren’t all his trans­ac­tions, be­cause some of the SSFs have rolled over from 2007 and be­cause the po­si­tion was only closed in March this year. Fol­low the trans­ac­tions on the graph to un­der­stand them bet­ter. Each SSF is equal to 100 or­di­nary shares.

Other in­vestors in Pere­grine shares, as well as in­di­vid­u­als and in­sti­tu­tions that use Pere­grine/Ci­tadel’s fi­nan­cial ser­vices, may rightly won­der why it was nec­es­sary for the ex­ec­u­tive chair­man to do all th­ese trans­ac­tions in Pere­grine shares. The pur­pose was cer­tainly to cre­ate wealth for him­self – and not nec­es­sar­ily for other share­hold­ers or for clients.

Pere­grine also cau­tioned on Sens on 5 Septem­ber last year that some­one un­der the guid­ance of chair­man Sean Mel­nick was ap­par­ently keen to make an of­fer for Pere­grine’s to­tal is­sued cap­i­tal. This cau­tion­ary was re­peated in Oc­to­ber and Novem­ber. In Jan­uary this year, the com­pany an­nounced that ex­ec­u­tive chair­man Sean Mel­nick was no longer in­ter­ested in mak­ing an of­fer to the other share­hold­ers. This caused the share price to fall fur­ther to 450c, be­fore it re­cov­ered re­cently to the cur­rent 650c-700c.

Pere­grine has just warned in a trad­ing up­date that its profit for the year to 31 March 2009 could be as much as 87% down on the 225c/share earned in the pre­vi­ous fi­nan­cial year.

Dur­ing this whole pe­riod of fall­ing profit, the ex­ec­u­tive chair­man clung stub­bornly to a mis­placed long po­si­tion in SSFs on the com­pany’s shares.

Ac­cord­ing to the trad­ing up­date, Pere­grine’s profit for the 2009 fi­nan­cial year could be some­where around 30c-35c/share. The shares of the coun­try’s lead­ing banks are cur­rently trad­ing at earn­ings mul­ti­ples of be­tween six and eight. Ex­pected div­i­dend yields are fluc­tu­at­ing be­tween 5% and 6,5%/year.

Pere­grine will prob­a­bly not – and in any case should not – de­clare any div­i­dend for the fi­nan­cial year to 31 March 2009 out of its sub­stan­tially lower profit. Last year, it still de­clared a fi­nal div­i­dend of 56c.

At the cur­rent price of 650c-700c, Pere­grine’s shares look ex­pen­sive. Af­ter all, that’s a his­tor­i­cal earn­ings mul­ti­ple of 20, without any div­i­dend, which is ex­pen­sive, com­pared to other fi­nan­cial ser­vices providers and even our large banks.

Spec­u­la­tion with SSF could cost him R100m. Sean Mel­nick

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