All the traps

The new list­ing not so ef­fi­cient af­ter all

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

THE RE­CENT pri­vate place­ment and sub­se­quent list­ing of the shares of Ef­fi­cient Fi­nan­cial Hold­ings pro­vide an ex­cel­lent sum­mary of all the traps naïve in­vestors in new list­ings all too of­ten fall prey to. Ef­fi­cient is an as­set man­ager/stock­bro­ker that’s been built up rapidly over the past few years by a few smart youngsters un­der the guid­ance of well­known econ­o­mist Dawie Roodt.

Just fewer than 9m shares were of­fered to se­lect in­vestors at 500c each in April through a pri­vate place­ment. The lat­est trad­ing of the shares on the JSE was at 540c and at first glance it would seem as if the min­i­mum re­quired num­ber of 300 share­hold­ers for a main board list­ing should be quite happy. But that’s not so. Though a few shares have been trad­ing daily at 540c, the real mar­ket for the shares is as fol­lows: Sell­ers are of­fer­ing 3 900 shares at 540c and 5 300 at 545c.

On the buy­ing side there’s a sin­gle en­try by some­one, prob­a­bly a di­rec­tor, pre­pared to buy 10 000 shares at 200c. That’s right, 200c – ver­sus the is­sue price of 500c a few weeks ago and the ap­par­ent price of 540c at which the shares were trad­ing re­cently. It must be only the most naïve in­vestor who is still us­ing that 540c to value the shares they re­cently ac­quired at 500c.

The traps in the sup­ply and list­ing of Ef­fi­cient that naïve in­vestors fell into started as early as March, when it was de­cided to list the group. This isn’t the right time to list an as­set man­ager. In fact, the pop­u­lar­ity of as­set man­agers has fallen so sharply world­wide that Bar­clays plc is keen to give its as­set man­age­ment divi­sion away for al­most noth­ing.

Switzer­land’s UBS, once the world’s most pop­u­lar as­set man­ager, has set new lo­cal records for how much money can be lost. On the JSE, the share prices and prof­its of Barnard Ja­cobs Mel­let and Corona­tion – two far more ex­pe­ri­enced bro­kers and as­set man­agers than Ef­fi­cient – are pid­dling along and cur­rently very far from be­ing highly rated as good in­vest­ment op­por­tu­ni­ties by fel­low as­set man­agers.

The tim­ing of Ef­fi­cient’s list­ing was wrong and in­vestors are cur­rently pay­ing the price for that. The man­ner in which Ef­fi­cient of­fered its shares was also wrong. The first part was a pri­vate place­ment of 3 480 000 shares at 500c by the com­pany. The re­turn of around R17m went to Ef­fi­cient it­self. That’s good. How­ever, pri­vate place­ment as a method doesn’t re­veal the real value of the shares. Java Cap­i­tal – Ef­fi­cient’s of­fi­cial spon­sors – placed the shares with other bro­kers and as­set man­agers, who then of­fered them to clients. Some­times that method wrongly cre­ates an im­pres­sion of scarcity for the shares. In­vestors should rather fo­cus on a pub­lic is­sue that’s once, twice or even 10 times over­sub­scribed if it re­ally of­fers value. The op­po­site, of course, also ap­plies if not enough sub­scrip­tions are re­ceived for the of­fer.

The sec­ond trap was the si­mul­ta­ne­ous of­fer by the direc­tors, staff and friends of 4 574 000 of their own shares, also at 500c, for a per­sonal re­turn of R22 870 000 in their own ac­counts. That’s more than Ef­fi­cient re­ceived from its of­fer of 3 480 000 shares. The pri­mary rea­son for Ef­fi­cient’s list­ing now shifts from the in­ter­ests of the com­pany to an op­por­tu­nity for its direc­tors to place a large por­tion of their own un­sold shares or, in sim­ple terms, to sell them. Even the late Piet den Boer didn’t do that with Brain­ware.

Re­mem­ber, if a com­pany lists pri­mar­ily in or­der to give its direc­tors the op­por­tu­nity to sell some of their shares, warn­ing lights start to flash.

Ef­fi­cient even went slightly fur­ther by also of­fer­ing 600 000 shares at 400c to spe­cial friends who had helped es­tab­lish the busi­ness. Cer­tain re­stric­tions were ap­par­ently placed on the trad­ing of those shares. How­ever, it doesn’t look right if every­one doesn’t pay the same price.

The big­gest slip up – and the one that

will prob­a­bly be re­mem­bered long­est by dis­sat­is­fied in­vestors – is the ex­tremely poor fi­nan­cial re­sults Ef­fi­cient has just re­leased for the six months to Fe­bru­ary 2009. The fall of nearly 80% in profit per share from 50,29c for the same pe­riod last year to just 11,71c for the lat­est six months is far more than the pos­si­ble drop fore­seen in its prospec­tus.

The direc­tors give many rea­sons for the fall, such as the col­lapse of the world’s stock mar­kets and the sharp fall in the com­mis­sion they earned from the weaker per­for­mances of their clients’ port­fo­lios. How­ever, those are all fac­tors a good man­age­ment must have known about when some of its own shares were of­fered at 500c each at end-March. Sup­port­ers of Ef­fi­cient’s share plac­ing may rightly won­der whether they were not mis­led some­where.

For the six months to Fe­bru­ary, Ef­fi­cient earned 11,71c/share. For the six months to 30 Au­gust 2008 it couldn’t have been much more. For the 18 months to 31 Au­gust last year the profit was 94,52c, of which 50,29c was earned in the six months to Fe­bru­ary 2008.

It looks as if Ef­fi­cient’s real profit for the cur­rent 12 months to Fe­bru­ary was be­tween 30c and 40c/share. That’s far too lit­tle to jus­tify the price of 500c at which the shares were of­fered to the un­wary.

Ef­fi­cient’s net as­set value is given as 161,7c/share. The net tan­gi­ble as­set value cal­cu­lated by the com­pany was 28,20c/ share. In its bal­ance sheet there are en­tries of R27,986m for in­tan­gi­ble as­sets and R20,259m for good­will. In­tel­li­gent in­vestors don’t like pay­ing for that kind of as­set.

Stock mar­kets have been re­cov­er­ing world­wide since Fe­bru­ary and Ef­fi­cient’s in­come for the six months to Au­gust this year could re­cover sub­stan­tially. Profit for the 12 months to 30 Au­gust 2009 could be some­where be­tween 30c and 35c/ share. Com­pared with other shares in the sec­tor Ef­fi­cient shouldn’t trade at an earn­ings mul­ti­ple of more than about seven times its profit.

The pur­chase price of 200c on the JSE – even though it’s far from the is­sue price of 500c – is looking in­creas­ingly like the cor­rect price. That puts a mar­ket value of less than R100m on Ef­fi­cient, which is cer­tainly too small for the more con­ser­va­tive in­vestor.

Bad guid­ance. Dawie Roodt

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