All the traps
The new listing not so efficient after all
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