Debit or­der in­vestors bail it out

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS march@fin­week.co.za

IN MARCH ????? this year Fin­week noted that Pre­to­ria-based fi­nan­cial ser­vices group StratCorp (“StratCorp’s easy money”) had man­aged a most amaz­ing feat in rais­ing half its mar­ket cap­i­tal­i­sa­tion in a shares-for­cash is­sue. At that stage we were keen to iden­tify the “pub­lic share­holder” will­ing to in­ject R27,5m into StratCorp by sub­scrib­ing for 57,3m new shares at 48c/share.

Af­ter all that the “pub­lic share­holder” ef­fec­tively be­came the largest sin­gle share­holder in StratCorp and was aw­fully brave to fork out a sub­stan­tial sum to a strug­gling com­pany at a time when cap­i­tal is scarce. We can de­duce from StratCorp’s lat­est an­nual re­port that StratCorp Empowerment Hold­ings (SEH) – now listed as the com­pany’s largest share­holder, with a 34,69% stake – took up those 57,3m shares.

An ob­vi­ous ques­tion would be how a sin­gle share­holder could pos­si­bly gar­ner such a large stake in StratCorp in a shares­for-cash is­sue – an ex­er­cise that tra­di­tion­ally would re­sult in 3% to 10% of any listed com­pany pass­ing into the hands of sev­eral in­sti­tu­tional-type in­vestors.

But StratCorp passed a res­o­lu­tion at its AGM last year al­low­ing direc­tors to is­sue up to 50% of its is­sued share cap­i­tal. In the SEH trans­ac­tion it seems StratCorp’s direc­tors is­sued as many shares as they pos­si­bly could to a sin­gle in­vestor without trig­ger­ing a manda­tory of­fer to its re­main­ing share­hold­ers. Fin­week notes a sim­i­lar res­o­lu­tion is on the cards for StratCorp’s AGM next month.

At first glance you might be for­given for think­ing SEH was a re­lated party – es­pe­cially since CIPRO shows the com­pany’s direc­tors in­clude sev­eral ac­tive and re­signed direc­tors who are also for­mer direc­tors and cur­rent direc­tors of StratCorp.

How­ever, StratCorp CEO David Har­ing­ton stresses SEH isn’t in any way re­lated to StratCorp. He sug­gests CIPRO’s in­for­ma­tion is in­cor­rect. How­ever, Har­ing­ton de­clined to iden­tify the in­vestors or per­son­al­i­ties be­hind SEH.

While the emer­gence of a new ma­jor share­holder is a sig­nif­i­cant de­vel­op­ment, a per­haps more crit­i­cal con­sid­er­a­tion is what StratCorp’s fi­nan­cial state­ments would have looked like without that R27,5m cash in­jec­tion. In that re­gard you must re­mem­ber the R27,5m was “booked” on 27 Fe­bru­ary this year – a day be­fore StratCorp’s fi­nan­cial year-end.

Clearly, StratCorp needed fresh cap­i­tal as its op­er­a­tional cash flow was neg­a­tive to the tune of R23m over the year. The fact of the mat­ter is that StratCorp’s cash pile – af­ter the R27,5m cash in­jec­tion from SEH – was just more than R2m at its fi­nan­cial year-end. In other words, without the shares-for-cash is­sue StratCorp would have been in a rather hefty over­draft po­si­tion.

It seems the prob­lem with cash flow is that StratCorp has more than R50m tied up in “in­ven­to­ries”. Those “in­ven­to­ries” re­late to StratCorp’s prop­erty de­vel­op­ments, which nat­u­rally can only be banked once they’re sold. It’s clearly a tough mar­ket out there in res­i­den­tial real es­tate…

Af­ter pe­rus­ing StratCorp’s an­nual re­port it’s dif­fi­cult to com­pre­hend that a sin­gle in­vestor would find suf­fi­cient rea­son to buy so con­fi­dently into a strug­gling busi­ness. A crit­i­cal ques­tion would be whether the ar­range­ment be­tween StratCorp and SEH was mu­tu­ally ben­e­fi­cial. Judg­ing from StratCorp’s an­nual fi­nan­cial state­ments you could sus­pect StratCorp needed the cash from SEH a whole lot more than SEH needed an op­por­tu­nity to buy shares in StratCorp.

Fin­week man­aged to track down Mike Tshis­honga, who was still listed as an ac­tive di­rec­tor of SEH. Tshis­honga – a for­mer StratCorp di­rec­tor – was the for­mer deputy di­rec­tor-gen­eral at the Depart­ment of Jus­tice who blew the whis­tle on for­mer Jus­tice Min­is­ter Penuell Maduna’s re­la­tion­ship with liq­uida­tor En­ver Motala.

Tshis­honga says SEH com­prises mainly black in­vestors who con­trib­ute in­vest­ment sums on a monthly ba­sis. In­ter­est­ingly, StratCorp sub­sidiary StratEquity uses a sim­i­lar modus operandi to col­lect monthly in­stal­ments from mainly black in­vestors who are then in­vested in listed shares and ex­change-traded funds via StratEquity Empowerment In­vest­ments.

StratCorp’s an­nual re­port shows StratEquity has in ex­cess of 44 000 monthly sub­scribers on its books, and to­tal in­vest­ment funds re­ceived from clients dur­ing the year to end-Fe­bru­ary 2008 in­creased to R84,4m.

StratEquity also has to take credit for putting a large chunk of its in­vest­ment monies col­lected by monthly debit or­der for StratEquity Empowerment In­vest­ments into re­cently listed meat pro­ducer Best Cut Hold­ings – an illiq­uid com­pany that’s seen its shares fall heav­ily af­ter poor op­er­at­ing per­for­mances.

SEH – while ev­i­dently not re­lated to StratEquity – looks a sim­i­lar col­lec­tive in­vest­ment, save for the fact it ap­pears to have (so far) only one ma­jor listed in­vest­ment. Most col­lec­tive in­vest­ment schemes – unit trusts, be­ing the best known – that take in­vest­ment con­tri­bu­tions on a monthly ba­sis usu­ally in­vest in a va­ri­ety of shares or as­set classes to mit­i­gate risk. At this point it looks as if SEH will also be a pas­sive in­vestor in StratCorp.

The no­tice con­ven­ing StratCorp’s AGM shows no rep­re­sen­ta­tives from SEH have been nom­i­nated as board mem­bers. A share­holder body hold­ing more than 33% of a listed com­pany would cer­tainly covet one or two board seats… Nat­u­rally, you then have to ask who acts and speaks on be­half of those “scheme share­hold­ers”? Tshis­honga – a cur­rent di­rec­tor of Best Cut – says he and StratCorp non-ex­ec­u­tive di­rec­tor Mikesh Pa­tel look out for the SEH in­vestors. Tshis­honga says he’s pas­sion­ate about build­ing black empowerment and hopes one day StratCorp will re­ward SEH’s share­hold­ers with a div­i­dend.

De­spite Tshis­honga’s re­as­sur­ances, it’s cu­ri­ous the par­ties charged with manag­ing the SEH funds couldn’t have found a bet­ter – less risky – in­vest­ment propo­si­tion than StratCorp. No dis­re­spect to StratCorp, but this small cap com­pany can’t ex­actly be re­garded as per­fect fod­der for “wid­ows and or­phans”.

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