A haunted home?
One would think a decade and a half is time enough for the oft-unforgiving market to forget past infractions and injuries. Well, specialist retailer and financial services company Homechoice International is about to find out. The company, which has ambitions to grow into a multiplatform retailer with a strong micro-lending offering, recently indicated a willingness to go to the market to raise fresh capital to fund these growth initiatives. How much capital is to be raised has not been confirmed, but Homechoice CEO Shirley Maltz says R1bn would be the minimum target.
Presuming a large strategic investor does not emerge — would acquisitive Long4life be interested? — a successful capital raising would entail several deep-pocketed institutional shareholders clambering aboard.
At face value Homechoice looks a compelling proposition. Despite a strong run in the shares to a high of R47, it still trades on a trailing earnings multiple of about nine — well below the traditionally richer multiples tagged to retail stocks with fair growth prospects.
The company’s track record — as pointed out in a press release around the potential fund raiser — is stellar. Revenue has grown consistently at a compound annual growth rate of 21%/year since 2008, from R557m to R3bn. Operating profit has grown 31%/year over the same period, to R752m. The dividend is quite generous — backed by some convincing operational cash flows.
It will be intriguing to gauge whether a nasty legacy issue comes back to haunt Homechoice. Older readers may remember that the company was floated on the JSE at the tail-end of the late 1990s new-listings boom. It raised a fair slab of capital, and enjoyed a brief growth spurt. Then things went south, and in 2003 its major shareholder — founder and CEO Rick Garratt (Maltz’s father) — proposed buying out minority shareholders and delisting the company. The buyout price was a cheap shot at 18c/share and, if memory serves, far less than the value of the debtors’ book.
Homechoice had raised capital of about R220m during its time on the JSE, and was being bought out in a scheme that valued the company at a smidgen of the funds raised — in a plan initiated by the very executive who had got the firm into a tangle in the first place.
While there was stern resistance from a group of minority shareholders, Garratt (despite pleading from the JSE) controversially voted his shares to ensure the contentious buyout scheme passed. It felt, smelt, looked and sounded like corporate larceny.
History lesson
Clearly some investors have not forgotten the events of 15 years ago. One veteran fund manager is appalled by developments, saying Homechoice is relying on poor institutional memory. “It does seem outrageous that a company that essentially flipped a finger at the market can now simply waltz back to the JSE and raise the fresh capital it needs for growth.”
What might make matters worse is that Homechoice’s capital raise will be coupled with an exercise that will allow Garratt and another large strategic investor to sell down an (unspecified) portion of their shareholdings.
When Garratt delisted the company in 2003, the inferred value was about R25m, compared with a current market value of close to R5bn. One could argue that he got superbly wealthy at the expense of institutional shareholders whose mandates precluded them from staying invested in an unlisted company.
Of course, many of the asset managers that will be weighing up the merits of Homechoice’s upcoming fundraising exercise were probably still in short pants when the company’s delisting debacle went down. Hopefully there is some googling of the delisting, because there is some evidence that Garratt knows when it’s time to pump shares into the market and when it’s time to buy them back.
The 2003 Homechoice buyout scheme felt, smelt, looked and sounded like corporate larceny