Diamonds & Dogs: Is a good company a good investment?
The 1HY2012 reporting season has started in earnest with a couple of trading updates coming through from Ok Zimbabwe, Delta Beverages & Econet Wireless.
Diamonds & Dogs is quite sure a number of investors will be lining up on the sidelines of the financial track as they decide which counters to put their money on.
Diamonds & Dogs thus seeks to throw some spanners into those investment decisions for the promotion of “Investing Wisely”.
Investors often don’t make a distinction between a good company and a good stock – a very important and often an emotional error. It is perhaps one of the biggest fallacies in investing.
It is very easy to identify a great company: it has great brands, a bullet proof balance sheet, often great margins (true for consumer but not the case for retail stocks), high return on capital – the usual suspects. However, EVERYBODY recognizes those qualities and thus turning these companies into “religion stocks” - you-cannot-go-wrong-owning-this-company type of stocks and thus pushing their valuations to ridiculous levels.
Diamonds & Dogs gets to look at tens of companies every year at various levels of analysis. Often he finds a company he’d love to own because of the quality of its business, however, its stock doesn’t meet the valuation criteria.
It’s placed on the watch list. To be more exact he figures out what P/E (or price to cash flows) he is willing to pay for the stock and once it reaches the valuation target he’ll take a second look.
Diamonds & Dogs is suggesting you do the same before you pile into the “blue chips”. Of course you will not get fired for owning Delta, Innscor, SeedCo, etc but are the valuations OK?
Diamond: Starafrica (US1.50c, WTD: +64.84%, YTD: +50.00%, Mkt Cap $7,777,037)
Diamonds & Dogs had just had sight of the Starafrica numbers. They are not pleasing to look at.
In the same set of results there is a disclosure to the effect that prior period profit was overstated by about $750,668 coming in the form of understated interest expense ($635,580) and understated cost of sales ($115,088) on an after tax basis.
The loss for the FY2012 from continuing operations was $6.2m compared with $7.4m whilst $2.2m was lost from discontinued operations giving a loss for the period of $8.4m.
The price did rally last week. Diamonds & Dogs is not sure whether it was in anticipation of these results or it was pricing the addition of Joe Mtizwa’s appointment to the Starafrica Board of Directors.
Diamonds & Dogs doubts if it’s the former because operationally the company is still posting significant losses.
He however lauds management for finally deciding to bury the dead and focus on sugar refinery only.
Only last week at the Delta beverages AGM, the Delta Execs did highlight that Zimbabwe produces adequate raw sugar but has no sufficient capacity to produce the sugar quality required for beverages manufacturing.
We all hope Joe will point the Board in the right direction this time and make them more acutely aware of the opportunity cost being sufefred by Starafrica shareholders because of failure to satisfy Delta’s demands.
Starafrica’s Weekly Trading Statistics
Attribute
|
23-July
|
24-July
|
25-July
|
26-July
|
27-July
| |
Starafrica
|
Price
|
0.91c
|
0.91c
|
Bid 1.00c
|
1.31c
|
1.50c
|
Volume
|
20,000
|
64,385
|
-
|
409,374
|
117,500
| |
Value
|
$182.00
|
$585.90
|
-
|
$5,363.00
|
$1,762.50
|
Dog: TN Bank (US20c, WTD: -33.11%, YTD: -0.38%, Market Cap $27,709,556)
Diamonds & Dogs did have some discussions with a couple of stockbrokers concerning listing prices and subsequent trades/trends thereafter.
TN Bank was a typical case in point where the share listed somewhere around 32c but has been doing a Facebook ever since.
The question that Diamonds & Dogs had was “Who sets the listing price?” to which he was advised that the exchange allows for price discovery.
Well, price discovery indeed. However what got Diamonds & Dogs asking is why there continued to be a huge disparity between what buyers want (bids) and what sellers want (offers). A 10c/24c quote has a discount (or implied upside of 140%...pardon the crude mathematics here). Does it show meeting of investor minds or at least point to eventual meeting of minds.
For the record, Diamonds & Dogs has nothing against TN Bank but thought that these huge variations (which throws in the gutter IFRS requirements for marking to market using bid prices) have a lesson for the market. Is the ZSE so inefficient or rather the price discovery process so inefficient as to create such discounts or premiums in other cases?
Just thinking aloud maybe!
TN Bank Weekly Trading Statistics
Attribute
|
23-July
|
24-July
|
25-July
|
26-July
|
27-July
| |
TN Bank
|
Price
|
Offer 25c
|
17c/25c
|
17c/24c
|
20c
|
10c/24c
|
Volume
|
-
|
-
|
-
|
482
|
-
| |
Value
|
-
|
-
|
-
|
$96
|
-
|
The Weekly Bulls n Bears
Bulls
|
Bears
|
ZSE Round Up
Market Performance:
§ Total market capitalisation rose 1.25% to close the week at $3.70bn. YTD -5.62%.
§ The industrial index closed the week 1.16% higher at 132. The mining index closed the week 5.28% higher at 105.6.
§ Amongst heavyweights, Innscor and Econet recorded gains for the week of 3.51% and 0.71% respectively while Delta was unchanged.
§ Star Africa, Apex and Riozim were the top gainers of the week, up 64.84%, 25%.00 and 21.28% respectively.
§ TN Bank, ART and LifeStyle Holdings recorded the most significant losses, down 33.11%, 16.67% and 11.11% respectively.
Flows for the week:
§ Volumes traded and turnover totalled 73mn shares and $10.6mn respectively.
§ Share volumes averaged 14.6mn shares per day.
§ Average daily value traded was $2.13mn for the week. Trades were dominated by Delta, Econet and Hunyani which made up 55%, 6% and 18% of turnover respectively.
Clarification:
The last edition of Bullish Thoughts on Insider Trading did include some comments on the share price movement of Falgold and subsequent publishing of a cautionary which cited BancABC Stockbrokers as the financial advisors. Bullish Thoughts would like to point out that the article erroneously indicated BancABC as the financial advisors yet BancABC Stockbrokers are the sponsoring brokers in the aforesaid transaction.
Furthermore, it has been brought to Bullish Thoughts’s attention that it was felt the article implied BancABC Stockbrokers were involved in insider trading on Falgold shares. Bullish Thoughts would like to point out that that was not the message and BancABC Stockbrokers were mentioned only in as far as they were a sponsoring broker (read financial advisor) a fact of which was on the cautionary statement.
However, Bullish Thoughts unreservedly apoligises to BancABC (both parent company & the stockbroking house) for any inconvenience otherwise caused.
Invest Wisely!
Notes
**The author of this report does not hold shares in any of the companies discussed/ mentioned in this report.
Bulls n Bears
Email: bulls@bulls.co.zw
Website: www.bulls.co.zw
Blogspot: http://bullsnbearszimbabwe.blogspot.com/
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