Diamonds & Dogs: Is a good company a good investment?

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.

** Statistical information was sourced from ZSE, IH Securities & Bulls n Bears (www.bulls.co.zw)

Bulls n Bears

Email: bulls@bulls.co.zw

Website: www.bulls.co.zw

Blogspot: http://bullsnbearszimbabwe.blogspot.com/

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CONFIDENTIALITY NOTE:

This message is intended for the addressee only, as it contains information that is privileged, private and confidential. If you are not the intended recipient of this message, you are notified that any distribution, use of copying of this communication is strictly prohibited. If you have received this communication in error, please notify the sender immediately. Bullish Thoughts, Diamonds & Dogs and Bulls n Bears are products of Faith Capital (Pvt) Ltd. Faith Capital (Pvt) does not and cannot warrant the information sent via electronic mail or results obtained by using this information. This report has been prepared by Faith Capital (Pvt) Ltd for general information purposes only and does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The information contained in this report has been compiled from sources believed to be reliable, but no representation or warranty is made or guarantee given as to its accuracy or completeness. All opinions expressed and recommendations made are subject to change without notice. Securities or financial instruments mentioned herein may not be suitable for all investors. Securities of emerging and mid-size growth companies typically involve a higher degree of risk and more volatility than the securities of more established companies. Neither Faith Capital nor any other member of Faith Capital nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Recipients of this report shall be solely responsible for making their own independent investigation into the business, financial condition and future prospects of any companies referred to in this report. Other Indices quoted herein are for guideline purposes only and sourced from third parties.

Bullish Thoughts: Insider trading still rampant on the ZSE

Bullish Thoughts did say in the last two editions of Diamonds & Dogs that there was really something funny with Falgold’s price.

The way it was moving up on tidly widly volumes pointed to share price manipulation…at least that’s what Bullish Thoughts had in mind.

Falgold went on to be the “largest listed mining company” by market cap in the process.

Counter	Previous Price USc	Shares In Issue	Market Cap ($)
BINDURA	3.10	126,048,355	3,907,499
FALGOLD	35.00	111,165,131	38,907,796
HWANGE	23.00	166,203,894	38,226,896
RIOZIM	55.00	29,986,011	16,492,306

Eventually Falgold did put up a cautionary this week to the effect that certain discussions were underway that would have a material impact on the company’s share price and it was in one of the small dailies with BancABC being in the fray as well as the financial advisor.

Now, does the share movement not point to insider trading here? A 250% gain in less than 30 days! SEC and the ZSE should do something about these developments.

Lay as he is, Bullish Thoughts had pointed out that the on the current fundamentals and funding gaps, the price movement was not justifiable…

Without belabouring the point, the issue here is that regulators and market players have a duty to promote the integrity of capital markets through ensuring that disclosures are made but quite importantly timeously as well otherwise what’s the point now when the prejudice has already happened.

Reminds us of the PPC fungibility issue where stockbrokers who had applied for the authority from RBZ bought the same shares in anticipation of the partial fungibility and regulators did nothing about it.

CBZ & ZB traded in closed periods in own shares and they got away with a warning.

Companies note severe losses but they do not give trading updates/ cautionary statements ahead of the results.

It’s not only the ZSE where regulators are failing investors and the general public.

Look at banking. The RBZ says NPLs are about 37% of loan book. Banks go on to provide only an average of 2% in the accounts and we all wait for the banks to go bust to be able to check which ones are the bad apples.

Surely, the regulator can do better to protect and promote market confidence.

No one wants to be the Greater Fool especially where US$ are involved.

Minimum Capital requirements up for banks & Insurance firms

Capital is scarce! That’s the first lesson in Form 3 Economics in high school.

Recently on the Zimbabwe financial markets regulators have indicated potential for increasing capital requirements for insurance companies and banks.

Bullish Thoughts welcomes the revision particularly for insurance businesses but at the same time feels that IPEC should decisively deal with issues of rate undercutting which corrodes the same capital.

Capital alone is not going to be the solution without the regulators being hard on brokers (who tend to promote rate undercutting through threatening “explicitly or otherwise” to move accounts to other insurers when quotes are deemed high.

On the banks though, the main problem has always been the issue of the capital quality. What really is tier 1 or tier 2 or tier 3? For banks these are largely paper entries unlike insurance where the capital can be physical buildings, money & bond markets instruments, cash or equities.

The central bank has to also insist on the banks having real & financial assets on the balance sheet rather than than the Zim dollar conversion paper entries masked as reserves and purpoting to be capital upon which a risk can be taken. It’s not capital in the proper sense of it which is why even with humongous amounts of “capita’ some banks could still not settle depositors demands!

Lastly, can someone educate Bullish Thoughts on why StanChart for example should have $250m in capital and CBZ Bank only $25m (of course CBZ has more than $25m) as a bare minimum?

Are foreign banks engaged in risky banking practices?

Note 1: New Dawn Trading Update

New Dawn Mining Corp. (TSX: ND)  a junior gold company focused on developing and expanding its mining assets and operations in Zimbabwe, reported consolidated gold production for the quarter ended June 30, 2012 of 9,536 ounces (8,702 ounces attributable to New Dawn, after adjusting for the minority interests' share of gold production), as compared to consolidated gold production for the quarter ended June 30, 2011 of 6,841 ounces (6,355 ounces attributable), an increase of 39.4% (36.9% increase on an attributable basis). 

As compared to consolidated gold production for the previous quarter ended March 31, 2012 of 8,736 ounces (7,926 ounces attributable), consolidated gold production for the current quarter ended June 30, 2012 increased by 9.2% (9.8% increase on an attributable basis).

Consolidated gold sales for the quarter ended June 30, 2012 totalled US$15,162,843 (US$13,776,012 attributable) at an average sales price per ounce of gold of US$1,608, as compared to US$9,791,973 (US$9,197,031 attributable) for the quarter ended June 30, 2011, an increase of 54.8% (49.8% increase on an attributable basis).

As compared to consolidated gold sales for the previous quarter ended March 31, 2012 of US$14,857,212 (US$13,551,287 attributable), consolidated gold sales for the current quarter ended June 30, 2012 increased by 2.0% (1.7% increase on an attributable basis). This increase in revenue for the quarter ended June 30, 2012 was accomplished despite a decline in the average price per ounce of gold to $1,516 for the quarter ended June 30, 2012 from $1,685 for the quarter ended March 31, 2012.

100% of proceeds from gold sales were received in US dollars.

At June 2012 quarter end, an additional 2,378 ounces of gold awaited export documentation for sale in South Africa, and will be included in July 2012 sales.

The Company will file its unaudited consolidated financial statements and related materials for its fiscal third quarter ended June 30, 2012, and report its consolidated results of operations for such period, on or before the filing deadline of August 14, 2012. 

New Dawn is a junior gold company currently focused on expanding its gold mining operations in Zimbabwe. New Dawn owns 100% of the Turk and Angelus Mine, the Old Nic Mine and the Camperdown Mine. In addition, New Dawn owns approximately 85% of the Dalny Mine, the Golden Quarry Mine and the Venice Mine (currently not in operation), and a portfolio of prospective exploration acreage in Zimbabwe. These six mines, five of which are currently operational, are divided into three significant gold camps, and have a combined milling capacity of 2,000 tonnes per day.

In addition to gold production, New Dawn is also actively exploring on highly prospective ground employing modern exploration techniques and deploying capital in Zimbabwe, a country that is proven to be geologically rich, highly prospective, and significantly under explored.

New Dawn, with its large gold resource, existing mine sites and production facilities, and current exploration programs, is a growing gold mining company in Zimbabwe, active in both gold production and gold exploration.-New Dawn

Bullish Thoughts: How Divine Ndhlukula became one of Africa’s top women in business

Bullish Thoughts loves it when there are inspirational Zimbabweans whose stories we can retell.

The story of Securico has been told too often but when Bullish Thoughts learnt that it began in 1995 when he was just starting his Form 1 at St Francis of Assisi, he got really fascinated.

Patience is a virtue they say!

Bullish Thoughts reproduces the story of Securico courtesy of Entrepeneur watch & Kate Douglas.

Divine Ndhlukula started SECURICO, one of Zimbabwe’s largest security service providers, with only four employees in 1995. Now the firm has over 3,500 employees, including 900 women. Ndhlukula is a women entrepreneur in a typically male domain and is an outspoken women empowerment activist in Africa. How we made it in Africa asks Ndhlukula about what it is like to break down stereotypes and be a successful woman entrepreneur in Africa.

Divine Ndhlukula with Sir Richard Branson

What inspired you to start a security service company?

Firstly, I needed to create a decent livelihood for my family and I always knew that I wanted to go into business from a very tender age and would tell my friends in high school that the business I was going to start was going to be significant in size.

Secondly, I identified glaring gaps in the quality of service and professionalism in the private security sector and this inspired me to start a security company and make a difference.

Thirdly, I wanted to make a difference to disadvantaged women who could not get opportunities to get formal employment and I knew the security industry was a mass employer. I became an activist for the empowerment of women when I was very young, at school. When I started working I joined women empowerment groups and I got to meet various role models who inspired me to seek personal self-actualisation. That inspiration assisted me in my professional career and I was able to climb the corporate ladder. By the time that I saw the business opportunity in the security sector I was ready – both emotionally and experience wise.

What major challenges have you faced since starting SECURICO?

The first major challenge was that the industry was heavily male dominated and there was a general perception that security was not a job for women. The challenge was to convince the market that I could do the job despite the fact that I was a woman.

Clients even refused to be guarded by women and it took a lot of persuasion to convince them that their security would in fact improve if they accepted women to guard them. Changing that negative perception about women was not easy but my team and I persisted and with time women were widely accepted in the industry.

The other challenge was that I was coming from a totally different industry and had no knowledge about how security organisations operate. I therefore had to learn the job from scratch. My aim was to learn the job, innovate and improve and perform better than the competition and that worked quite well.

Another challenge was that the industry was dominated by big players who had been in the business for a long time. They had the brand and financial muscle but I was certain that I could beat them on service quality. I also struggled to get funding for the new business. At that time the economic challenges that faced Zimbabwe for the next decade were just starting and the financial sector was very jittery so they mostly refused to provide funding.

I was also unlucky in that I was a woman venturing into a business where there was a general belief that women would not succeed and this contributed to the failure to secure funding. In the end I decided to make do with the little that I had and eventually I grew the business by ploughing back all the profits.

Where would you like to see your company in 10 years time?

In ten years time SECURICO shall be the biggest name in the private security services sector in the Southern African Development Community (SADC) region.

How did your business manage to survive during the Zimbabwean economic crisis?

The period of the economic crisis was the most difficult for SECURICO but ironically the company actually grew and gained a lot of the market by taking advantage of the hardships that competitors were facing. When the crisis started to bite I assembled a taskforce comprising of identified individuals at various levels. We tasked this team to brainstorm and come up with ideas on whom to tackle the various challenges that we were facing.

The situation called for people to think outside of the box and it is quite amazing how we got excellent innovations that we implemented to our advantage. We managed to keep ahead of the situation because we kept changing our strategy to suit the current situation. Things were changing very fast during those days and something that worked for you at the beginning of the week would be useless by the end of that same week. This called for versatility, constant adaptation and use of creative business methods.

In the end we used a raft of strategies such as providing temporary accommodation to employees, negotiating to be paid in kind for services, paying employees using basic commodities instead of cash, providing transport to employees, deferring payments for service for strategic clients, rewarding employees for going the extra mile, going to the rural areas to recruit staff and a lot more other strategies. We also introduced our Excel Guards – highly trained operatives who were paid twice the normal salary. We sold this new service offering to targeted clients who had the funds to pay a premium price for high quality services.

Looking at that time in retrospect I attribute our survival and growth to the decision to involve everyone in tackling the challenges that the company was facing.

What is the biggest mistake an entrepreneur can make when starting a business?

There are three big mistakes in my opinion. One is failing to learn the job adequately. Second one is not having a strategic vision and thirdly, lacking financial discipline to distinguish personal funds from business funds thus stifling the business from growing.

What does the Zimbabwean economic climate look like today? Is it a good time to start a business in Zimbabwe?

There are a lot of opportunities in Zimbabwe. In fact there are more opportunities now than ten years ago. During the last ten years the economy shrank considerably and there is a sort of a vacuum now. There are very few formal jobs so a big chunk of the population is making a living through various enterprises.

It’s like everyone is an entrepreneur now because all the workers who were laid off are using their skills to start small businesses that sustain their families. Most of the money in Zimbabwe now is in this informal sector were things like furniture, basic foodstuffs, clothes and other services are found on the streets and home industries.

The way I see it people are starting small now in various ventures but in a few years a new breed of entrepreneurs will emerge. It certainly is a good time to start a business in Zimbabwe. In fact we have seen a lot of people coming to start businesses in Zimbabwe especially by people from the Asian countries.

Why do you think there are so few woman entrepreneurs in Africa? Do you think this is changing?

The African economy is actually driven by women at the micro level. Most of the African population lives in the rural areas and women are more active in economic activities there than men mainly for family survival.

However we have very few women entrepreneurs who break into big business, mostly due to cultural reasons. When growing up women are never primed to become leaders. Rather the stereotypical role is that a woman should become a good wife and mother therefore many women simply strive to fulfill this role. Even at school, boys are expected to perform better than girls and in the professional world women simply drift into certain professions that are regarded suitable for women.

So at the end of the day it’s our society that mostly militates against the development of women entrepreneurs. Motherhood is also a big factor that acts as a drawback. Most people do not realise that raising children is a full time job and those women who manage to raise children and advance in their professions at the same time are really strong.

The good thing in Zimbabwe is that we have a very good education system so the new generations of parents are more enlightened about issues affecting the girl child and are raising them differently. This will afford space for women in the future.

Any advice to budding women entrepreneurs?

Women entrepreneurs have to work twice as hard to succeed. They should expect certain difficulties to crop up merely due to the fact that they are women. In such situations the best thing to do is to remain resolute, focused, ethical and preserve your integrity.

It is also very important to network and get to know people – the right people with the potential to help your business either as customers, suppliers or associates.

Keep a sober head and remain focused. Do not rush to conclude that you have made it. Always expand your dreams and reinvest your money into the business. Avoid the trap of leading a luxurious life at the expense of the business.

Bullish Thoughts hopes that whether you are in Zimbabwe, the rest of Africa and beyond you have been inspired. Perhaps you can steer someone else in the bullish direction and 10 years from now we will all be celebrating their success.

Bulls n Bears

Email: bulls@bulls.co.zw

Website: www.bulls.co.zw

Blogspot: http://bullsnbearszimbabwe.blogspot.com/

If you wish to unsubscribe from this service, please click here.

CONFIDENTIALITY NOTE:

This message is intended for the addressee only, as it contains information that is privileged, private and confidential. If you are not the intended recipient of this message, you are notified that any distribution, use of copying of this communication is strictly prohibited. If you have received this communication in error, please notify the sender immediately. Bullish Thoughts, Diamonds & Dogs and Bulls n Bears are products of Faith Capital (Pvt) Ltd. Faith Capital (Pvt) does not and cannot warrant the information sent via electronic mail or results obtained by using this information. This report has been prepared by Faith Capital (Pvt) Ltd for general information purposes only and does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The information contained in this report has been compiled from sources believed to be reliable, but no representation or warranty is made or guarantee given as to its accuracy or completeness. All opinions expressed and recommendations made are subject to change without notice. Securities or financial instruments mentioned herein may not be suitable for all investors. Securities of emerging and mid-size growth companies typically involve a higher degree of risk and more volatility than the securities of more established companies. Neither Faith Capital nor any other member of Faith Capital nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Recipients of this report shall be solely responsible for making their own independent investigation into the business, financial condition and future prospects of any companies referred to in this report. Other Indices quoted herein are for guideline purposes only and sourced from third parties.

Bullish Thoughts: You will be killed, made into mincemeat and packaged as dog food!

The 0913 people…
 
Does that sound familiar? Does anyone remember the Nissan NP300 single cab trucks that were branded the 0913 people?
 

Those were the days! Bullish Thoughts remembers buying his 0913 line for $65 when sanity was returning to the mobile sim cards market.
 

It was quite interesting to see an article in the Herald of 19 July 2012 indicating that some Econet sim cards had seen prices skyrocketing to $20 at a time where Telecel is saying $1 for 2 sim cards.
 

Bullish Thoughts got thinking…Econet is surely doing something right in the telecoms sector to warrant a black market premium of +800% on its sim cards.
 

There is no doubt that despite the relatively high prices, Econet Wireless still offers the best internet and voice connectivity deal for the mobile user.
 

Still on Econet Wireless, it was quite interesting to read the Econet Wireless CE update to Parliament. Not that he said anything new… its stuff we all knew…that Net*One refused to share its base station towers when it still boasted of bringing “the world in your pocket”. What happened in between is history suffice to say Econet Wireless had eureka moment and got “inspired to change your world” and Net*One is now crying foul.
 

There is a lesson to be learnt from this by all would be entrepreneurs and business managers. Do you really understand what gives you competitive advantage? Isn’t there a competing business that will leap frog your business by just a slight different value proposition?


Are you sure that you have got your business model right to the extent that you will not be left claiming that you have “the widest coverage” when all mobile phone users including my grandpa in Bhegedhe know who is the boss on coverage?

 
Apply your mind and introspect your business model and value proposition. Do you have a unique advantage or you will be history once another player lands in your space?

 
Recently Econet Wireless announced a slash of the 4G Mobile WiMax service prices and a return of the Mobile WiMax dongle that hasn’t been on the shelve since a while ago.

 
The slash is quite significant and outright makes redundant the need for a 3G dongle. For US$45 dollars you can purchase a ZTE TU25 Mobile WiMax dongle and be charged just US2.5c per megabyte for Internet.

 
To understand just how big the price slash is, consider that the same dongle used to cost a staggering $175 just two years ago and the price per megabyte was 15 cents just weeks ago.


 
Was/ Is price your competitive advantage? If so, you are probably history!

 
One last issue on value proposition is that never make a mistake when you introduce a competing product! Do you remember the EcoCash advert/ by-line:-
 

“No new sim card, no bank account, works across all networks”.
 

You get the idea, don’t you? Competition will “kill you, make you mincemeat and be package as dog food”!

 
 
The mid term fiscal review...

 
Bullish Thoughts can only say “YAWN!!!!!!!!!”