Diamonds & Dogs: Are stock market analysts scared of making wrong recommendations?

 

Diamond: Meikles Africa (US20c, WTD: +17.60%, YTD:  23.50%, Mkt Cap $49,074,958)

Diamonds & Dogs gotta say that if wishes were horses, he would have preferred the Meikles Africa of pre-demerger period with Kingdom Financial Holdings.

Those days, Tanganda was separately listed and therefore had more financial disclosure when it reported its financials.

Essentially, the information was fairly easy to understand. Now Tanganda is reported on just like TM & the departmental stores implying more difficulty/ less financial info availability.

Back to the parent company: Meikles Africa used to be a blue chip stock, the kind where a fund manager of stockbroker would just paste a buy or recommendation without doing any analysis at all.

It was deemed a defensive stock, the TM Supermarkets taking care of the ever consumptive economy, departmental stores catering for the credit market while the hotel business was the icing on the cake given the Leading Hotels of the World affiliated Meikles has been the best hotel in Zimbabwe even post dollarization. So the assumption was that cash would flow to the business.

The stock even traded at 82c on 29 & 30 June 2009 (note that the entire market was close to an all-time high). The stock fell and seemed to have a support level at 55c, then 32c then 18c before trading as low as 12c.

The movement from an all-time high of 82c post dollarization to a low of 12c represented a capital loss of 85%. Currently the price is around 20c which is still 75% lower for the greater fool which bought at 82c and 64% lower if bought at 55c.

Whilst price is moving up, there has been no resolution to the c$60m debt that the group is saddled with.

That amount of debt is every investor’s worry. Won’t Meikles Africa do another RioZim…Lose shareholder value further while investors suck up the price trend reversal?

Diamonds & Dogs will be watching the space especially on the fundraising issue given that a sum of $200m has already been thrown around.

It is envisaged that the funds will be raised through largely debt and also offshore. It would be interesting to see if Meikles Africa can attain the funders’ confidence the extend of Econet Wireless (Zimbabwe & Global) that has seen it raising a $300m syndicated facility locally and offshore over and above series of finance facilities from regional finance institutions.

Finally, have you noticed that fewer and fewer stockbrokers, fund managers and analysts are rating Meikles Africa?

Should be all scared of making a wrong call especially in the wake of having gotten it wrong on Starafrica, TA, RioZim and Bindura Nickel!

Or may be the majority of stock market research peddlers are sell side analysts? Just wondering aloud! But whatever the reason, the ZSE generally is crying for quality research reports and sound analysis whether buy or sell side.

Meikles’ Weekly Trading Statistics

	Attribute	08-Oct	09-Oct	10-Oct	11-Oct	12-Oct
Meikles	Price	17.02c	17.5c	20c	20c	20c/21c
	Volume	7,181	3,092	3,127	35,380	-
	Value	$1,222.21	$541.10	$625.40	$7,076.00	-

Dog: Afre Corporation (5c, WTD: -33.33%, YTD:  +66.67%, Market Cap $10,856,195)

Diamonds & Dogs will not deliberate much on the capital loss registered by Afre Corporation in the past week given that the volumes and value of trades are just over $800 for the whole week.

Instead he takes a look at the now public rights offer document. Afre Corporation recently published a cautionary/ circular with the details of the rights offer that had been pending for a long time. The rights offer will be deliberated on 26 October at an EGM, the same meeting which will deliberate the outstanding directorship changes as recommended by IPEC.

Approximately US$8,630,675 is expected to be raised by way of offering approximately 162,842,928 Rights Offer ordinary shares of nominal value of US$0.001 at a price of US$0.053 per share to holders of Afre Corporation shares on the basis of three (3) new ordinary shares for four (4) ordinary share already held.

The Rights Offer shares are payable in full upon acceptance and within the Rights Offer period, and will rank pari passu with all existing Afre Corporation ordinary shares including the right to receive all dividends and other distributions thereafter declared, made or paid on the issued ordinary share capital of Afre Corporation with effect from date of issue.

The Board indicated that the Rights Offer is being undertaken to address minimum capital and solvency requirements of Afre Corporation's insurance businesses, namely TristarInsurance, FMRE Life & Health, FMRE Property & Casualty Zimbabwe and FMRE Property & Casualty Botswana.

It is interesting to note that the second biggest life insurer and health funder, First Mutual Life is not part of the capitalization drive.

A scan at the 1HY2012 financial numbers from First Mutual Life shows stable business growth which obviously has had an impact on the balance sheet growth of the same business

First Mutual Life Gross Premium Income Analysis
	June-12	June-11	Growth
	$’000	$’000	%
Life assurance	4,825	4,065	19%
Medical Savings Fund	17,634	14,712	20%
Employee Benefits	5,406	8,278	-35%
Total	27,865	27,055	3%

The business has stabilized significantly post dollarization with the fairly new Medical Savings Entity now accounting for a big chunk of Afre Corp revenues whilst still seated at a health claims ratio of 67% well below regional averages of 90%. Whilst Employee Benefits did witness a downward swing in premiums largely emanating from the loss of investor and policyholder confidence during the tumultuous 2010/2011 period, the unit is still profitable and is certainly going to build upon the leadership renewal that has happened at the holding company.

First Mutual Life Claims Analysis
	30-Jun-12	30-Jun-11	Growth
	$’000	$’000	%
Life assurance	1,575	1,649	-4.5%
Medical Savings Fund	11,732	11,176	5.0%
Employee Benefits	1,613	2,928	-44.9%
Total	14,920	15,753	-5.3%

The Rights offer proceeds are expected to be utilized as follows:-

	Amount
	US$
Recapitalisation of FMRE Life & Health	$1.5m
Recapitalisation of FMRE Property & Casualty (Zimbabwe)	$1.6m
Recapitalisation of FMRE Property & Casualty (Botswana)	$2m
Recapitalisation of TristarInsurance	$1.65m
Settlement of Amounts owed to policyholders	$1.33m
Expenses of the rights offer	$0.55m
Total	$8.63m

The rights offer is being underwritten by NSSA which is the current major shareholder.

The Afre Corp Board of Directors has since recommended that shareholders follow their rights under the proposed rights offer as they believe that the transaction is in the best interests of both the company and its shareholders. Afre Corp’s balance sheet size will be materially enhanced enabling the  insurance businesses to underwrite more business, retire internal debt and purchase investments that meet liquidity and solvency requirements.

Afre Corporation Weekly Trading Statistics

	Attribute	08-Oct	09-Oct	10-Oct	11-Oct	12-Oct
Afre Corporation	Price	5c/7c	5c	5c	5c	5.2c/7.5c
	Volume	-	2,065	13,714	528	-
	Value	-	$103.25	$685.70	$26.40	-

One question on Diamonds & Dogs’ mind is: “What is the intrinsic value of Afre Corporation?” In as much as the market dictates the value through demand and supply, can anyone convinced that Afre Corp should be valued at $10.8m do the maths for us.

Is there a conglomerate discount at play here? A scan of various shareholder registers on the market will reveal that the equity investments alone of the Group exceed $10.8m. Despite the pending rights offer, is this kind of discount warranted?

At least Econet Wireless, another perennially undervalued stock, has recently rallied to $4.80 is now about 40% away from the market consensus price of $6.70.

If Diamonds & Dogs takes the plunge on Afre Corp, wont he be a mini Warren Buffet 5 years down the line?

The Weekly Bulls n Bears

Bulls	Bears

ZSE Round Up

Market Performance:

·   Total market capitalisation rose 1.65% to close the week at $4.5bn. YTD +12.17%.

·   The industrial index closed the week 1.86% higher at 151.8. The mining index closed the week 0.21% higher at 87.3.

·   All heavyweights recorded gains this week, with Innscor, Delta and Econet rising 5.56%, 4.79% and 1.05% respectively.

·   Meikles, TA Holdings and Dairibord were the top gainers of the week, up 17.65%, 17.12% and 17.07% respectively.

·    Afre, ZB Financial Holdings and Phoenix recorded the most significant losses, down 33.33%, 30.43% and 25.00% respectively.

Flows for the week:

·    Volumes traded and turnover totalled 55.1mn shares and $7.4mn respectively.

·    Share volumes averaged 11.0mn shares per day.

·    Average daily value traded was $1.4mn for the week. Trades were dominated by CBZ, Econet and Delta which made up 30%, 18% and 17% of turnover respectively.

·    RioZim was the only mining stock receiving significant interest as it accumulated trades worth US$178 thousand in the week.

 

Week Turnover Contribution

Delta and Econet Contribution to Total Turnover

In a sign of continued liquidity challenges in the market, the turnover trend continues to be depressed. Average daily trades are under US$1 million and from the plot above Delta and Econet have dominated the trades. Econet and Delta have a combined market capitalization of US$1.9 billion which is 42% of the total market capitalization. It is therefore not surprising that these counters drive the Industrial Index.

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, BancABC Stockbrokers & Bulls n Bears (www.bulls.co.zw)

Bulls n Bears

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