MarketViews

My Potential Share Portfolio

African Bank Investments Limited (Abil)

Focus

The focus of the group is to underwrite largely unsecured credit risk through the provision of personal loans to the formally employed emerging market.

Investors’ Opinions

Ok, so now I’m going to look at the P/E ratio of Abil as it generally indicates what investors think about the company’s future.

On the Sharenet site I look the share up using the “Quickshare” function. This takes me to a page with quick fundamental analysis of the company. The p/e ratio is 13.02. Now on it’s own this number means nothing so it’s useful to compare it to other companies in the same sector.

The lower the p/e ratio the better for the company.

History

The company first listed on the JSE in 1998 and looking at past income statements they’ve showed good growth since then. What is encouraging to me is that despite the introduction of the National Credit Act in the middle of this year, the company has increased diluted headline earnings per share by 20% and revenue increased by 18.3%.

Quoted from their reviewed results for the year ending 30 September 2007:

“In addition, the group’s proactive approach to and early adoption of many of the National Credit Act requirements, resulted in a smooth transition to the new Act on 1 June 2007. This paved the way for the unlocking of the opportunities that the NCA presented, resulting in a strong 4th quarter, with sales of new loans up 53% over the same quarter in 2006. Finally, ABIL launched its offer to acquire 100% of the Ellerines group, affording the group the opportunity to leapfrog its growth and expansion strategy over the next 3 to 5 years.”

ABIL’s intention is to “entrench its position as the market leader in a larger, more competitive and fast changing unsecured credit market, fuelled by the introduction of the NCA and a growing and transforming economy.”

Management

What’s encouraging to note is that directors, management and staff holds 5.92% of shares in the company. This always indicates that the company itself and the people that run it have confidence in themselves.

The company is headed by the CEO, Leonidas Kirkinis, who has been with the company since 1997

Forecast

I read Imara Sp Reid’s report on the group and they had the following to say:

“Without taking into account Ellerines, our forecast for Abil for the financial years 09/08 headline EPS growth of 15% to 309.7c for a FPE of 11.2x.” They note that “it is well below management’s forecast of advances growth between 30 and 35% due largely to the ongoing polic of reducing interest rates.”

EPS = Earnings per Share
FPE = Forward PE

Broker consensus forecasts (found under “Subscribers” on the Sharenet site)

Recommendation: BUY

Online Research

In an article on Moneyweb (by David Carte – 14 May 2007) the following was said about Abil – “Abil has much still going for it – rising employment and the ability to take a less cautious attitude to lending…” They plan to increase their network to 700 outlets in the next 2 years.

I also read a very interesting article by Adrian Clayton (Moneyweb: 24 October 2007) where he talks about the pro’s and con’s of Abil’s acquisition of Ellerines. He believes that “the takeover of Ellerines by Abil is a logical transaction that is likely to enhance the value of the combined group over time.”

Have a look HERE at the company’s latest annual report:

Conclusion

I like the sound of this share and their progress on the JSE thus far. They have a sound management team, a high dividend yield and a good growth forecast for the years ahead. The acquisition of Ellerines should boost the company and provide more scope for business in the future.

This is definitely a share I’m seriously considering adding to my portfolio!

If anyone has any comments or ideas about this share please feel free to comment!

Next Time

I have a look at Stefanutti & Bressan Holdings in my next diary post as a possible addition to my investment portfolio.

My Online Trading Adventure

The first step in setting up an online trading account is to visit Sharenet’s website and have a look at the brokers available on the site. By going to the “Trade” section, you’ll see the selection of 4 brokers and a handy hint is to click on the “Compare Rates” section to see how much initial investment money you need and what brokerage fees each broker charges.

Because I’m only going to be using the broker to carry out my instructions, I’ll be paying a brokerage fee according to the value of the actual transaction.


I choose to open an account with Imara SP Reid as they provide comprehensive daily research and tips which should come in handy as I go about choosing shares. I click on “Open an account” and then start the process of filling in the forms that I will eventually send off to Imara.

By signing up to a broker on the Sharenet site you’ll also gain access to an online trading account. You’ll get sent a username and password which will allow you access to Sharenet’s products and services (live prices, charts etc) and monitor your portfolio whenever you want to.

THE FORMS

This is the part I was a little intimidated by as some of the language used on the forms were a bit beyond my (somewhat lacking) financial knowledge. It started off okay as you first have to fill in basic details like your name and email address. The second part involved contact and employment details and addresses etc. Fine, I thought, no problem.

After I completed this I was taken to a page which detailed the supporting documents (also known as FICA documents) I needed to accompany my mandate (or essentially my application) form. These FICA documents are important and they usually don’t allow you to open an account without these documents.



*FICA stands for the Financial Intelligence Centre Act and was established in 2001 to curb money laundering and prevent criminals from making money. Because of this, you need to provide proof of your identity and address before you’re able to invest so they can do a background check and ensure that you are who you say you are.

After printing out the mandate form I had to fill in a few more details, some of which confused me quite a bit. Despite the fact that I had registered earlier as an individual (and not a company or CC), there were still some areas they requested I fill in under the “personal details” section. Things like “Co. Vat No" and “Country of Incorporation” had me stumped for a while until I asked somebody what they meant and was told to just leave them blank.

Also note that as a private investor I needed to tick the “non-discretionary” circle as I want an “execution only” portfolio not managed by the broker company. They will merely carry out my instructions.

After initially each page and signing the last, I had to get two witnesses to do the same. Attaching all the necessary documentation together, I’ve placed them in a large envelope and am now on my way to post them to Imara.

Step one (and probably the easiest part) completed!

Regards, Marika

The tools: R20 000 to invest and an online trading account with Sharenet and Imara S.P. Reid

The mission: To invest/buy shares in a company listed on the JSE and document my progress and each step of this process

The goal: To hopefully make some kind of return within a year and show fellow beginner investors that investing isn't the deep dark unknown terrain we believe it to be!

So there you have it, armed with some cash and the instructions to document my every move on the stock market (from signing up to how I actually go about choosing which shares to buy), I'm about to embark on an investment adventure that aims to expose how easy (or difficult?) investing actually is.

This online diary will record my every move and will take you through my thought processes and emotions that go hand-in-hand with investing. As a novice in this field, I'm both excited and nervous to discover what all this entails! I only hope that what I learn from this experience will benefit other beginner investors and encourage them to also take the plunge and start investing themselves.

So (deep breath), wish me luck and join me as I enter the exciting and hopefully not-so turbulent world of investing!!

Regards, Marika

With the Steinhoff directors recently taking out futures to the value of R489million over the company’s shares, the effects of this and the evidence of greater derivative speculation must be considered. The Steinhoff directors gamble joins the ranks of a growing number of directors that have opted for buying into these geared financial products over buying the underlying equity.

I won’t go into all the details of the differences between buying shares as opposed to buying futures, but the point that I find most pertinent is the fact that futures are geared. Unlike shares where you can only lose the amount of money that you have invested, with futures you can lose more than your initial investment.

Furthermore, futures are mark-to-market which means that at the end of each day money is either flowing into your account…or out of it. Short-term cashflows in the form of margins can cripple you if the market turns against your one-way bet and (in the words of Keynes) “…the market can be wrong longer than you will be solvent”.

So, no matter what philosophy is thrown around, futures have a short-term element embedded in their very nature: your solvency.

Although it may show a great regard for the (short-term) prospects of a company when its insiders opt for futures buying over just buying the equity, I question what the long-term effects of this will be on both the market and the underlying company.

Firstly, because futures are geared, it means that if the market crashes then the directors could potentially become bankrupt. According to section 218 of the Companies Act, a person is disqualified from being a director (save under authority of the court) if they are an unrehabitated insolvent…which a bad bet on futures can do to a person.

So, say you are a shareholder of Steinhoff and the market crashes, Steinhoff drops by 50% in one day…and this movement then makes the directors that went long on it bankrupt due to their futures gearing. Not only are your shares in Steinhoff now worth 50% less, but you now have shares in a company whose directors are disqualified from being its directors. Lacking a management team, it will no doubt crash even further, adding woe to woe.

Secondly, bearing this in mind, I’m pretty sure that the directors will follow Steinhoff’s share price extremely closely. This will detract from their focus on managing the company to managing their own investments, i.e. costing shareholders money.

Finally, although I like insider buying I don’t like the cowboy-like buying of futures by insiders. Given that this trend carries on gaining popularity with directors and eventually becomes the norm just before a large market crash, we could be sitting with an entire stock exchange with directorless companies.

In closing I must add that I dread the day I see a director shorting his own share; I only hope that this doesn’t happen to any of the shares in my portfolio…

Regards,
Keith McLachlan

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It's no secret that the construction industry's present boom has sent the construction shares sky-high, but is there any other angle you could take to gain from the spill-over effect of this boom?

Well, that's where "late play" construction shares come in (of which I have discussed in my February Small Caps Newsletter). These are shares in companies that benefit from the after effects of the construction of large numbers of buildings, roads and infrastructure. For example, plumbers and gardeners (someone has to service the new houses), home retailers (someone has to stock the new homes), and even IT companies (someone has to sell the new computers and software/networks to all the new corporate buildings).

If I could invest in any business right now I would invest in a plumbing business.
Why..?

Well, for a number of reasons. Plumbers are in short supply with skills barriers to market entry that prevent just anyone competing with them. Plumbers basically get annuity income from new suburbs, as a regular number of houses will have problems and need their services. Plumbing is not a "flashy" investment (like "gold" or "oil"), thus the market tends to ignore it.

Unfortunately, there are no listed plumbing shares…but, there are plumbing related shares, because they sell the plumbing related goods. Alert Steel (listed on the AltX on 1 March 2007) sells—among other things—plumbing and hardware. PSV and Rare Holdings produce pumps and valves etc. that can be used in plumbing.
All three of these companies offer very good "late play" options.

What other "late play" construction shares are there?

Well, Safic is one, providing the flooring to new buildings, which is often the last component in a building project. Thus, provides Safic "late" profits after all the other construction shares have shown theirs.

Amecor manufactures security components and maintains private security networks for private security companies like Chubb and Atlas. The more houses and neighborhoods that spring up, the more the demand for security (components and services)…but, of course, this only comes along after the houses have been built and the building companies have taken their quick profits.

Datapro is another one, as new houses and new business all need an ISP…but, unfortunately it appears that the market has noticed this with DTP trading at present PE of around 40.
So…how can any of this be of use?
One word: strategy.

The most money is not made in investing into companies that everyone has already bought up, but into anticipating this buying and entering the market just before them. As (potential and real) earnings is the main driver in share price, anticipating these earnings in the future is paramount to out guessing the market and finding true value.

In a market where construction is booming, in my opinion, this value is found in "late plays".

Yours sincerely,
Keith McLachlan

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With all the recent number of new listings on the AltX the Small Cap investor's options have almost doubled. No doubt some of these listings will fail (such is the intrinsic risk of an IPO or newly formed company), but enough of these companies appear to offer real value to growth investors.

Hence all the over-subscribed private placements.

Although I will not discuss all of the new listings here, I have noticed that a number of them either have dividend policies in their offering to the market (i.e. they promise to or already do pay dividends) or already pay dividends.

Now, most of us know that dividends are tax free, thus a dividend yield on a share of 4% actually beats an interest rate on a bond of, say, 6%. This is because (excluding the interest exemption allowed by SARS), if you are paying the marginal tax rate of 40% then you will only receive 3.6% return on the interest of 6% after tax. I’ll take the 4%, thank you.

So the higher your income tax bracket, the more appealing dividends are - basic logic.

The other (hidden bonus and flaunted risk) of dividends is that the fair value of the underlying share paying them can (and probably will) fluctuate. Thus, if you pick a "dividend yielder" correctly, you make a nice capital gain. At the marginal tax rate for a natural person that means you only include 10% of the gain on the sale in your taxable income.

A double bonus for the smart investor.

So…what does this have to do with Small Caps?
Well, Small Caps often have the best potential for a growth and—taking into account the risks—can offer the best chance for capital appreciation. Their dividend yields are traditionally higher too, as they are traded at a risk premium (i.e. a lower PE ratio than Blue Chips, as their risks are higher).

Let me show a quick break down of a couple Small Caps potential "dividend yielders" I have noticed. Note that 3 out of the 5 are newly listed ones and Esor has yet to pay its first dividend at the end of the 28 February 2007:

The Dividend Yield of the All Share is approximately 2.22%, so an average Dividend Yield of 3.704% for a portfolio holding equal weightings of all five shares above would beat the market’s "safe" dividend return. Not only this, but it would expose you to the construction industry (Esor), the financial services industry (SAB&T and IFCA), the tourism industry (Gooderson), and the IT industry (ISA and IFCA)…all with companies that have potentially good growth aspects, enthusiastic management, and promising futures.
Note, the All Share also has a PE of 17.42, thus this "virtual portfolio’s" PE of 16.61 might allude to it being a value play too.

I haven't included Silverbridge Holdings Ltd ( SVB ), a niche software company that's newly listed on the AltX. But it derives more than half its income from annuities. This makes it cash-flush like ISA and it may well also pay hansom dividends in the future. Although, it does have startup risks associated with it, whereas ISA has been producing profits for a number of years now…

I also haven’t included IPSA (IPS), although once it receives its Carbon Credits and begins to produce power at its Newcastle Powerplant on 23 February 2007, its first dividend should follow within a year.

I'm definitely not advocating blindly going out and buying all the Small Cap shares that hint at dividends, but rather I am aiming to give a different spin on things for private investors interested in tax free money with Small Cap growth potential attached.

Yours,
Keith McLachlan

Keith McLachlan is an active equity investor and is the editor of the blog "Small Caps with Keith McLachlan" (www.smallcaps.co.za). This is a collection of financial/investment theory for the self-education of investors and a site dedicated to high potential Small Caps on the JSE with full length valuations and research reports.