THE DAVID GLEASON COLUMN
Valuing financial services companies is always difficult, especially when they are brand new to the investing public.
This is certainly the case with The Appleton Group, a company about to be listed for the first time on the Johannesburg Stock Exchange (JSE)and whose initial private offering for R50- million has already been oversubscribed. This means institutions and private clients who know something of the group have concluded it offers good prospects as an investment vehicle.
Does it? And how should it be valued? If you happen to have surplus disposable income and are looking for ways to make your money work for you through the JSE, getting a handle on new offerings such as Appleton may provide handsome rewards down the line.
Financial services companies don’t usually own much in the way of fixed assets. Appleton is no different. It has fixed assets of only R1,8-million, but what it does have is cash of R65,7-million.
If goodwill is excluded, the company’s tangible net asset value is about 25c a share. But it has just invited subscriptions for 50-million new shares at R1 each and more than enough subscribers are anxious to put their hands in their pockets for more of the same.
Another method of valuation is to consider the ratio between the price of the shares and the company’s earnings (called in shorthand the p:e ratio). Over the financial year just concluded, Appleton’s forecast profit produces a p:e of 17,2. This compares with an average for the banking and financial services sector of 19.
However, if Appleton’s profit forecast for 2000 is correct (and it certainly should be), the p:e falls to only 12. The market’s appraisal of other companies most like Appleton varies greatly ( Iota has a p:e of 13; Brait, on the other hand, is on 21 and high-flyer Coronation demands 25; Thebe is on a modest 11 and stockbroker Barnard Jacobs Mellet is on 15). So Appleton’s early pre- listing rating puts it where it should be – around the bottom of the range.
What makes any of these companies really different from each other is the area in which they choose to specialise. In Appleton’s case it has set its sights on looking after what is known as private clients, a term used to differentiate individual accounts from those of the institutions.
This is no easy place in which to conduct business, and it is because of the expense involved that many of the major players have deliberately chosen to neglect this sector, leaving exactly the sort of hole Appleton (and a few others) seek to fill. There’s no doubt that there’s money to be made in this part of the market – it’s just that making it is that much more painstaking and time- consuming.
Market expectations for Appleton shares are quite high and there are rumours the price will rise as high as R4 each. If you can buy them up to R1,50, grab them. Anything higher, say up to R2,50, implies a steadily increasing risk ratio. This may be all right, of course, but be aware of the chances you are taking. Better still to buy the shares and keep them for the long term. If it’s of any comfort, that’s what Appleton’s managers are doing.
Many of you will have followed the saga of New Republic Bank (NRB) with interest. Its present controlling shareholder, SMG Holdings, agreed to sell a controlling stake in NRB to Mawenzi Resources, a company whose chair is Mzi Khumalo, better known for his disastrous foray into mining through JCI.
The deal between SMG and Mawenzi was valued at R495-million. It quickly came off the rails, however, when Mawenzi wouldn’t (couldn’t?) pay up and then alleged NRB had failed its due diligence examination. That led to a typical run on NRB by its depositors and it then sought protection by asking the registrar of banks to put it into curatorship.
Within two weeks of that happening, however, and much to the shock and horror or its major shareholder and managers, the registrar asked for NRB to be liquidated.
Why? No doubt we shall find out more when the matter is finally heard in the Natal Supreme Court. But the application for liquidation raises many questions.
It is plain that NRB is in much less trouble than many other banks to which rescue packages (“lifeboats”) were handed with gay abandon. So why hasn’t it also been given the benefit of a lifeboat? Perhaps it would need to be in shtook to the tune of hundreds of millions (like others) before it qualifies.
The registrar and the Reserve Bank have a problem here: whatever rules apply in bank regulation in South Africa are known only to a few. Perhaps these few make them up as they go along. The NRB saga looks suspiciously like becoming a case of unfair prejudice.