Polar opposites do not attract

Investors pile into cash shell Long4Life, but avoid asset rich Stellar.
Brian Joffe

This article was first published in the May issue of the Moneyweb Investor. Click here to read the magazine in full, at no cost to your pocket.

Why do people invest in a particular share? Obviously track record, valuation, share price performance and industry sector are important determinants.

But in many cases investors are attracted to a stock by softer things – market perception, interest and management profile for instance. People like Brian Joffe, Christo Wiese, Jannie Mouton and even Motty Sacks have amassed personal fortunes through astute deal-making and in the process have generated wonderful returns for others.

Thus when these individuals invest in new ventures, people tend to pay attention. Just how often they are able to replicate early successes however, is open to debate.

Long4Life, Stellar Capital Partners and Capital Appreciation are three investment holding companies that are backed by haloed names in SA’s business and investment community – Brian Joffe of Bidvest fame; Christo Wiese of Pepkor, Shoprite and more recently Brait; while the co-founder of Netcare, Motty Sacks along with former CEO of Macsteel SA Michael Pimstein, and Bidvest executive Alan Solomon are the names behind Capital Appreciation. 

In 2015 investors in Stellar Capital Partners supported a rights offer at R2.30, which saw the company raise R1 billion to fund acquisitive growth that would position the company strongly in two sectors: industrial (mining and construction equipment supply) and the financial services sector. While Stellar acquired two significant assets in 2016, Prescient and Amecor, the benefits are yet to kick in and the share price has slumped to R0.98. This is a significant discount to its most recent sum-of-the-parts value of R1.42.



Capital Appreciation which is classed as a special purpose acquisition company (SPAC), raised R1 billion on listing last October. That shareprice is languishing at 85c, down 15% since listing, while management seeks acquisition opportunities.

The most recent of these high profile investment opportunities is Brian Joffe’s whimsically named Long4Life, which raised R2 billion ahead of its listing in April. The share listed at R5, rose to R6.73 and has since fallen back to R5.50.

“Joffe is an inherant deal maker and his reputation precedes him, but people who invested in L4L [on the day] did so at a 26% premium to cash,” says Anthony Clark, small cap analyst with Vunani Securities. “This is madness and understandably the stock is beginning to unwind.”

This listing suggests there is an inherent dichotomy in the decisions that investors are making, he says. Long4Life is the antithesis of the Christo Wiese-backed Stellar. “There is the hope and belief that Mr Joffe can add material value to the cash premium,” says Clark. “Meanwhile Stellar has invested significantly into its assets and trades unloved at a new 52-week low and at a fat discount.”

According to the pre-listing statement L4L is in discussions to acquire Sorbet, the nationwide beauty franchise for R130 million, in a cash and share deal.  But aside from that all shareholders know is that management is scouring the country for deals in the beauty, health, retirement and related industries; while similtaneously avoiding the mining, banking or resource sectors. Its medium to long-term objective is to achieve sustained growth in NAV per share in excess of 15% per annum.



“The only thing we have to go on is the net asset value,” says Anthea Gardner, CEO of Cartesian Capital. “With no assets, NAV is simply cash raised, less expenses which gives a NAV of R4.35 – well below the current R5.50 tag.”

What may appeal to shareholders is that Joffe has put his own capital on the line – R100 million of it – acquiring shares at a 20% discount to the listing price.“However I would prefer to wait and see what Mr Joffe is going to deliver before investing,” Gardner says.

“Joffe has a camelot – cash, lustre and ability to deals – he needs to deliver quickly or people’s love affair with the company will diminish,” adds Clark. “Charles [Pettit CEO of Stellar] used to have this. But Stellar’s management has been on a deal frenzy where they bought Set Point, Control Instruments, Amecor and a stake in Prescient among others. These deals [in particular the earlier deals] have failed to deliver and management’s credibility is in question.

“Now they are in a position where they can no longer do deals using paper, they have limited cash and they need to deliver solid NAV growth and meaningful growth in Heps at a time when no one knows where industrial SA is going.”

Speaking to investors after the company posted disappointing results for the year to November, Pettit noted that although both Torre and Tellumat had difficult years, the outlook for both businesses was improving. The mining sector recovery means companies will end capex freezes and Torre has already felt the benefit, he said.

While Torre is a cyclical business, short term growth in NAV is expected to come from financial services business Prescient, which will provide annuity income and is expected to show growth of 15% to 20% a year.  In addition asset manager Cadiz, under CEO Shawn Stockigt, is showing dramatically improved investment performance, while Stellar’s specialist lending businesses are delivering double digit returns.

In addition, security technology specialist Amalgamated Electronic Corporation exceeded budget by 19% and for the 6 months ended 30 September 2016, was 29% ahead of the prior comparative period. This is expected to continue and will provide a support to NAV growth.

What we have are two fundamentally different businesses trying to do the same thing – find opportunities in fragmented businesses and exploit them. “Both CEO’s are personally invested in the business, I prefer the combination of industrials and financials in Stellar,” says Gardner. “They have spent a huge amount restructuring the business to make it more efficient and I don’t believe it qualifies for a price like this. What it means is that people are nervous about the economy.”

“The market is clearly betting where it sees upside. But I hate paying a premium for anything and like a discount,” adds Clark. “Stellar makes more sense.  However, it would be a brave man to rush headlong now into Stellar and I believe it will remain unloved for some time until material earnings and NAV uplift is seen.”



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