On Tuesday last week construction company Group Five filed for bankruptcy protection and went into business rescue. Its shares were suspended from trading on the JSE.
“It appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months,” Group Five said in a statement. “As a result, the board of directors of Group Five and G5 Construction have resolved to place each of these companies into business rescue.”
The last price at which Group 5 shares traded was 89 cents. While this was a large gain from the 20 cents per share at which they opened on January 1 this year, it is a long way from the high of R69 they hit in 2007.
At that time, the company was not only enjoying the positive sentiment that came from being involved in the construction of 2010 Fifa World Cup stadiums, it also had a strong pipeline of independent power producer projects across Africa.
The popularity the share enjoyed back then was however a distant memory by the time it was suspended. Figures from Morningstar show that just 21 unit trusts held the share in their portfolios, according to the latest available portfolio information. For all of them the weighting it carried was insignificant.
The fund with the largest exposure was the Investec Value Fund, which held 0.14% of its assets in the stock. In most cases, however, the weighting came to less than a hundredth of a percent:
|Funds exposed to Group Five|
|Allan Gray Balanced Fund||Dec 31, 2018||0.00032%|
|Allan Gray Equity Fund||Dec 31, 2018||0.00137%|
|Allan Gray SA Equity Fund||Dec 31, 2018||0.00247%|
|Ampersand SCI Equity Fund||Dec 31, 2018||0.00998%|
|Analytics Ci Managed Equity Fund||Dec 31, 2018||0.00054%|
|Ashburton Multi Manager Prudential Flexible Fund||Dec 31, 2018||0.00147%|
|BCI Best Blend Specialist Equity Fund||Jan 31, 2019||0.01001%|
|Ci Alpha Fund||Dec 31, 2018||0.00053%|
|Ci Managed Fund||Dec 31, 2018||0.00022%|
|Ci SA Balanced Fund||Dec 31, 2018||0.00036%|
|Cohesive Capital Flexible Prescient Fund||Dec 31, 2018||0.00956%|
|Discovery Equity Fund||Jan 31, 2019||0.02617%|
|Investec Value Fund||Jan 31, 2019||0.14372%|
|Kagiso Islamic Balanced Fund||Dec 31, 2018||0.00429%|
|Mazi Asset Management Prime Equity Fund||Dec 31, 2018||0.00135%|
|Momentum MoM Specialist Equity Fund||Dec 31, 2018||0.01561%|
|Nedgroup Core Guarded Fund||Dec 31, 2018||0.00002%|
|Perpetua SCI Balanced Fund||Dec 31, 2018||0.00270%|
|Perpetua SCI Equity Fund||Dec 31, 2018||0.01687%|
|PPS Equity Fund||Dec 31, 2018||0.00176%|
|Prescient Equity Fund||Dec 31, 2018||0.00021%|
The current market expectation is that these Group Five shares will realise no value.
“I think we agree with the board’s assessment,” says Allan Gray portfolio manager Leonard Krüger. “The chance of a positive realisation for equity holders is quite slim.”
These investments are therefore likely to be written off. Given how small the holdings are in these portfolios, however, the losses experienced by investors if that happens will be negligible.
Allan Gray had, since 2015, been one of Group Five’s major shareholders. By 2017 it had accumulated close to 14 million shares – over 12% of the company – likely purchased between R15 and R25 per share.
A rough calculation, at an average price of R20 per share, would put the full price paid for that holding at around R280 million. Much of that was sold before the end of last year, and at a loss.
As Krüger points out, however, this might seem like a big number, but spread across Allan Gray’s funds and client portfolios, the losses are insignificant. Those holdings that remained when trading was suspended would have been seen as an option rather than a material position.
“When the whole company was only worth R80 million, our position was only a fraction of that,” says Krüger. “The managers who still held shares would have effectively written them down to zero, but would have felt that [by] holding the share, they still had an option of something coming out some day.”
Coronation was also a big shareholder in Group Five, and had been since at least 2009. The bulk of that initial position was however sold in 2014. It accumulated shares in its funds again from 2015, but had disposed of them before last week.
“Coronation currently holds no shares, having sold out entirely by 2018,” says Karl Leinberger, the firm’s chief investment officer. “But the majority of our holdings had been reduced in preceding years.”
And the largest …
The largest shareholder in Group Five was the Government Employees Pension Fund (GEPF). It owned more than 20% of the company, according to the 2018 annual report, and has held at least 15% since 2011.
Back then, the shares were trading at between R25 and R35. The GEPF did sell some of those shares when the counter rallied back in 2014 to over R40, but according to Group Five’s annual reports its holding never fell below 16.9 million shares. A back-of-the-envelope calculation would suggest that, in a best-case scenario, those shares were bought for over R400 million.
In reality the fund’s exposure was almost certainly greater, since the GEPF did buy almost five million more shares between 2015 and 2018. Even if one assumes a conservative average price of R12 per share, that is another R60 million, taking the fund’s total loss close to half a billion rand if it did not sell any of that holding prior to last week.
Again, however, this is not a big number in the context of the GEPF’s total assets. The fund manages more than R1.6 trillion, which means that Group Five shares were only around 0.3% of its portfolio.