Over the past few months, there has been a great deal of controversy around JSE-listed African Equity Empowerment Investments (AEEI) and Ayo Technology Solutions. The two firms have been unable to escape negative headlines.
The testimony from current and former senior Ayo staff at the Mpati Commission of Inquiry into the Public Investment Corporation (PIC) has been particularly unsettling. It has suggested a pattern of misleading the market.
Ayo chief investment officer (CIO) Malick Salie told the commission that Ayo’s listing valuation had been ‘stretched’. While he initially valued the company at R2.3 billion, Ayo listed on a final valuation of R14.7 billion, or R47 per share. Since its listing in December 2017, the stock has fallen 77% to trade at around R11 per share.
The company’s former CIO, Siphiwe Nodwele told the commission that Ayo’s financial statements had been manufactured. This aligned with testimony from former CEO Kevin Hardy who testified that Ayo’s interim results to February 2018 had been altered. The JSE has since instructed the company to get an audited opinion on those numbers as well as its interims to the end of February 2019.
Ayo is a subsidiary of AEEI, which is the listed public trading company of Sekunjalo Investment Holdings. The JSE’s general manager for issuer regulation, Andries Visser, told the commission that the stock exchange is looking at a number of related party transactions involving companies connected to Sekunjalo. In particular, he mentioned the transfer of money between Ayo and investment management firm 3 Laws Capital, which is controlled by Sekunjalo.
Under the weight of these controversies, AEEI’s share price has fallen from a high of R7.70 in January 2018 to current levels around R2. That is a drop of 74% in 18 months.
Given this backdrop, it’s not surprising that most asset managers have steered away from including either AEEI or Ayo in their portfolios. In fact, there is only one unit trust in the country that holds either. And it is invested in both.
The IP Flexible Fund, which is managed by boutique firm Integrated Managed Investments (IMI), has been invested in AEEI since it launched in February 2017. It is the fund’s largest holding. The fund’s portfolio also includes Ayo.
According to figures from Morningstar, the IP Flexible Fund is the worst performer in the South Africa multi-asset flexible category – over the last year and for the year to date. It is down 27.6% in the past 12 months, and 11% since the start of 2019.
IMI portfolio manager John Lamont explains that the unit trust was initially funded by a private family. Those clients have held AEEI since 2012, based on what he believes is a strong investment case.
“The value reflected in AEEI’s underlying NAV [net asset value] was not reflected in the share price,” Lamont says of their decision to invest in 2012. “This was expected to unlock through the separate listing of both the IT and fishing operations, continued growth in the various underlying operations through strategic acquisitions and organic growth, and the through payment of dividends back to shareholders. There was also blue sky optionality within their biotech division, which is focused on immune gene therapy.”
Despite what has transpired over the past 18 months, Lamont argues that this investment case has in fact improved, not deteriorated. He believes AEEI is achieving milestones set in its ‘Vision 2020’ strategy, and that it is trading at an attractive discount to its peer group of up to 50%.
He believes it has a strong portfolio of investments, including in multinationals British Telecoms South Africa and Saab Grintek Defence, as well as AEEI Premier Fishing. The company also started paying dividends in 2015, and these have grown at 30-40% per year.
“We still see significant upside,” he says.
With respect to Ayo, Lamont argues that it has concluded a number of transactions, with projected revenues of over R3 billion and profits of R200 million. These figures were cited by Salie in his testimony to the Mpati Commission.
This part of Salie’s testimony was not widely reported. Despite the concerns he raised, the company’s CIO expressed the belief that if Ayo can get past its corporate governance and reputational issues, it has good underlying businesses:
“If you look at those real existing cash generative businesses, they are hampered by the current Ayo reputation, but obviously, as things get remedied, the hope is that they will continue to trade and operate the way they have always done and grow from there,” Salie said.
The difficulty for investors, however, is whether they can really believe the numbers. At the moment, there is more than enough uncertainty to keep most asset managers away. Lamont, however, is not deterred.
“We view it as unfortunate that few persons have taken time to interrogate or engage AEEI and Ayo on their various strategies,” he says. “In terms of the disclosures made to the PIC commission, we are presently engaging with the boards of AEEI and Ayo in order to ascertain the corrective measures being followed.”