IT’S with some trepidation we again ask: is it time to buy empowerment investment company Sekunjalo?
Near year-end 2010 the market appeared to warm to Sekunjalo following the release of its year to end-August results. Its price touched a 12-month high of 52 cents per share in late November, then standing at a discount of 20% to tangible net asset value of 67c/share at end-August 2010.
A discount of 20% to 25% of net asset value (NAV) is a market rating that would normally be applied to a well-established investment trust such as Remgro (a company whose quality and diversity of underlying assets, as well as related dividend flows, aren’t in question).
However, the enthusiasm for Sekunjalo appears to have worn off. Following the release of its interim results to end-February 2011, the share has settled into a 38c to 40c range – which discounts the last stated tangible NAV of almost 69c/share by a hefty 43%.
A discount of 40%+ is an attractive proposition for value-inclined investors – provided, of course, the valuations of the assets held in the investment company are robust and easily validated. The problem in valuing Sekunjalo’s sum-of-parts is that there’s a good chunk of its investment portfolio where directors’ valuations can’t easily be quantified by profits and cash flows.
Here we’re thinking of its strategic investments in British Telecoms and SAAB SA, as well as its stake in the biotechnology operation Genius Biotherapeutics (which is still awaiting SA Reserve Bank approval on an overseas listing application).
To be frank, it’s unsurprising the market may view Sekunjalo’s interim results as negative. Who wouldn’t notice its main operating asset – Premier Fishing – saw a marked drop in turnover to less than R70m and posted an operating loss of R1m.
Others may have even noticed Sekunjalo failed the “acid test” – with current assets of R154m not covering current liabilities of R160m.
Then there’s the niggling strategic matter of Sekunjalo wasting more precious management time on its iffy healthcare operations.
Thankfully, there are finally indications these operations, which are clearly finding traction elusive, could finally come under review.
Hopefully, “review” means close or sell its healthcare operations, which will leave management more time to look at ways of bulking up and diversifying Premier Fishing.
Despite its small interim loss, Premier Fishing still looks a steady ship and remains the major reason – aside from future deal-making – to delve into Sekunjalo. In particular, Finweek is encouraged by the determined shift into the pelagic and hake (as well as abalone) segments, which will lessen Premier’s reliance on its “exchange rate sensitive” West Coast and South Coast lobster businesses.
Investors worried about its interim loss need to recognise Premier is a seasonal business, with the first half usually a break-even period because most of the year’s maintenance and upgrading of vessels are normally undertaken in the first six months. Its second-half trading is traditionally stronger, which means the small first-half loss could easily be made up by end-August this year.
But perhaps more fascinating will be gauging whether Sekunjalo can help Premier net some of the smaller pelagic and hake players. In that regard it’s significant Premier is investing in production facilities at its Saldanha production plant, something the company wasn’t prepared to do a few years ago.
We reckon at current prices investors in Sekunjalo are probably paying a fair amount for participation in Premier Fishing, which should have upside (and more reliable cash flow) as it transforms into a more diversified business.
And as for Sekunjalo’s other investments … well, let’s just say we wouldn’t hold our breath for fireworks over the near term.
* This article was first published in Finweek.
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