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Investment punts that raise questions

May 04 2011 13:06
Marc Hasenfuss

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IN SUCH cynical times, it is difficult to believe that “invitations” to invest in unlisted shares can be tagged to a promised listing but not offer the potential investor sight of audited figures, either in the form of pre-listing material or recent annual reports.

This ploy was largely utilised by much-hyped unlisted projects such as Garek, SunAir, Wealth 4 U and (more recently) SunEnergy – none of which came even close to a listing on the JSE.

Last week we were sent marketing material for a pre-listing share offer in a property development/construction company called Sciofin, which is punted as part of a reverse listing with two other companies – Lashka and Cherry Planet Properties. There are major related party issues here – at least judging by the numerous cross-directorships between those companies, as reflected by Cipro.

Interestingly, the emergence of Lashka, Cherry Planet and Sciofin might mark the return of Barry Havenga to the JSE – last seen with Paradigm, which sparked briefly in the late nineties before fizzling out.

We might also be forgiven for presuming the reverse listing vehicle to be Decillion, a cash shell that once housed a financial services boutique.

Finweek makes that presumption based on the fact a number of directors involved in Sciofin and Cherry Planet were appointed to the board of Decillion in mid-2010 – including Havenga as full-time financial director and Morrison Smit (who serves on the boards of Lashka, Cherry Planet and Sciofin) as CEO.

Decillion, now suspended on the JSE, has been trading under a cautionary since May last year – pending a deal that would see R2bn worth of property development and construction assets reversed into the shell.

On approaching the principles behind the pre-listing share offer we were told by two directors – Kobus van der Berg and Smit – that “there’s no public document that states Sciofin is placing shares and will be listing”.
We beg to differ.

Finweek is in possession of marketing material sent out by share peddler Oyster Portfolios, which states quite clearly: “We are proudly associated with an investment opportunity by Sciofin (Pty) Ltd, which is in process of listing its mega property and bulk construction assets on the JSE by process of reverse listing into an existing listed shell.”

The marketing document details an offering of shares worth R30m to finance operations during the period leading to listing and “to finance certain transactions that might not otherwise be available to them after listing”.

The Oyster Portfolios document states further: “Sciofin has provided a significant upside on listing, whilst minimising any pre-listing downside by providing investment security by means of a ring-fenced security in an ‘Insolvency Remote Special Purpose Vehicle’ (IRSPV) with an actual asset underpin.”

Apparently, Sciofin has now accordingly arranged a number of properties that are to be bought by Lashka 132 Ltd – “the IRSPV especially (sic) registered for this purpose”. The Oyster Portfolios brochure reckons the value of the security comprises “R150m of independently valued properties confirming investor security of R2 for every R1 invested”.
Forgive our cynicism, but that sounds way too good to be true.

But it gets better. The marketing documentation explains that Lashka – together with the complement of the full portfolio of Sciofin (which includes Cherry Planet Properties) will be subsequently reverse listed into “Listco Ltd” (Decillion, if you will). According to the marketing material, listing is expected within 120 days.

Oyster Portfolios waxes on: “Sciofin has enormous expansion potential in infrastructural development projects in addition to a diverse portfolio of Industrial, Healthcare, Retail, Office, Residential, Leisure and Retirement assets. Sciofin also enjoys significant ongoing government/parastatal bulk construction contracts.”

The offer pitches 50m Sciofin shares at 60c/share. Oyster Portfolios claims the Sciofin shares will be converted at a value of 1.3 times of the private placement shares in Lashka into “Listco”.

So if 166 667 shares are acquired in Sciofin/Lashka for R100 000, the converted value at listing will be 216 667 listed shares. A possible listing value of 100c/share is pencilled in by Oyster Portfolios, which means a very quick doubling of investment value to nearly R217 000.

In truth, the value of those shares will be determined by the price of the listed shell the assets are being listed in. In other words, the IRSPV really only protects investor value while the venture is at a pre-listed stage. As the long-term price of the listed Lashka entity will be determined by market forces, it’s probably a prudent exercise to ponder how the investment community might perceive the new listing.

But what if the market thinks the real estate and development properties parcelled together for listing by Sciofin, Cherry Planet and Lashka really stink? That might be a pertinent question, remembering what happened to the value of the shares in Acc-Ross (now Pinnacle Point Holdings) after it listed in 2006.

Unfortunately, we were stonewalled when we asked for the relevant audited financial information (the latest audited financial statements, asset registers or pre-listing documentation) in order to gauge the relative value in the 60c/share offer.

Both Van der Berg and Smit were adamant the companies were currently finalising documentation and related transactions for listing.

“This means we’re extremely cautious with the distribution of information … full information will be published once approved by the JSE.”

Caution ahead of a listing is one thing, but reticence about releasing critical information needed to make an investment decision when shares are being peddled to the public is quite another issue.

Since Oyster Portfolios suggests R16m of the R30m share offer has already been placed, Finweek sincerely hopes investors – before tilting to double their money – had more luck extracting essential financial information. At this juncture we wouldn’t touch the 60c/share offer – not because we’re saying it’s a bad investment, but because there’s simply no way we can assess the potential value in the listing.

But let’s be specific about our concerns – which we honestly think are reasonable in terms of transparency. How does an investor quantify the “value” of the 60c/share offer without recourse to balance sheets, cash flow statements, income statements and an asset register?

As far as we can ascertain, the Lashka properties bundled together for the reverse listing – according to the IRSVP document – comprise the Ngomo Lodge (near the Cradle of Humankind) and several “game reserve” properties in North West province.

Around 600 (unspecified) units will be developed on game reserve properties that extend to almost 6 500ha. There’s also Portion 8 of the Farm Onbekend 398 near Bronkhorstspruit, which is leased to Mega Green Building Structures for R50 000/month.
Other than the monthly rentals detailed for the Bronkhorstspruit property there are no other financial details to allow prospective investors to gauge the value of the properties (undeveloped or fully developed) or their yield potential.

Pre-listing documentation would detail the number of listed shares in issue for the reverse-listed company, which would give some inkling into the envisaged enterprise value.
The documents that accompany the marketing material from Oyster Portfolios contain no allusion to the possible value of the listed enterprise.

Effectively, investors who bought and might still take up an offer of shares at 60c/share are buying blind.
Naturally, the lack of financial disclosure does bring us back to the original premise (at least according to Oyster Portfolios’ marketing document) for the Sciofin/Lashka share issue: to raise funds to fund operations and potential transactions.

Why is a company supposedly forming part of a listing with consolidated portfolio purportedly worth R2bn looking for R30m in capital?
 Surely the property portfolio – presuming it’s of good quality – would offer sufficient leverage for funding?

Finweek would suggest prospective investors wait until audited financial information is released on the companies involved in this reverse listing exercise before committing capital.

It might also be instructive to read a recent JSE Sens announcement from Decillion, which warned that information being issued by certain parties about a proposed reverse listing was “both premature and inaccurate”.

* This article was first published in Finweek.

* To read more Finweek articles, click here.

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