The Investor endures but does not forget!

Investments are a platform for savings, a back up to the pension fund and a compliment in case the life policy does not suffice. There are many ways to look at it, the list is long and the arguments in great supply but in it all l wish to talk about our public firms, the very institutions that vault many savings and that ultimately run our stock markets. We have come a long way since we dollarized, the economy registered aggressive growth levels only for projections to be revised downwards as we approached year end 2012 coming into 2013. It was bound to happen at some point that the graph would regularize and well plainly speaking, the digits went normal. We got to a point where the market was now well served, looking for a loaf of bread was not a hustle anymore and your mother could now choose between cheddar cheese and garlic cheese. In such times the marginal utility reduces or in other words we are not as desperate, the consumers’ freedom of demand kicks in! So there is no better time to talk about our public companies than right now when sanity prevails and well, we have the opportunity to quote them on their promises and wishes!

African Sun forged a strong ambition to go into the African Safari when the economy dollarized. They laid out what seemed like a clear plan to take advantage of the World Cup in South Africa by doing a facelift to their hotels in preparation for the tourist influx during the tournament. This strategy would be supported by a private placement deal plus a rights issue deal which was well documented by a Herald newspaper article on the 5^th of November 2009

“PAN-AFRICAN hotel group African Sun Limited will facelift six local hotels to world-class standards ahead of the 2010 World Cup in South Africa.African Sun has also said it will embark on new projects in the region as it targets 8 500-room capacity by 2012 from the current 2 926 rooms. It is against this background that the group has proposed a US$10 million rights offer and a US$15 million private placement.A rights offer is a way by which a company raises capital from its shareholders that buy new shares on the basis of the ones they already hold.On the other hand, a private placement is also a capital raising initiative, but differs from a rights offer in that the company in question sells shares to new shareholders outside the existing ones.African Sun is therefore going to issue 125 223 168 ordinary shares of nominal value US$0,01 each to the current ordinary shareholders of the group and the shares would be sold at US$0,08 each. Ten new ordinary shares would be issued to existing ordinary shareholders of the company for every 56 ordinary shares already held.The hotel group, however, would not indicate conditions for its proposed US$15 million debt-capital. It is against this background that shareholders of African Sun would meet on the 13th of this month to consider the group's directors proposals for a rights issue and debt capital instrument.”

Now all this did not go according to plan as the Newsday a daily paper then reported on the 2^nd of December in 2010 almost a year later that 

“African Sun, Zimbabwe’s largest hotels group with operations in nine African countries says it will no longer pursue its private placement as the prevailing business conditions were not favourable.However, they have secured a deal for the debt instrument that will be concluded early next year.African Sun wanted to raise $60 million in the next two to three years for recapitalisation.The group got shareholders’ permission to raise $35 million but so far only $10 million has been raised through a rights offer.Private placement is when shares are offered to few institutional investors.Shingi Munyeza, African Sun group chief executive officer said the loans and rights issue have sailed through and the debt instrument has been secured while the group was currently dealing with the conditions precedent that should be concluded by early 2011.
“We will not be doing the private placement because the market is down, and market conditions are not right. We will do the private placement when our figures start showing up, and the pan-African conditions begin to improve although it’s still a long way to go,” Munyeza said.” 
I can quote articles all day long but l wish to put myself in the shoes of the African Sun investor and wonder where all my savings were going. You see with every rights issue transaction, if one does not have any savings to consolidate shareholding and exercise their rights, shareholding is immediately diluted. Adding to that the ultimate goal of rights issues and private placements is to see to it that there is sustainable growth that does not carry an interest obligation. The public benefits directly from owning shares as retained earnings are sliced as dividends whenever a resolution is passed. However in the case of African Sun that wealth has been sliding downwards as the firm repeatedly changed strategies along the way. They kept dipping their feet on different spots in the river looking for where to cross and ultimately the tide will sweep them away. 

Star Africa took shareholders through a similar path, geared operations through bank loans, asked shareholders to endorse a rights issue exercise and the ultimate reward was a drop in share price, failure to turn around operations and the delisting of its subsidiary Gold Star. 

Some firms have been brave enough to delist totally from the stock market but shareholders have been the hardest hit. The savings meant to build a fallback have been depleted and well the dreams have naturally faded. Personally l have often asked if the people running these firms are even qualified enough for the high offices or if they know what they are doing. It would be unfair to point out characters, or qualifications as the reason but reasons have to be stated and l believe shareholders deserve an explanation. However it is highly unfortunate that some of the shareholders have themselves to blame as the individuals they appoint to run these public firms are not the right people for the job and at that level if they cannot correct their own actions then all is doomed. In it all what many do not realise is that institutional investors who are cash rich enough to hold majority stakes in most public firms are actually owned by the people. The decision they make has a bearing on my pension payout years later after retirement. As you all read this article be aware that as long as you contribute to the National Social Security Authority (NSSA) it is in your best interests that the markets perform which house the funds of institutional investors.

Banks now comprise a huge component of institutional funds. NSSA has stakes in FBC, Interfn, ZB, Capital Bank and CBZ. The viability of all these institutions is in the best interest of every institutional investor who one day anticipates a payout once retirement kicks in. Some say the problem rests with the fact that we have allowed foreign products to dominate our markets to a point that any level of local manufacturing is quite unviable at this stage. The irony is that as much as the fiscus has tried to limit foreign products pricing our local products out of the markets we are on the other hand proud of our Look East Policy which has undermined out local manufacturing levels. However this article is not reserved for the foreign outlook, it is to look at what possibly is going wrong with our listed entities and the rest will be for the reader to judge.

Firstly all hope is not lost, a book l once read by John C Maxwell on the 21 irrefutable laws of leadership pointed to one way of looking at leadership when it comes to fixing a failing firm, loosely speaking “......fire the leadership..... and place motivated individuals....” who are motivated enough to carry the new strategy and do genuinely want to see the corporate succeed and of course perform. Some firms such as Delta have managed to fit in and grow within the same operating environment that others are failing in. Econet has believed in its growth so much that the firm has taken a long-term strategy, equipped themselves for it and pursued it. Many corporates are taking short-term strategies and applying them on long-term platforms which l must say is not a viable route. In certain circles there is always a concern when one uses working capital to refurbish a plant; ordinarily the plant will take too long to generate enough to pay for working capital obligations. Long term strategies should be based on long-term commitments; it is highly unfair for a firm to accumulate short term loans while trying to chase a capital goal. If one is to go through the balance sheets of local firms that reality is so amplified one wonders how some of these firms have not gone under yet.

The notion that some firms are too big to fail has negatively impacted on a lot of listed firms. Most investors throw savings to such companies that are looked at as being too big to fail and this l must say is a corrupted approach. Interfin once stood tall among many financial institutions in the country. Based on which ever source you are to use the bank currently has negative capital of between $100 million - $150 million. The bank had a stable base and many looked at the innovative approach the bank did while carrying out business and took them to be too big to fail. However l boldly state that gone are the days when that term could be used wilily nilly. Now each tremor has to be attended to with equal attention as the times have changed. The American markets know this all too well. Executives who run these firms should wake up and smell the coffee and not waste shareholders funds on half thought ambitions and poorly implemented strategies! Once upon a time Blue Ribbon was a corporate many would have looked at as too big to fail, now the firm is under judial management which in all fairness is a level of failure by those entrusted to run it!

Instead of looking for high margins firms need to think about how to keep consumers coming back on reasonable margins! The marginal utility for certain products is inelastic and under those conditions one can say “you will never go wrong if you pursue......” so set good principles as you approach such types of products. For a time the shareholder will endure, for a time they will take all the nonsense fed to them but do not think they will forget! The economy will see more entrants coming into the fray, some of these entrants will exhibit strategies never witnessed before and those asleep will miss the midnight train. So l say to all public firms change or be changed, sober strategies brew a sober return.