Investing in companies that have suffered a misfortune in the hope of a quick recovery is a terrific idea, when it happens – which, unfortunately, isn’t all that often *. But for those brave enough to try it, here are two of the bigger disaster stories of the last few years:

Blue Financial Services

In the commentary to the company’s interim results to 31 August 2008, Dave van Niekerk, the company CEO, said Blue Financial Services was “well positioned to maintain a strong growth path” and would be able to “maintain an aggressive expansion strategy without compromising on its Corporate Governance and risk management practices.”

At the time Blue’s share price had just come off a high of 690c.

At 28 February 2009 Blue reported interim earnings of 11.8c a share and an increase in net assets value of 32.3c, to 196.8c a share. However, in the following 18 months (to 31 August 2010) the company suffered a loss of almost R1.2bn, that reduced shareholders’ funds to a negative R208.5m and raised total liabilities to almost 1.5bn.

Two months earlier the share price had fallen to below 10c.

Van Niekerk is no longer in charge. The Mayibuye Group has taken control with the stated objective of returning Blue Financial Services to profitability within 18 months.  A new Board has been appointed.  The company is being recapitalised.

Already the share price is back over 30c, but that will still be cheap if Mayibuye achieves its objective.

Afdawn.

At 28 February 2008 things were still looking pretty good at Afdawn; that year reported earnings per share rose to 85.5c and net asset value rose a100c to 255.7c a share.

In the next six months, however, the company suffered a loss of 137c a share and a subsequent reduction in net asset value of 200c.

By February 2010 Afdawn’s net asset value stood at 10.7c a share.

The company’s  share price fell from a high of 545c in October 2008 to below 10c in June 2010 when  it revealed that it needed R60m to fund its activities for the next financial year, but that lenders were hesitant to provide it “without the backing of a strong anchor shareholder.”

Since then things have got a little better. Afdawn has reached an agreement with the National Housing Finance Corporation over the R36m owing to it (sitting in current liabilities) which “will allow the directors to proceed with the raising of additional capital without material uncertainty facing the company.”

But while the interim results to 31 August 2010 were not as terrifying as those of the year before, they still showed a loss of R10m together with operating cash outflows of R11m. Shareholders’ funds now stand at R12m (6c a share) alongside long-term borrowings of R28m, which suggests funding will have to come through the equity account – diluting future earnings. Added to the fact that Afdawn is still not out of the woods and is currently trading at twice book value, it’s probably best to stay on the side lines for now.

* Murray & Roberts went from R2.00 a share in February 1999 to R112.00 in October 2007. Rainbow chicken fell to a low of 50c in November 1999 before going back to R20.00 in December 2007.