09.02.11

Simeka issued a trading update in December last year saying it expected earnings per share for the 6 months to 30 November 2010 to be between 110% and 120% higher than that of the previous corresponding period, with headline earnings per share between 3% and 5% higher. That translates into expected earnings and headline earnings of between 4c and 5c a share.

Added to the previous six months headline earnings of 1.1c a share, that means, at around 15c a share, that Simeka is currently trading on a p/e ratio of less than 3. Which would make it a screaming buy except for three things: The company’s tangible net asset value, its reluctance to further reduce its interest-bearing debt, and the fact that it doesn’t want to pay more for its own shares.

Despite that fact that Simeka wrote-off more than R275m in goodwill and intangibles in 2010 it still carries over R185m – roughly 35c a share – in goodwill and intangibles. That leaves a tangible net assets value of about 6c a share.

In the second-half of 2010 (to end May) Simeka reduced its interest-bearing debt by some R50m, leaving a balance R88m – resulting in a debt-equity ratio of 0.4. While that’s not a problem, the fact that it also has cash-on-hand of R94m that it’s not using to reduce this debt, begs the question: why not?

Finally, the fact that Simeka is engaged in the buy-back of a maximum of 30m shares for an aggregate amount of R4.5m, suggests it’s not keen to pay much more than about 15c a share, which given the expected earnings, also begs the question: why not?

The company will be renamed Morvest in March this year, before then it will, hopefully, have issued its first-half results for the current financial year. It may be worth waiting to see what they reveal before paying too much above the current price.

Besides a lacklustre cash performance, there’s nothing obvious in Trustco’s results to explain the collapse in its share price between May 2009 (80c) and August 2010 (25c). From March (ye) 2009 to March 2010 headline earnings increased from NAD0.108 to 0.126 a share (eps from 0.014c to 0.203c), net assets value increased from NAD0.561 to 0.707, dividends doubled (from 1c to 2c).

Insiders took advantage; In September last year directors bought a total of 1.1m shares at 40c to 47c a share. That month, shareholders approved a share buy-back and the transaction between Trustco Mobile, Econet Wireless and First Mutual Life Assurance Company was approved by the Commissioner of Insurance, Pension and Provident Funds in Zimbabwe.

All of which may have contributed to the share price bouncing back (above 70c) by November.

In December the company reported headline earnings of NAD0.078 per share for the six months to 30 September 2010 (from 0.045 the previous year) with a 12% increase in net assets value to NAD0.123 a share.  Unfortunately, the cash performance once again went the other way with a net cash outflow from operations of NAD3.4m contributing to drop in cash from NAD69.4m to NAD63.8m

Nevertheless, the directors declared an interim dividend of 1.5c a share and continue to buy – 3 of them having bought 557,500 shares @ 64c so far this year.

On a 12 month headline p:e of less than 5 and at a 20% discount to net asset value it may be worth following suit. On the other hand Trustco is trading at a 30% premium to its tangible asset value. Given its price volatility it may be wiser to wait and see what happens when the buy-back comes to an end. By which time the cash performance might have improved too