ARTICLES

City Lodge Rights Issue

The COVID-19 pandemic has hit few listed companies on the JSE as badly as City Lodge. Business and holiday travel has slowed to a crawl and occupancy in the second half of March 2020 fell to a dismal 16,7%. KPMG, the City Lodge auditors, drew attention to the fact that in the 9 months to 31^st March 2020 the company lost R316 000 which left it in a position where its liabilities exceeded its assets by over R750 000. Clearly, the board had to do something to rectify the situation.

The decision to undertake a rights issue cannot have been an easy one. The share price was wallowing at less than R20, down from over R170, 18 months earlier in February 2018.  The company was now technically insolvent, and it would be necessary to pitch the issue at a very deep discount. In the end it was decided to offer 556,5m shares to existing shareholders at 212c each in a fully underwritten rights issue.

This involved offering existing shareholders 13 new shares for every share which they already held – a massive dilution. The offer came in the form of a “renounceable nil-paid letter of allocation” or “NPL” for each new share. These NPLs are currently trading on the JSE as a separate derivative instrument (CLHN) until the 18^th August 2020. Each NPL entitles the person holding it to buy one City Lodge share for 212c – so it has a value which is directly dependent on the price of City Lodge shares.

At the close of trade on Friday 14^th August 2020 the NPLs were trading for 160c and City Lodge shares (CLH) were trading for 550c. Obviously, with the new shares to be issued on 18^th August, the company’s share capital is massively diluted. The company gave its net asset value (NAV) as R37.40 per share with 43,574m shares in issue at 31^st March 2020 giving a value of R1629,67m. The drop in the NAV from the previous year’s R43,90 was mostly due to the R344,6m impairment in the value of the company’s existing hotels based on their lower expected occupancies as a result of COVID-19. Following the rights issue, the company’s net asset value has been increased by the R1200m raised, but there are now 610m shares in issue – so that means, theoretically, the NAV per share should be 463,9c (R1629,67 + R1200m divided by 610m shares).

On the first day after the NPLs began trading on the JSE with the dilution, City Lodge’s shares fell to just 319c – which is about 45% below the company’s current theoretical NAV (463,9c).

A well-managed company like City Lodge cannot be worth 45% less than the value of its assets. At 319c it was an absolute bargain. The smart money piled into the share and drove the price up to 550c by the close of trade on Friday last week – a gain of 72% in just 7 days. The jump in price was accompanied by a huge increase in the volume traded and that gave an excellent OBV buy signal. Consider the chart:

This shows the candle stick chart of the shares price at the top, the on-balance volume (OBV) chart in the middle and the volume histogram at the bottom. You can see the sharp drop in the share’s price as a result of the rights issue dilution in the top chart. The bottom chart shows the huge increase in volumes as the smart money stepped in to buy up whatever loosely-held shares were available at bargain prices. The OBV went up by 73,45% in just 3 days, giving a very convincing buy signal by Friday 7^th August 2020 at a share price of 391c. Since then, during last week, the share has risen to 550c – a further gain of 40% in one week.

This shows that the alert investor can find money-making opportunities in this market, especially by following and watching the volume traded.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly

CA Sales Revisited

Retailing in Africa is difficult with many of our leading retailers having attempted to open stores in countries to the North of us without notable success. These countries are often unstable and volatile politically. Getting adequate stock to branches has proved problematic and expensive.

It is not surprising therefore that a company has been

Bluetel

Bluetel (BLU) is a company involved in pinless top-ups, prepaid electricity, ticketing and universal vouchers. As such it is a company with substantial repeat business from existing customers. This type of business model is attractive to investors because it implies minimal working capital and strong cash flows.

Bluetel’s purchase

The Debtors' Book

A BIT OF HISTORY

Many years ago, in 1982 when I started this business (which became “PDSnet”), I ran advertisements in both the Rand Daily Mail (RDM) and in the Star – which were the two most widely read newspapers in Johannesburg at the time. At that time, we were a very small business and had no credit rating at all. Despite this the RDM immediately