ARTICLES

Near Equities

An equity or ordinary share is one which shares in the risk and returns of a company. Most of the shares listed on the JSE are ordinary shares which rise and fall in price as the company’s potential profits (and hence the prospect for dividends) fluctuate. This is compared to other types of investments like redeemable preference shares and debentures which receive a fixed return and are insulated to some extent from the risk in the business.

Preference shares and debentures are thus designed to appeal to those investors who are more risk-averse, but there is another class of investment which is halfway between these two extremes. These are known as “near-equities” because in addition to their fixed return, they also “participate” in the ordinary dividends paid out by the company or they are “convertible” into ordinary shares at a specified date in the future.

Thus, for example, a participating preference share might receive a dividend of 8% of its par value and in addition receive one cent for every 10c which the company pays out in ordinary dividends.

Convertible preference shares or debentures are converted into ordinary shares at a specific future date – and as that date approaches, they tend to behave increasingly like the ordinary shares which they will become.

When companies issue and sell these various investment instruments, they are trying to appeal to a range of investors from those who want to be involved in the risk of the business and benefit from its success to those who prefer to get some sort of guarantee or security over the return that they are going to get.

A good recent example of a near-equity is the convertible debenture which has recently been issued by the mining conglomerate, Sibanye (SSW). To raise additional capital, Sibanye has sold $500m worth of convertible debentures which will get a return of between 4% and 4,5% per annum and then convert into ordinary shares on 28th November 2028 with a conversion premium of 32,5%.

For the next five years these bonds will get a fixed rate of return and then, when they convert, they will increase the company’s issued ordinary shares. The announcement of this issue caused the SSW share price to fall about 20% because it will ultimately result in a dilution of existing shareholders and some shareholders decided to sell their shares and buy the bonds because they offer the security of a fixed return during the next 5 years.

Consider the chart of Sibanye over the past 8 years:

Like all commodity shares, Sibanye is volatile, impacted by fluctuating platinum group metals (PGM) prices. It peaked on 4th August 2016 at R70 and eventually reached a low of 708c in July 2018. The subsequent upward trend lasted until February 2021 when it again peaked at around R70 before beginning a new downward trend.

You will notice that a good strategy is to use the points at which the 200-day moving average changes direction (indicated by the red and green arrows on the chart).

So, we suggest waiting for the 200-day moving average to turn up before investigating further.

Notably, Sibanye is not the only commodity share that is trying to raise capital in anticipation of a further fall in commodity prices. ARC Invest (AIL) announced a rights issue last week to raise R750m.   

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

Bell Equipment

We are often asked what prompts us to add a share to the Winning Shares List. The answer is that it is a variety of factors – but usually because the share appears to be very cheap in relation to its fundamentals. In other words, we expect it to be upwardly re-rated as its fundamental value becomes recognised by the institutional fund managers. A

JSE All Time Record High

On Friday last week, the 12th of July 2024, the JSE Overall index closed at 81686 – an all-time record high. Consider the chart:

The chart shows that the Overall

Construction

The entire construction industry was decimated by the 2008 sub-prime crisis, the ANC under Jaco Zuma’s presidency and then finally by the pandemic in 2020. Hundreds of thousands of jobs were lost and massive companies like M&R were reduced to penny stocks on the JSE.

The JSE Construction and Materials Index (JS5011)

Murray & Roberts

A company’s debt is critical in establishing the risk inherent when investing in its shares. High debt levels expose the company to high interest and capital payments and can swallow up a large part of whatever profits it makes. Low debt levels give the company the headroom to invest in further growth either organically

Mr Price

Mr Price is a well-known and focused retailer of clothing in South Africa. It is a quintessentially South African company, and its performance is a direct reflection of the state of the economy and the level of consumer spending. It is an extremely well-managed company in a very tough and competitive market. Clothing is sold by many dedicated outlets in South Africa and almost

Uncertainty = Risk = Volatility

We live in uncertain times. Among the sources of this uncertainty are the final outcome of the recent local elections (i.e. what the shape of our future government will take) and the prospect of the American elections on 5^th November 2024. In the background are the wars in Ukraine and the Middle East which constantly threaten to escalate.

The uncertainty

Winning Shares List

Investment in the share market is not about certainties – it is about probabilities.

Success comes from bending the odds in your favour, so that it becomes like playing a roulette table where you have a 60% or 70% chance of winning.

That, of course, means that you must fully expect to lose 30% or

Wall Street and the Rand

As South Africa edges closer to election day, the ANC has been desperately doing everything in its power to pass populist measures to bolster its waning support, especially with the country’s lower income groups. This includes the signing of the highly controversial National Health Insurance (NHI) bill into law by President Ramaphosa.

There

Pan African Resources

In our opinion, the gold price in US dollars should continue to perform well for the rest of 2024 with the potential for rising inflation and increasing political instability in various parts of the world. The upward trend will, of course, be marked by corrections, but the overall direction of the trend is clear. Consider the chart:

Market Overview

This week, the US Federal Reserve Bank’s monetary policy committee (MPC) held interest rates unchanged at their historically high levels and said that they intended to hold rates at these high levels for longer than previously expected. This information was followed by the April 2024 non-farm job creation number which came in at 175 000 – considerably