Premfish Plays the PE Game

23 October 2017 By PDSNET

One of the great advantages of listing on the JSE (or any market) is that it re-rates a company’s shares from their pre-listing level as a private company (which is usually between 3 and 5 times their most recent after-tax earnings). Most listed companies can look to trade on the JSE at somewhere between 10 and 15 times after-tax earnings – depending on their track-record and the type of business they are in (service companies tend to trade on higher multiples than, for example, manufacturing companies – because they have much less working capital risk). The difference between the value of an unlisted private company and a listed public company opens an opportunity to play what we call “the P:E game”. This consists of a listed company buying an unlisted company for somewhere between 3 and 5 times its annual after-tax profit – and then adding that profit to its own at which point it is immediately re-rated to between 10 and 15 times. The result of doing this is that the shareholders of the listed company see an immediate gain in the value of their shares. A current example is Premier Fishing Brands' (Premfish - PFB) acquisition of 53,5% of the Talhado [glossary_exclude]Group[/glossary_exclude]. This controlling stake was bought for R106m and for that gave Premfish 53,5% of Talhado’s after-tax profit of R51m (in the year to August 2017). If you do the maths, this means that Premfish paid roughly 4 times Talhado’s most recent after-tax earnings. But Premfish is trading on the JSE for 15 times its after-tax earnings. Once the deal goes solid (and there are some conditions), Premfish will add 53,5% of R51m to their annual earnings – and those additional earnings should immediately be re-valued to 15 times. This means the acquisition which cost R106m will immediately be worth roughly R409m – quite an nice addition to Premfish’s market capitalisation of about R1 billion prior to the deal. By making this deal, the directors of Premfish will effectively hand their shareholders a tidy 30% capital gain. That is playing the P:E game. Of course, the acquisition must be a good acquisition. It must integrate well with the company’s existing business and it must have a stable earnings [glossary_exclude]rate[/glossary_exclude] and not bring with it any major unforeseen problems (for example, in the fishing industry the [glossary_exclude]allocation[/glossary_exclude] of quotas can sometimes be a problem). And as a private investor you need to consider whether the share is sufficiently liquid on the JSE – otherwise you won’[glossary_exclude]t[/glossary_exclude] be able to execute your stop-loss should you need to. Premfish has clearly not attracted much institutional [glossary_exclude]investment[/glossary_exclude] so far. This can be seen from the fact that over the past 3 weeks it has traded an average of only R100 000 worth of shares, on average, each trading day. This makes it useless for the big institutions who want to see at least R2m trading per day before they become interested. But for you, even this volume would [glossary_exclude]warrant[/glossary_exclude] an investment of R30 000 (our rule on volume is that you must see at least 3 times what you want to buy passing through the share each trading day). Technically, it appears that the share has found some [glossary_exclude]clear[/glossary_exclude] support at around 365c and is in the process of preparing for a major upward move. Consider the chart:

Premier Fishing Brands Ltd (PFB) - Chart by ShareFriend Pro
So, we believe that this share is worth buying at these lower levels, and given the acquisition of Talhado – which does not appear to be discounted into the price yet. Once the directors get a taste for playing the PE game, you can be sure that more earnings enhancing acquisitions will follow. Premfish raised over R500m when they listed in March – so they still have plenty of balance sheet “head-room” to work with.  


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.



Share this article:

PDSNET ARTICLES

Gold and Harmony

In our last Confidential Report, published on 6th March 2024, we drew your attention to the fact that the US dollar price of gold was about to break up through a critical resistance level at $2060. Gold has now moved up to $2166 so this observation provided an opportunity for private investors to make a significant capital gain, either in actual gold

Reverse Takeover

At the end of October 2023, Mix Telematics (MIX) was a relatively small fleet management company with a market capitalisation of just R2,3bn listed on both the JSE and the American NASDAQ. Its shares on the JSE were wallowing at a low of 380c. This compares with its competitor, Karoo (KRO), also listed on the JSE, but which was at the time, more

Rare Opportunity

You may not have been aware of it, but last week, between Monday and Friday, there was an opportunity to make an 80% profit on your capital. This opportunity occurred because of insider trading on a little known and traded share called Quantum Foods (QFH) in the poultry and animal feeds business.

Generally, the poultry business is

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of

The Great Bull Resumes

On the 12th of June 2023, we published an article, headed "Bull Trend?". In that article we suggested that, after a 25% correction, the great bull market on the S&P500 which began in March 2009 was still intact and would, in time break to a new all-time record high, above the high

CA Sales

In recent years, the JSE has not seen many high-quality, exciting companies listing on the exchange. One of those few is CA Sales Holdings (CAA), which offered both fund managers and private investors an excellent opportunity to make a significant capital gain last year.

CAA is a company which has grown

Two Elections and Two Wars

As the New Year begins, private investors should consider the most important factors which are likely to impact on the prices of shares and the profits of companies listed on the JSE. Some of these factors are local, like the general election which is expected to take place sometime in May, and some are international like the oil price, the