I’ve taken a speculative position in Cambria Africa (LON:CMB). Cambria Africa is an investment company that is building a portfolio of investments primarily in Zimbabwe (I know, hold on!). The company is listed on the AIM market in London.
Cambria is definitely a microcap. There are currently 353.8 million shares outstanding and the latest share price is 1.24p, giving the company a market cap of just £4.39m or $5.9m USD. The USD is the functional currency of the company, so that will be used in the rest of this post as well.
The company has been around since 2007 (known as LonZim then) when it issued shares at 100p per share. In other words, original investors in this company have literally lost ~99% of their money here. If they are still holding, that is. The only way to achieve that result is to make a whole series of disastrous investments and that is what the company seems to have done.
I’ve read about big losses on the sale of hotels and various money losing subsidiaries in other African countries like Malawi and Zambia. There was also a claim against the former managers of Cambria alleging unlawful transfer of monies and fraudulent misrepresentations. In September 2015 this matter was settled and Cambria received net proceeds of $3.5m.
By 2015 the company’s financial situation had become pretty desperate. Ultimately an entity called Ventures Africa Ltd (VAL) was willing to subscribe for 107m shares at 0.85p. This, and a few loans provided by VAL, allowed the company to survive. VAL is owned by Samir Shasha. Mr. Shasha is now the CEO of Cambria and the majority owner with 66.5% of the outstanding shares.
Since Shasha is in control of Cambria Africa he has sold off investments, shut down unprofitable subsidiaries and scaled back unprofitable operations. What is also notable is that he has taken no compensation from the company since the change in control in 2015. He has said that he would not do so until the company’s cash flows could support this. The directors have not been compensated since that time either.
What is left?
Cambria Africa currently owns two subsidiaries:
- Payserv Africa: Zimbabwe’s leading provider of Payments and Business Process Outsourcing services targeted at financial and related sectors. There are three business units: Paynet Zimbabwe, Autopay and Tradanet.
- Millchem: a distributor of industrial solvents and metal treatment products in Zimbabwe
Millchem was bleeding money before Shasha took over, but in the next two years he was able to reduce losses by sharply scaling back the business. In H1 of fiscal 2018, the company posted a profit of £102k, its first profit in four years.
The real value of the company is currently in Payserv Africa though. I think the most valuable business unit is Paynet Zimbabwe, although I can’t be sure because the company doesn’t provide the results of each unit within Payserv Africa yet.
Paynet is a payments transfer system that links Zimbabwe’s banks to 1,200 corporate institutions. The system is used for bulk salary transfers, supplier payments and direct debits. Paynet has a market share of 90 – 95%. It also is one of the cheapest solutions apparently, because in the 2017 annual report the company talked about “rationalising transaction pricing which remains among the lowest in the industry”.
I think that Paynet is almost certain to benefit from economic growth in Zimbabwe. Mugabe resigned as president in November 2017 and Emmerson Dambudzo Mnangagwa took over. I have no idea if Mr. Mnangagwa is able to improve things significantly in Zimbabwe, but I do think it’s difficult to do worse than Mugabe.
Autopay provides payroll management services to companies in Zimbabwe. Not much detail is provided in the annual report, except that this unit was profitable, but not achieving its full potential.
Tradanet facilitates loan origination at the employer’s site on behalf of financial institutions. No details about profitability are given. Loan volumes had taken a big hit in 2015, but have recovered somewhat since.
Results Payserv Africa
These are the results of Payserv Africa since 2013:
|Year/Period||Revenues||EBITDA||Net income *|
|H1 fisc. 2018||$3.66m||$1.55m||$0.95m|
|Fisc. 2014||$4.59m||$0.32m **||Not reported|
|Fisc. 2013||$4.16m||$0.44m||Not reported|
* Note: net income excludes minority interests
** The results for 2014 included a $0.7m write-off of transaction costs relating to a Zambian investment which did not proceed.
As you can see, Payserv Africa is a solidly profitable business that is growing its revenues nicely as well. The interim results showed revenue and EBITDA growth of 16% and 17% respectively. If the company is only able to maintain these results in the second half, it would make $1.9m for the full year, giving the company a P/E ratio of 3.1. Given the historical results, it seems likely they will be able to grow these numbers though.
Now this obviously looks obscenely cheap, so what is wrong here? Besides Zimbabwe probably being one of the most unpopular places on earth for investors to put their money in to, and the horrible track record of this company, there are a few other things that could offer an explanation.
One factor that’s probably depressing the price currently is that investors are being asked to put more money in. An open offer is being proposed. Investors will be able to subscribe for two additional shares for every share they hold, at a price of 1.10p per share. The record date for participation in this offer is expected to be May 29, 2018.
Venture Africa Limited will convert a maximum of £1.6m in loans it has to the company into equity. The company has done open offers in the past as well, the latest in December 2016 when VAL also converted debt into equity.
At the end of fisc. 2017, the company owed VAL ~$2.5m. If £1.6m (around ~$2.1m) is converted into equity, there should be a maximum of $0.4m left. The company also owed ~$0.8m to CABS, a Zimbabwean bank. In H1 2018, net debt was reduced by $0.46m as well. I don’t know how if the VAL loans or the bank loans were reduced. The company’s financial position should look fairly solid after the VAL conversion and the money that shareholders might put in.
I don’t think many outside shareholders will take the opportunity to buy new shares in the offer. In the last open offer only 15.9m shares out of a maximum of 125m (12.7%) were subscribed for by minority shareholders, raising just £159k.
So after the open offer, Cambria will have a lot more shares outstanding than currently. If VAL subscribes for 145m shares than there would be 498.8m shares outstanding plus whatever outside shareholders would subscribe for. We don’t know what this last number will be, but it seems unlikely that it will be anywhere near the maximum of 243.7m, given the lack of interest shown in the last open offer. Let’s say 30% of this amount is subscribed for, or more than twice as much as in the last open offer, than another ~73m shares would be outstanding. In that case there would be roughly 570m shares outstanding. If the share price remained around the current level, the company’s market cap would be around £7.1m or $9.4m USD. The company would be trading around 5x fisc. 2018 earnings in that scenario. Probably for a lower multiple even, because interest expense would be substantially lower and Payserv is likely to grow earnings.
I’m not sure if I will be able to participate in the open offer. I’ve asked my broker and they are looking into this at the moment.
Risk of delisting
Another thing that could be a concern for investors is that the company could be delisted at some point. Mr. Shasha already owns 66.5% of the shares and after the open offer his stake is likely to be substantially greater. Also, directors are being handed 5m shares just prior to the open offer as compensation for the unpaid work they’ve done over the last couple of years. I believe they are able to then participate in the open offer as well with those shares and take up possible excess allocations from outside shareholders who don’t take up their full entitlements for shares.
I don’t know what Shasha’s plans are for the company’s listing. In 2015, a delisting was proposed but then cancelled at VAL’s request. I do think that investors should be prepared for a future delisting in this case. A delisting is going to create issues for some investors and that is probably keeping investors out as well.
The shares are very illiquid. It is probably difficult to buy more than a few thousand pounds worth of shares. The open offer does create an opportunity to buy more without being dependent on market liquidity.
Cambria Africa looks very cheap. For this investment to work out well, a lot will depend on how the CEO, Mr. Shasha, will act and behave. If he is a trustworthy individual who will treat shareholders reasonably, I think investing in this company will probably work out well. Figuring this out is difficult though.
I’m not sure how to feel about the open offers in this regard. On the one hand, Shasha has been able to take advantage of these by obtaining control of the company at – what now looks like – a bargain price. On the other hand, the situation looked really bleak when he stepped in and he’s also provided much needed financing to the company that allowed it to survive. It seems reasonable to me that he wants to convert those loans into equity, as long as outside shareholders can participate, which they are able to do. Shasha and the directors have also not taken any compensation from the company when the company was struggling.
Shasha’s capital allocation skills are another unknown for me. The company plans to make other investments in Zimbabwe. Perhaps more money needs to raised for this in the future. I don’t know enough about Shasha to make a good judgment there. What I have seen is that he has managed to stop the bleeding at Millchem and has done a good job of closing down unprofitable operations. In the past he bought an ISP in Zimbabwe called Zimbabwe Online and served as its CEO until he sold the company to Liquid Telecom in 2012. My impression so far is that he seems like a competent businessman, but I could be completely wrong.
I bought a small position and if my broker can accomodate this, I will probably subscribe for additional shares in the open offer.
This post was originally meant to be posted on VIB Premium, but I thought it was probably better for me to get a broader audience for this post and publish it on the public blog. Outside shareholders are in a vulnerable position and it’s probably good to have more people looking at this situation.
Disclosure: long Cambria Africa (LON:CMB)