Cambria Africa: trading at 3.1x forward earnings

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. 2017 $6.37m $2.65m $1.52m
Fisc. 2016 $5.32m $1.96m $1.26m
Fisc. 2015 $5.01m $1.23m $0.37m
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.

Open Offer

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.

Illiquid

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.

Conclusion

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)

Posted in European Stocks and tagged .

3 Comments

  1. I came across your blog by chance when I asked Siri (the Apple bot) what the price of Cambria Africa is. I was very impressed by your detailed review of the company and its prospects. Sadly when I tried to find your article on google, it was listed far below automatic investment “analysis” entries yet it is one of the more insightful coverages of the company.

    Obviously, I cannot say what has not been publicly stated as I’m the CEO of Cambria Africa. I didn’t get “permission” to comment, but I don’t see the harm in clarifying some of the issues you have raised.

    The risk of delisting had never occurred to me until it was brought up by our NOMAD and now in your blog. As the ultimate beneficiary of VAL, as you correctly state, VAL invested in Cambria Africa because it is publicly listed. In fact, I am considering a request by our NOMAD to commit that VAL will not vote in the unlikely event that a delisting proposal comes before the shareholders.

    It should be noted that VAL’s conversion of debt to equity is a significant vote of confidence in the value of Cambria’s equity and regardless of participation by other shareholders, will significantly improve the Company’s balance sheet and increase the net equity of all shareholders. If the Open Offer goes ahead as planned, Cambria will be practically debt free and its debt service burden will shrink. As debt is senior to equity, VAL’s move in converting the majority of its debt to equity shows that in VAL’s opinion the share price is attractive and prospects are good.

    Given the illiquidity of the share, the point of the Open Offer is to give an opportunity to the other shareholders to increase their shareholding in Cambria at a fixed price. Shareholders will be able to retain and increase their ownership percentage of the company the price of 1.10p which represents an even higher multiple of forward earnings. The Open Offer Price is fixed at 1.10p regardless of how many shares are bought or how many excess shares are applied for. Shareholders can apply for more shares than their allocation. There is no limit to how many shares can be applied for as long as the total shares on offer have not been allocated. In fact, it is a reasonable possibility that if shareholders actively participate and take up all shares on offer, VAL will be diluted while shareholders can increase their percentage ownership. This in turn should improve liquidity.

    Cambria has closed a very difficult and sad chapter on its past since my involvement. We have moved to an era of greater disclosure and commitment to all shareholders, not least because through VAL I am the largest beneficial shareholder and my interests are closely aligned with that of all shareholders. Cambria represents a unique opportunity to invest in Zimbabwe through an international exchange. I do hope that our management team, our independent directors, and I can continue to steer the current and future investments of Cambria in a profitable direction.

    Thank you again for taking note of Cambria and its investments.

    Respectfully,
    Samir Shasha
    CEO
    Cambria Africa plc

    • Thank you very much for your comment, Mr. Shasha. I’m glad you appreciated my post. The past has been very tumultuous for your company and I’ve definitely not learned all there is to learn about Cambria Africa, let alone address all the events that took place in the last few years in my post. I think your comments will help investors to assess the company and to perhaps take away some of the concerns that they might have.

      Personally, I would very much like to see VAL commit to the company’s NOMAD to not vote VAL’s shares in the event of a delisting proposal. I believe VAL, and Cambria Africa’s directors, are likely to hold more than 75% of the shares after the upcoming Open Offer. I believe an approval of 75% of the votes cast are required in a delisting vote. As you pointed out, it is possible that VAL will be diluted if shareholders actively participate. At this point in time, it’s hard for me to see that outside shareholders will show strong support though. The results of the previous Open Offer were not encouraging in this regard. That said, operations have improved substantially since then, so perhaps outside shareholder support will be stronger now.

      I do think that shares of the company will continue to trade at a large discount to their intrinsic value as long as this “threat” of a potential delisting hangs over the company. A delisting would force many investors to sell and they are likely to get a price well below the previous day’s market price at the time of the announcement.

      A current example is Servoca Plc, which published its delisting announcement on May 14: https://www.investegate.co.uk/servoca-plc/rns/proposed-cancellation-of-trading-on-aim/201805140700098903N/. The share price immediately dropped 21%. That company might well be a bargain right now, but many investors simply can’t continue to hold shares in – what will become – an unlisted company. Delistings like this have been fairly common on AIM and I believe investors tend to avoid companies where a delisting seems likely.

      There must be many investors who refuse, or are not allowed to, own companies where this scenario could occur. If VAL and the company’s directors would commit not to vote on a potential delisting proposal, this worry could be taken away and the discount to the company’s fair value could be reduced. If the company would like to have the option of using reasonably priced shares as a currency in a future transaction, providing clarity about this issue is important as well, I think.

      All the above is written from my perspective as a small shareholder. It might well be in VAL’s and the company’s best interest to delist. In its press release, Servoca Plc mentions cost savings of £150,000 per annum. I don’t know how much Cambria Africa could save by delisting, but it should be a substantial amount. As a percentage of the company’s equity, it would be a meaningful sum, even after the Open Offer is complete. I think many investors will be aware of all this as well. Many potential investors and current shareholders will be wondering what benefits VAL sees from a continued listing of the company on AIM and if they are likely to be put in a position where they are forced to sell. I believe it would be a good idea to address these questions in the annual report.

      Finally, as a new shareholder of the company, I would like to take the opportunity to thank you for your efforts in turning the company around. I realize this must have been difficult to achieve, especially when many of the problems you faced were the result of others’ past actions. It is also very positive to see you respond here to the questions that I raised in my post. Openness from a company’s management about questions raised is always a good sign to me as an investor.

      I do believe the future looks a lot brighter for the company. I hope Cambria Africa’s shareholders can benefit from the improved financial position of the company and the improved outlook for Zimbabwe.

      Best regards,
      Paul Snijders

  2. The Open Offer Circular was released today. It can be found on Cambria Africa’s website: http://www.cambriaafrica.com/

    VAL has committed to the company’s nominated adviser (WH Ireland) that it will not vote its shares in any delisting proposal:

    “VAL has given WH Ireland an undertaking to continue its support for Cambria’s listing on AIM and has agreed that it would exclude itself from any vote to delist the Company. VAL will however, retain its right to vote all the Cambria shares it holds against any proposal to delist the Company.”

    I think that’s good news for shareholders. I do get the impression that VAL / Mr. Shasha really values the listed status of the company and does not intend to delist it from AIM. That makes me more comfortable to participate in the Open Offer.

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