GARY BOOYSEN: How Vunani dodged the Ellies bullet – rifles and shotguns

All six foot five and a half inches of Gary Booysen is fascinated by the share market. Especially the smaller stocks that are the playground of retail investors. In our CNBC Africa Power Lunch discussion today he explained how Vunani's clients managed to dodge the "negative ten-bagger" Ellies bullet (great research) and got philosophical about directors buying into their own stories. Specifically Gijima's founder Robert Gumede who threw good money after bad last year – only to see the share price halve again. – AH

ALEC HOGG:  Gary Booysen, Head of Trading at Vunani Private Clients is with us in the studio. Private clients love Ellies – or rather, loved Ellies. The shares got smashed again this morning – down 22 percent. I guess there are a few bets on how much money they're going to need to raise, but at least those who own the shares are going to have something at the end of the day. Or are you worried?

GARY BOOYSEN: We are worried. We're actually, very fortunate. Our analyst Anthony Clark covers Ellies and he actually sent out a sort of 'take profit' at R9.50 and said 'sit back and wait'. If you follow the Small Talk newsletter, he covers it in a huge amount of detail. He's been saying there was a critical level for them. After chatting to management, he was saying 'it's the only way out of the situation really; with the delays of the terrestrial analogue conversion is to go to the market and raise capital. The management said 'for us to raise capital is suicide. We can't do that' and here they are. I think it's another 15 or 20 percent decline from that stage – and now they're raising capital. He's also flagged that they're probably going to need to sell off their Megatron business as well.

ALEC HOGG: But that's something that they've only recently acquired…(Megatron was acquired in June 2008)

GARY BOOYSEN: That really just patched the holes. I think they need about R300m of working capital and if they can achieve that, it should still be a sustainable business. The business that was Ellies a year ago is going to be very different in six months. We're looking forward to hopefully, seeing it once this is all through the wash…coming with a nice recovery play, getting back to the nuts and bolts, and becoming a very entrepreneurial company again. I think there is a future for shareholders, but definitely a grim picture at the moment.

ALEC HOGG: Would you be buying at R1.20?

GARY BOOYSEN: Until we get the full details of that rights issue and we also want to see if that… It hasn't been flagged that they're going to sell Megatron at all. Let me just put that very clearly. Until we see something like that happening, we're not buying. At this stage, the call is definitely 'just wait and see. See where this goes'. It does look like it could become a good recovery story but at this stage, rather…

ALEC HOGG: You need a lot more information before you look at that one?

GARY BOOYSEN: One hundred percent.

ALEC HOGG: Gijima is another similar type of story, isn't it? It's come down a long, long way. The founder Robert Gumede was telling us that it was a great business at 75 cents. He put R75m of his own money in and it's now less than half that level. It just shows that inside the business, sometimes companies can go very wrong, or that the understanding can be very wrong.

GARY BOOYSEN: Yes Alec and I think the way that guys described it; it's the rifle versus the shotgun view. When you're a Director of a company…when you work for a company, it becomes very easy to understand that business very well, but you're looking down the scope of a rifle. You don't often see the whole playing field that you're sitting on, and that's why portfolio managers take more of the shotgun approach. They can never look at it as in-depth as someone can who works there and someone who manages the business, but a portfolio manager can look at the global playing field (and the whole playing field) much clearer and sometimes that's a more accurate way of generating returns for your investors.

ALEC HOGG: Well, in these two instances – most definitely. Does that make us reassess? Rian du Plessis at Phumelela has been buying – I don't know if you've been noticing – every day since the results were out, he's been picking up R1m or so of that stock.

GARY BOOYSEN: Definitely. To base your investment decisions purely on the SENS announcements of where the Directors are buying and selling is always a very dangerous investment philosophy. We would always counsel to go and dig into the company. Don't just look at a Director buying shares and say 'I must follow this' – definitely not.

ALEC HOGG: Don't always coattail those. In both Ellies and Gijima's cases, you would have been very badly burned. The Cadiz trading statement: when Ray Cadiz moved out and Ram Barkai (you might remember) came in, and then he left in a bit of a hurry as well. Since then, the company has been sliding and today's announcement is not at all encouraging.

GARY BOOYSEN: Definitely. The trading statement came out today expecting…well, I suppose it's a trading statement. They had to be put out because the headline earnings are going to be down more than 20 percent again so Cadiz is definitely going through a very difficult time. They've seen a type of mass exodus of assets, which makes it difficult for any asset manager to make money when the guys are leaving. In addition, they were knocked by an investment in Abil as well, so they had exposure there, which obviously hasn't treated them very well. Yes, it's a difficult business. We almost look at it just as a competitor, but we think that if someone's prepared to go and buy Cadiz out and clean up the book… There are many economies of scale and asset management and we're looking at them – depending on due diligence, obviously – but it could be a decent target for one of the larger asset managers.

ALEC HOGG: Well, at these prices (compared with where it came from), it's a good opportunity. However, it's also a bit of flag waving on the BEE schemes because Makana was loaned money and in their statement today, they said they don't think they're going to be able to get that R65m back because the share price is now too low. That's a bit of a strange way to structure a BEE deal.

GARY BOOYSEN: It's very strange. As I said, I haven't looked at that BEE scheme in a lot of detail but definitely, I also saw that flagged in the results. There's a lot of uncertainty around Cadiz, especially. Looking at that and saying 'will they get the money or won't they get the money': it's always difficult. I think that once the stock starts sliding below R1.00, you're probably going to stay away.

ALEC HOGG: The Mining Indaba has started in Johannesburg. There's one in Cape Town, in February. I'm involved with it tomorrow morning and already, the information that's coming out is that there's a lot of engagement between the parties, which perhaps, wasn't the case a year ago and two years ago. Business Day had a go at the story as well, this morning.

GARY BOOYSEN: Yes, I just picked up on it very briefly. Looking at it, I think we need to. If you look at the IMF forecast for South Africa – downgraded again. One of them is obviously electricity concerns. Are we going to be able to build these power stations on time? That's key to our economic growth but the other major flag is our labour situation and that's obviously, coming on the back of that platinum mining strike. It's very difficult. Again, Government's coming in with more regulation. I saw that they'd flagged that they actually want to be notified of any deals that are going down in the mining sector, so that they can have input. For us, that's one more red flag, as well because the industry is already strangled by red tape. This may not be the best thing, but we'll see how it plays out. Communication, especially in that industry, is always a good thing. We'll see how it plays out.