Saturday, November 10, 2007

Why Mutual & Federal is a low-risk buy

On Thursday Mutual & Federal announced the details of a special capitalisation award and discussions with Royal Bafokeng to buy Old Mmutual's interest in the company. The salient features are:

- Improved 3rh quater results, leading to a special dividend of R2 per share;
- Old Mutual are in discussions with Royal Bafokeng, with indications the offer may be R27.50 per share, escalating at 7% p.a. from 8 November.

Before the announcement, market rumours have pushed the M&F share price up to R29. Subsequent to the announcement, the market was disappointed with the indicated offer and pushed the share price down, to close at R26.40 yesterday.

However, from my view, the share is now a low-risk buy at around R26 - R26.50. The reasons are:

- The share is now trading below the indicated offer price;
- Minority shareholders are no obliged to sell;
- Mutual & Federal is a high-yield share, returning cash to investors.

At R26.50, the minimum upside is 3.77%. While this does not look impressive, traders can use CFDs and futures to magnify this movement and increase their returns. As the share price is now loosely underpinned by the indicated offer price, the downside risk will be small.

Monday, November 5, 2007

Gold stocks set to run

After a year of falling share prices, gold shares are, in my view, finally set to run given the strong gold price, both in dollar terms and in rand terms.

Back on 15 August, we mentioned two gold stocks in our watch list: DRD Gold and Goldfields. At that time DRD was at R4.15. Today it closes at R5.53 (up 33%). Goldfields was then R108.90, today at R113.85 (up 4.5%).

Gold shares have been performing poorly over the last twelve months as they were unable to capitalise on the rising gold price, due to declining production and escalating costs. In particular, company-specific problems, like Harmony's accounting dress-up, have hit the share price hard.

However, I believe many of the gold shares are now at a level that offers value. According to our valuations, the following three gold mining companies are undervalued and therefore of particular interest:

Goldfields: Its fair value is north of R160, and we believe in the next twelve months it should reach R170, if the strong gold price is sustained.

DRD Gold: Its technical chart looks promising, we believe it will reach R9.80 in the next twelve months.

Harmony: After the shocking announcement of its former CEO, Bernard Swanepoel, its share price fell by about 40%. It will take some time for the company to sort out its operational problems, but I believe the company presents value at the current levels. The target share price is R126.