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.