FML: high prices always lead to low prices

By Admire Mavolwane

IN the past five days of trading, the industrial index has lost some 4,9% to close Wednesday at 18 313 611,62 points, as the fainthearted continued dragging the market down through “profi

t taking” ostensibly to crystallise their gains. It was a mixed bag in terms of gainers and losers with a one time high flyer, which for fundamental reasons is now being weighed down by the unsavoury dog status tag, Celsys, finally being discovered by punters and having its price driven from $70 to $100. Tracing back to the beginning of the month, the telecoms company was trading in the lower $30s.



One counter that has kept market watchers captivated has been First Mutual Life (FML). The insurance group, since its listing on November 24 2003, seems to have an uncanny propensity to grab the headlines.


Next week Thursday, FML will be celebrating its two-year anniversary on the Zimbabwe Stock Exchange (ZSE) and what a tumultuous time it has been.

After its listing, there were a lot of grumbles regarding the acquisition of a 20% stake by Capital Alliance, a management consortium. On January 13 2004, the counter was suspended from trading following its exposure to ENG Capital via its asset management firm and also to Trust Holdings through the strategic alliance. The latter had its flagship tottering during the liquidity crunch of early 2004.


The initial suspension was meant to facilitate the evaluation of the impact of the two exposures and subsequently notification of shareholders through a cautionary statement.


Trading resumed on February 5 only to be suspended again on March 8, apparently following a confrontation between the ZSE and management regarding the Capital Alliance transaction. The ZSE never published an official statement, though. The press had a field day, falling short of describing the whole deal as capitalism at its worst. Yet it was never mentioned in the press the enormous debt and its attendant risks that the management team had taken in acquiring this stake. Now that the management team has all but lost the entire stake, the press is nowhere to be found and is conspicuous by its silence.


Those interested in and who advocate for debt funded employee share or participation schemes should visit the initial scheme set up by Cottco at its listing in 1997 and what became of it.


On July 29 2004 following a mudslinging match in the press with Royal Bank which was then heading for curatorship, management of FML sought and got approval from the ZSE for a voluntary suspension from trading. What started off as an intentional adjournment to trading turned out to be a welcome chance to those sections clamouring for the management team’s blood, who under the guise of pursuit of justice, pressed the Commissioner of Insurance to launch a policyholder funded investigation into the operations of FML.


The findings of the report are yet to be made available to the policyholders notwithstanding the group’s re-listing after the conclusion and submission of the report to the commissioner and Minister of Finance. One can only wonder as to the contents of the final report.


This last sojourn proved to be the longest period lasting close to eleven months as the counter only resumed trading on June 21 2005. Upon its re-listing the counter went on to break records, notching a 259% gain in three days from $34 to peak at $122 with considerable volumes going through. The price then receded before stabilising in the $80-$100 range and was then considered to be trading normally.


However, since the beginning of November, maybe in anticipation of the second year anniversary celebrations, the strange trading pattern manifested itself once again, with a single broker pushing the price from $290 per share on November 4 to $2 000 by Monday. In one instance, on November 11, the price leapt 104% from $785 to $1 600.


Now, we understand that according to the rules of the ZSE if a counter’s price changes by more than 50% in one trade, it is immediately suspended and management may be called upon to either furnish the whole market with information that could have accidentally been leaked to certain parts of the market leading to the abnormal movement or confirm that nothing untoward is happening. Granted, the 50% threshold may now have been rendered impractical by inflation, but surely a 100% appreciation in one call-over is thunderous enough to waken the authorities from their deep slumber.


We do not advocate the suspension of counters, particularly in the case of FML which has specialised in these, but this is a glaring example of a scenario that warrants investigation together with a statement from management and the board to both shareholders and policyholders.


Where will that share price eventually settle, now that it is retracing back? That is the multi-billion dollar question that all those who, for various reasons, are still holding onto their FML shares are asking. There have been many excuses advanced for not selling at that stratospheric price – inattention with regards to the counter’s trading pattern or lack of information as to what was driving it. Or just plain old fashioned greed.


In direct contravention of all common sense, most still feel cheated by the counter’s return to $800 although every sane person this side of Mars agreed that at $2 000 it was horrendously overvalued. Some investors and group executives are fairly confident that the share price will not go much further below $800 – it would have been very enlightening to find out exactly how many of these very same people thought that the share was worth that much when it was range-bound near $100. Bubbles have a way of distorting perspectives – followers of behavioural finance refer to such irrational sentiments as “anchoring”.


An extremely charitable valuation to account for these emotions, using both group earnings and asset values, suggests a price under $500 a share. An excellently run business with a very good management; nonetheless were it not for the spirit of Christmas which has descended upon all mankind, our valuation for it would be closer to $400 a share in a strong market.

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