How you can make massive returns off other people's money

by , 26 September 2018
How you can make massive returns off other people's money
I have a number of interests in private businesses. One startup that I invested money in is about to pay off in a big way.

Suddenly I'm getting calls from investors wanting in on the opportunity….

But mere months ago - when the startup was burning through capital in order to get its products market ready investors didn't even want to give it a second glance.

They were saying that there's no sales there, the company is eating through cash, - and it is too risky.

But I wanted the business to burn through cash. We needed to build a production facility and get a distribution network in place.

This needed money.

What does matter though is how effectively the money is used.

Did we spend R1 million to build a business with R5 million annual revenue, or did we spend R5 million to build a business with
R1 million annual revenue…

It should be clear to you, which is the preferable choice.

Listed companies and shares work in a similar way to private companies.

But, unlike private companies, there's a way for you to make big returns off other people's money.

Even when you weren't an early investor…

Let me explain.


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The listed company investment sweet spot


For this example, I’m going to use a company putting up a new mine.

What usually happens is a company does exploration, discovers a reserve, and then needs to build the mine.

But it doesn’t have cash. So it goes to investors.

Raises R100 million in cash and then starts building the mine.

Building the mine takes two years. During this time, there’s no income for the business, and it is burning through cash.

Eventually production starts – and investors that were distraught catch newfound excitement about the company…

But when the first results come out there’s big depreciation charges and the profits don’t look good.

That’s when many investors exit the share.

I’ve seen it happen repeatedly.

But this is where the investment sweet spot lies…

The money that was put in by investors has now done its job, and profits are around the corner.

This is where you want to buy in to the company.

Think about it – if you invested millions in a private business would you sell out at this point?

Would you let other investors buy you out cheaply?

 

A company that’s in the investment sweet spot right now
 
In September 2016 a consortium of investors put R211 million into Wescoal shares.
 
The company burnt through this cash repaying debt on a new mining project, and then it bought another junior mining company as well.

The excitement of this transaction sent the share price from 169c to 270c by February 2017.

But investors soon became despondent.

Profits didn’t pan out as well as they’d hoped while the company was busy consolidating its new acquisition and completing mine development.

By April 2018, the share hit a low of 161c after the company reported an 18% drop in earnings in November 2017.

Since this low, the company has steadily started picking up again.
And following a string of announcements between July 2018 and 29 August 2018 announcement I believe the company is now in the investment sweet spot.

The money investors put into the company in 2016 has now done its work.

And the company’s profits have made a massive turn upward… The upside potential now is massive – amidst all the investor scepticism.

 

Buy into this massively profitable miner at its investment sweet spot right now


Wescoal reported results on 26 June 2018. The company increased revenue from R2.1 billion to R3.5 billion.

Earnings per share soared from 11.3cps to a massive 46.4cps.

The company is valued at R877 million today – with its profit for the last year equalling a massive R201 million - that means the company will make its own value in profits in just four years!

If you compare it to its largest competitor Exxaro, you see why the share is so attractive. Exxaro is on a PE of 16.45 whilst Wescoal trades on a PE of 4.22!

Exxaro’s latest revenue was R22 billion, compared to its market value of R54 billion.

So investors pay more than R2 per R1 revenue Exxaro generates.

At the same time, investors only pay 21c per R1 revenue Wescoal generates.

In short – if investors assign the same valuation to Wescoal as they do to Exxaro the company would sit on a share price of +-R16, compared to its current R1.97. And that’s without further production growth.

It is therefore possible for Wescoal to grow Ten-Fold in a matter of mere years.

Simply put – Wescoal is in a great position. The company is cash flush. It has a client in deep need of coal – and it can charge a premium for it.

And most of all – the share is VERY attractively priced!

 

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Here’s to unleashing real value

Francois Joubert
Editor, Red Hot Penny Shares


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