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You need to avoid this investment trap

by , 15 May 2019
You need to avoid this investment trap
“Francois - AEEI shares look really attractive. The company's interim earnings showed a profit of 38.67cps and the company's net asset value is a whopping R10 - while the share price is a mere R2.55. Certainly there must be upside potential here?”

Surely a company trading at a 74.5% discount to its assets and a PE of 6.59 on half year earnings is cheap, and a certain buy?

Well, in some cases not.

In fact, even at this price I would do all I can to avoid the share.

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Connections to fraud is never a good sign
AEEI or African Equity Empowerment Investments is a large shareholder in Ayo.
Ayo Technology Solutions, if you haven’t heard of the company, is the company that is linked to Iqbal Survé.
The company has recently come under the spotlight following revelations that the PIC (Public Investment Corporation) invested billions in the company without doing proper due diligence.
The PIC invested R4.3 billion in Ayo in December 2017 for a 29% stake. The thing is – the company wasn’t worth this much.
The PIC has started investigations into the whole Ayo affair.
And what’s coming out of the woodwork is shocking.
Former CFO and CEO alleges the books were cooked
The former CFO Ayo Technology Solutions told the inquiry into the PIC deal how she was asked to "adjust" margins to increase the company’s profit.
According to Gamieldien, the CEO of Ayo parent African Equity Empowerment Investments (AEEI), Khalid Abdulla, who was also a board member of Ayo at the time, called her to a meeting at his home to discuss the technology company’s interim results for the period to end-February 2018.
"I presented to him an Excel version of the results as prepared by the Ayo finance team. At this point, Ayo’s profit after tax was R32m," said Gamieldien.
She said Abdulla questioned why the number was so low "as he was expecting a higher profitability and asked me to adjust the spreadsheet to reflect the usual margins to show him what the effect on PAT [profit after tax] would then be".
Gamieldien complied, and this resulted in profit after tax rising to R50m.
According to an Ayo announcement on May 15 2018 the company reported profit after tax of R65.9m, which is more than double the number Gamieldien initially provided Abdulla in the spreadsheet.
An allegation of accounting manipulation was previously put forth by Ayo’s previous CEO, Kevin Hardy, in his testimony before the commission.
So far, Ayo’s share price is down 62.75% in the past twelve months. This means the PIC’s investment is all but wiped out.
What’s more – the spread on Ayo shares is very wide. Offers to buy the share currently sits at R6.88, with offers to sell at R11.88. This, and its low liquidity make the share price easy manipulate. And there have been allegations that the share price is being “supported” to avoid a total collapse…
And to make all of this even worse: The day following Ayo’s listing saw the company pay R70 million to two Iqbal Survé linked companies without board approval.
Board approval was received ‘after’ the transfers were made. The payments were subsequently ratified by Ayo's board as investments, with a change that the full amount of R70m go to only one of the companies, 3 Laws Capital. Later a further R400 million was paid over to this company in order to “Diversify” Ayo’s cash holdings.
Iqbal Survé attributes all this to ‘the white business establishment and rivals running a campaign of misinformation against his companies.’
He also said that all funds invested in 3 Laws Capital had been paid back and the mandate terminated because of "media hype".
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How all this ties to AEEI
AEEI owns 49.36% of Ayo.
The company valued its holdings of Ayo at more than R4.8 billion in August 2018.
It has also made a number of accounting tricks to change the way it accounts for the value of Ayo. The latest of which means AEEI does not have to disclose the ‘value of its investment’ in Ayo. This also means that it doesn’t have to write down its investment in Ayo to the greatly reduced market value of the company.
Sure – the upside potential if anything of Ayo can be salvaged could be significant for AEEI investors.
But you need to ask yourself – with all of these allegations and SA’s recent experiences with state capture – do you really want to invest in any of these two companies?
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares 
P.S: If you’re looking for profitable investment ideas for 2019, then I suggest you look here - you only have a few days left.

You need to avoid this investment trap
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