Since October 27, within seven trading sessions, Africa-Israel Investments Ltd. (TASE:AFIL) has risen sharply, putting on no less than 40% on very high volumes. What could have brought about this extraordinary movement?
The answer perhaps lies in a company notice at the close of trading on October 25. That day, Africa-Israel laconically reported that it had sold a real estate asset in Russia for $90 million. The company is not prepared to disclose the name of the asset, but the notice stressed that the capital gain from the sale was not material.
On the face of it, in the absence of a capital gain from the move, the notice seems devoid of any special significance, but, in the company's current position, and particularly given its current share price, it seems that a report of this sort can be very significant.
Africa-Israel has for some time been traded a long way below its shareholders' equity. While the shareholders' equity at the end of September was NIS 3.6 billion, the company's market cap (after the recent rise) is just NIS 1.2 billion. This gives a very low multiple of just 0.33, when a normal multiple is around 1.
Africa-Israel's low equity multiple indicates that there are large question marks over its ability to sell its assets at values close to their balance sheet values. Therefore, even a $90 million sale without any substantial capital gain, that is, at a price close to the balance sheet value, can excite investors.
They apparently reckon that Africa-Israel ought to be traded at a higher equity multiple, because it succeeded, contrary to all the fears, in converting a part of its shareholders' equity invested in real estate into shareholders' equity invested in cash, and so there is no reason for pricing it at such a deep discount, 59%, on its shareholders' equity.
Talking to "Globes", IBI real estate analyst Shai Azar said he believed that the asset that was the subject of the company's report is one of the four towers in the Ozerkovskaya office complex project in Moscow. Two months ago, Azar said that the main key to Africa-Israel's ability to repay its debt over the next two years was the sale of the huge Ozerkovskaya project, and if the company has indeed sold one of the towers in it, then it is a quarter of the way there.
Something else that might well have contributed to the rise in Africa-Israel's share price was the company's recent request to its bondholders to allow it to make early repayment of bonds. The question that arises in this connection is, of course, where will the company find the cash for such a large repayment? Azar estimates that the basis for the request is the company's belief that it will succeed in selling further assets successfully in the future, and points out that of all the concessions that Africa-Israel has asked for in the bond trust deeds (which have not taken place), it left as a final and sole request the matter of early redemption.
So, taking all these things into account, it is not in retrospect surprising to see that, since the release of the notice to the stock exchange about the asset sale, Africa-Israel's two bond series have risen by 8% each, and that the gross yield to redemption on them has fallen from 12% to 10%.
That is the real story of Africa-Israel today: it has to sell assets in order to be able to service its huge debt, amounting to NIS 2.7 billion, with more than NIS 500 million repayable during 2014. So the news is good for the bondholders and, at the current share price, good for the shareholders too.
All the same, after this outbreak of optimism, an important cautionary word must be added. The small print in Africa-Israel's notice to the stock exchange states that, until December 2, the buyer is entitled to withdraw from the deal without paying any compensation. You don't have to go very far back to recall that, in June this year, Africa-Israel reported the cancellation of a deal for the sale of an asset in California for $40 million.
Published by Globes [online], Israel business news - www.globes-online.com - on November 7, 2013
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