Why RHG is a diy decision

The RHG saga continues unabated, with stock in the re-named Rams Home Loan book climbing 20 per cent since hitting a low of 40 cents on June 3.

The rise flies in the face of predictions that from June 13 a tsunami of tax-credit hungry DIY super investors would be selling the stock in order to lock in losses to offset capital gains on other investments. And it begs the question, what is the exact value of RHG's book?

To recap, these investors purchased the stock after the announcement of a 79 cent dividend on April 28 to gain access to this fully franked dividend, which would reduce their tax bill. This helped drive the stock price above $1.20.

After RHG's stock went ex-dividend on May 13, it has traded as low as 40 cents, and is now is trading at 47 cents, producing a market cap of $153 million.

Until 13 June, these dividend/franking credit hungry investors have been prevented from selling because of the requirement to stay in the stock “at risk” for at least 45 days to be entitled to its franking credits.

So does the rise mean that there is more to life for these small investors than tax?

As any punter will tell you, price is only one side of the equation in the stock market. The other side is the number of shares traded at any one time, or volume. RHG's rise this month has been on very low volume. Between 2 and 2.5 million shares a day have traded, or less than 1 per cent of the stock on issue.

Compare this with the volume which occurred in the 15 day period following the dividend announcement on 28 April. The daily average was almost 37 million shares a day or 12 per cent of the shares on issue. During the period, more than the whole company was turned over.

The elephant in the room here is value. There is no doubt the newly appointed board of RHG are mulling over this question in the absence of founder John Kinghorn, who famously, or rather infamously, parachuted off with $44 million after selling his stake, “cum” dividend in early May.

Karl Siegling is a portfolio manager with Cadence Capital, which has a 13.3 per cent stake in RHG. He points to the 45 cent a share of cash on its balance sheet, and that at its current price, RHG is trading at 1.5 times 2011 cash flow.

A value of a mortgage book lies in the “roll-off rate” of its portfolio, or when the mortgage holders either find another means of finance, defaults on payments, or simply finish paying their mortgage. The key to RHG's value could be the quality of its loan book, which was closed in 2007, before the property bubble burst and the fact that mortgage finance is now a much trickier prospect.

RHG is a story that keeps delivering column inches, and DIY Super investors and its Board will continue to play a big part. When the board will make a decision about whether to sell or stay on as managers, only it knows, but at least there will be a resolution to what DIY Super funds will do by 30 June, after which those tax losses cease to be as relevant.

“Toot toot,” it's Engenco

This column often looks at turnaround situations and the Tasmanian-based company Engenco, previously known as Coote Industrial, certainly fits the bill.

This week the company issued a profit downgrade and its shares are now trading at below 10 cents – a discount to the 12 cents a share at which it raised over $85 million.

Engenco (ASX: EGN) is best known for repairing wagons and locomotives, but its biggest business is “Drivetrain” which ironically has little to do with the former. The company is a specialist in large diesel engines. Its biggest customer is the Australian Navy, for which it maintains the Swedish engines of its Collins Class submarines.

The company's depressed shares and the changes occurring at the company mean that many in the investment community are considering Engenco. The word “cheap” was repeated many times by fundies when describing it.

Profit warning aside, there is a transformation occurring at the company. At the helm is Tasmania's richest man (but not person), chairman Dale Elphinstone, whose company, Elph Pty Ltd, owns just under 36 per cent. Elphinstone's wealth comes from being the Victorian and Tasmanian franchisee for Caterpillar construction equipment.

When Elphinstone and his team, led by Vince de Santis walked into Engenco in July it was into a company that was about to report a $107 million loss with $110 million in debts.

Fast forward to today and the company has reduced its debt by 75 per cent through the capital raising and more importantly, is making profits. In the first half Engenco did little more than break even. Its revised profit before tax forecast for the current year is of between $3 million and $5 million.

Managing director Vince de Santis says that he tells investors that it is a “three to five year turnaround story”, but this doesn't mean that investors won't make money in the interim.

The key is to improve the earnings of Gemco, its rail business. Engenco's revenues are currently about $200 million and are split between its rail business and its “Drivetrain” engineering division. But the latter produces about two-thirds of profit.

“Keep the faith, is what I tell investors in the placement,” says de Santis.

This pretty much sums it up. House broker RBS Morgans values the stock at 17 cents and believes that it is trading at a big discount to its competitors such as Bradken (BKN) and RCR Tomlinson (RCR).


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