The Vox share was struggling to find direction this morning after the group's market capitalisation fell more than R1 billion in the wake of the collapse of Dealstream.
News that the failed broker was holding R30 million of Vox's cash saw the telecommunication group's share shed 39.1% this week, from a R2.20 closing price on Friday, to a R1.34 close on Tuesday, ahead of yesterday's public holiday.
The share was trading lower this morning, although it was struggling to find direction, dropping to R1.15 in early trade before moving to R1.30 and falling back to R1.15 before holding at R1.20 by late morning.
Vox CEO Doug Reed says the movements have been solely on market sentiment and have nothing to do with the Vox business itself.
"The price will drop until it settles, and I think it has in fact bottomed out," he says. He points out that the business is strong and the group has just had a record month, and on the share front, single stock futures in the company were being converted into shares, and this should be finalised today.
Certainty
That finalisation might give some needed certainty to shareholders. Independent analyst Irnest Kaplan, MD of Kaplan Equity Investments, says part of the share's fall might be attributable to shareholders being in the dark about how Dealstream's collapse affects them.
News of Dealstream's woes came to light on Monday, when the JSE issued a press release warning against trading in contracts for difference (CFDs), as these are not regulated by the securities exchange.
The JSE disclosed that the company had failed to meet its obligations with regard to transactions on its proprietary account on the JSE's financial derivatives division and, as a result, all its proprietary positions would be transferred to its clearing member, Rand Merchant Bank.
CFDs are unlisted derivative products that allow for trading on stocks without actual delivery of that stock. Parties to the contract agree that the seller will pay the buyer the difference between the current value of a security and the value at contract time. Essentially, investors trade on the stock price, and are thus exposed to the benefits and risks of the underlying stock without owning it.
The exact reasons for Dealstream's collapse have not yet been made known. However, another CFD broker, Global Trader 247, has been quick to defend the concept of CFDs, saying the problems at the company were not specific to CFDs, "but more than likely attributable to a failure in risk management and/or questionable management practices".
CEO Charles Savage says while the JSE does not regulate CFDs, this does not mean they are without oversight.
Real damage
One of the rumours circulating on trading floors was that Dealstream had been undone by risky trading in Vox and uranium mining company Simmers & Jack Mines. The Vox share lost 11.4% on Monday, to close at R1.95. However, analysts have dismissed the idea that trading in Vox was to blame, as the Vox share had been steadily "hovering around R2" for some months.
The real damage to Vox came on Tuesday. That morning the company issued a statement on SENS, the JSE's electronic notice board, disclosing its exposure to the collapsed broker.
"Vox has not entered into any contracts in which it has any liability to Dealstream. However, Dealstream holds Vox cash of approximately R30 million, the recoverability of which the company believes has now been materially prejudiced," the Vox statement reads.
"Vox is taking legal advice in regard hereto. This amount, if unrecoverable, will not impact the delivery of services to Vox customers."
The announcement sparked a sell-off of Vox shares, with the stock losing 31.3% to close at R1.34, as about 5.2 million shares changed hands in 362 trades. With about 1.16 billion shares in issue, this gave the company a market cap of R1.56 billion, compared with R2.56 billion at the close of trade on Friday.
The R1.20 share price recorded this morning translates to a market cap of about R1.4 billion.
Tender markets
Kaplan says the R30 million exposure is "definitely not" as significant as the share price fall seems to indicate. Given the market cap at a R2 share price, "R30 million is irrelevant", he says.
Kaplan believes several factors are behind the share's fall, including the fact that investors and other stakeholders "do not really know what's going" and that Vox's announcement did not go far enough to explain fully.
"People are nervous because they are not sure what this means for shareholders."
The incident also occurred at a time when the market was already jittery as a result of the global financial crisis resulting from the woes of US financial institutions. "It's come at a moment when the market is tender," he comments.
Kaplan says Vox is sound from a fundamental operating point of view and it is a good company. "They've just been incredibly unlucky."
He says if the share's fall is the result of an overreaction, "when everything comes to a conclusion, depending on the outcome, you might find that the share will come up again, and it might in fact present a buying opportunity".
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