Cape Town – Two local risk analysts plan to bring a new petroleum investment option to the JSE.
Daryl Ducasse and Ken Morison, investor risk analysts and partners at Merkurius Capital Solutions (MCS), plan to bring their new initiative Cardinal Petroleum Holdings (CPH) to market via the JSE, with the possibility of a dual listing on the Stock Exchange of Mauritius.
The board of Cardinal hope to raise R2.3bn through initial private placements, and offer the public ordinary shares.
CPH, an investment holding company, is focused on building a portfolio of petroleum and related real estate assets, and more specifically of wholesale diesel storage and distribution. The properties owned or occupied by those businesses are an essential component of the investment model, providing security of capital to investors.
Used in industrial, agricultural, mining and transport industries, diesel indirectly contributes to South Africa’s economic development.
To put the size of the market and the viability of Cardinal’s model into perspective, CEO Ducasse says that according to the department of energy’s consumption statistics, more than 27 billion litres of liquid fuel energy was consumed in South Africa between January and December 2012, and of this about 42% was attributable to diesel sales.
Asked how the company will achieve its stated objectives, Ducasse said Cardinal plans to finalise negotiations to acquire a portfolio of independently owned and well established wholesale diesel depots countrywide. It will achieve organic growth through the development of storage facilities, truck stops and further depots.
“We have spent the last two years identifying, sourcing and conducting due diligence exercises on a significant number of opportunities, and have selected those which we believe will deliver consistent cash flow and capital growth for our shareholders.”
The company aims to deliver these assets to market under a single brand which will potentially achieve pricing parity, deliver much-needed fuel storage, and be a secondary source of fuel supply after the major oil companies.
The distribution network will be supplemented by a virtual trading platform designed to facilitate access between suppliers and customers, Ducasse said.
“The model is unique, and a first for South Africa in that no JSE-listed firm can claim to offer investors an empowerment initiative with the same investment opportunity and focus.
“We plan to seek a single or dual listing on the main board of the JSE and/or the SEM (Stock Exchange of Mauritius), with a total capital raising target of R2.3bn,” he said.
The company projects an initial dividend return in excess of 12.5%. With the real estate underpin, it aims to use the listed real estate indices as a performance benchmark.
Fin24 questioned Ducasse on his partnership in MCS, the new CPH initiative and the risks and opportunities investors encounter:
Fin24: Firstly, what does MCS do?
DD: MCS is a corporate and transaction advisory services business. Due to our experience and backgrounds, around 60% of the transactions we look at are for clients in or wanting to get into the commercial property sector.
Fin24: What services do you deliver to market and perform for clients?
DD: The majority of our work involves looking at opportunities clients have brought to the table and taking a view on risks, transaction structure and potential funding mechanisms.
Fin24: What does this process involve?
DD: Typically clients will come to us with an opportunity they have identified, or one that has been introduced or offered to them by a broker. They usually want an unbiased opinion on the deal.
We first analyse the opportunity to establish the merits and risks, which involves drawing on our own experience and tapping into our very extensive network for opinions or views. Then, we use our own financial models to create scenarios and forecasts that the client will understand.
Each one is unique, so there will never be any data or formula contamination or residual assumptions. This enables us to form an opinion as to whether the opportunity is more viable than risk inherent, and whether there would be an appetite from funders.
Fin24: What are your priorities when acting for clients?
DD: Our first task is to make sure the client is not exposed to unreasonable or hidden risk with the potential to lose money. In that regard, the initial assessment, the research and financial modelling together with the way we structure the transaction goes a long way to ensure that risk is mitigated.
Thereafter, we need to assist the client in making money from the opportunity – that is, after all, why they were considering it in the first place.
Fin24: What kind of risks do investors face in the market?
DD: I would say the single biggest risk is lack of knowledge, information and practical advice. The second risk comes in the shape of dubious structures and unscrupulous or unfair market practices.
However, armed with the first set, you can avoid falling prey to the second – this is why we always strongly advocate “do the research” and “seek advice”.
Fin24: How can the average investor reduce risk?
DD: Just as the investor has learned a skill or profession, they need to go through the process of gathering information – information is knowledge, and knowledge assists in the decision-making process.
It is a good idea to seek advice, but we’ve discovered that investors tend to be reluctant to pay for it. Not wanting to pay for advice is often a case of “goedkoop is duurkoop” (penny wise, pound foolish).
If the opportunity is presented as being financially viable, surely then it is worth spending a bit of money to make sure you know what you’re getting into? Conversely, if the offering is not feasible, then the money paid for the advice is negligible compared to the loss the investor may face.
Fin24: Can you give examples?
DD: We have seen scenarios repeatedly with many failed syndications where investors have been shown a prospectus by a financial adviser or broker, and are given a sales pitch (I pause to point out here that I doubt all investors read a prospectus from cover to cover, are able to interpret the language and structures and understand the implications).
If the sales pitch is good, the investor will sign a subscription form immediately, committing him/her to the investment. This is usually a hard sale environment, and we believe that investors should agree to keep the document and give it to an expert to analyse for risk and anomalies.
In many cases, investors have taken the document to an attorney and yet still invested – I’m not convinced advisers feel comfortable telling their clients to invest or not to invest, for fear of recourse. We believe in telling it like it is – or our interpretation of how it is, and although that doesn’t always win friends, I don’t think a single investor of ours has lost money.
Fin24: What is the effect of investor risk, and what should be done to reverse this?
DD: Everything said here errs on the side of caution. There are many opportunities to invest safely and with varying degrees of risk. Our main concern is this cyclical effect – the more cash investors lose in schemes, the more sceptical they become; the more sceptical they are, the less likely they are to invest in anything beyond fixed deposits, retirement annuities, unit trusts, government bonds and equities, and the effect of that will be felt on our economy.
Fin24: How does CPH fit in?
DD: CHP is an investment holding company which focuses on petroleum and related real estate assets. Essentially, this model benefits from strong cash flows from a high demand product, but is underpinned with the security and tangible net asset value of property.
We are very excited about this initiative and will be seeking approval from the JSE for a listing in due course. We will be doing a private placement pre-listing in order to secure seed and working capital, and to finalise the first acquisitions.
Fin24: What type of acquisitions will Cardinal make?
DD: We have a very strong pipeline of target acquisitions; firstly we will be acquiring a number of current income-producing wholesale diesel depots valued at approximately R600m to get a national footprint to rebrand.
From there, we have identified several sites to develop truck stops and storage facilities. We have budgeted about R300m for product trading. In total, we will be looking to raise R2.3bn for the cost of acquisitions and development capital.
Given that our target price earnings range is 3 to 5, we believe we will be able to deliver dividend returns to investors in the range of 11%-15%. This is a key factor because it is our view that investors are mainly chasing returns, not necessarily capital growth alone.
Fin24: Tell us a bit about the muscle behind CPH.
DD: The professional team assembled has an exceptional track record of success, and the board prides itself on an ethics and integrity statement which favours the rights of investors – these claims are made under the watchful eye of our independent non-executive chairperson, Abel Sithole.
Sithole is currently the chairperson of the Financial Services Board, which regulates the non-banking financial services industry in the interests of the investing public.