AYO share price surge: Some things are just too good to be true

First published by Daily Maverick 168 weekly newspaper.

Technology company AYO, owned 29% by the PIC, 49% by African Equity Empowerment Investments and 20% by individual investors, has delivered stellar returns for its shareholders in the past year. Its share price appreciated by more than 300% – from 148c in January 2020 to 600c in January 2021 – making it the second-best performer of the year, after AH-Vest, makers of tomato sauce. 

Incredibly, on Monday, 11 January, the share leapt once again, this time from R6 to R30 after an on-market acquisition of a paltry 400 shares.

In a year that also saw a dividend drought, AYO shareholders had another reason to smile – dividends leapt by 100% from 51c in 2019 to 100c in 2020.

This sudden reversal in fortune must be of interest to the PIC, given that it acquired its stake in AYO at R43/share ahead of its listing in December 2017. Since then, the share has mostly traded below R10.

The PIC has issued summons to have the subscription agreement declared unlawful and set aside. It wants AYO to pay it back R4.29-billion, together with interest of 10.25% per year accrued from 22 December 2017 to the date of final payment. 

The case is yet to be heard.

In its results for the year to 31 August 2020, AYO earned revenue of R2.8-billion, up from R1.9-billion in the previous year, partly thanks to acquisitions. However, operating performance disappointed and profit before tax decreased by 61.90% to R104-million, down from R273-million in the prior year. Headline earnings fell from 43.40c to 8.02c per share.

It is worth noting that the full-year 2020 results are the first to be published under the eye of AYO’s new auditors, Crowe, a member of Crowe Global and THAWT, which replaced BDO as joint external auditors from the end of April 2020.

Previously, the JSE fined and censured AYO in relation to the group’s 2018 interims, 2019 interims, 2019 audited annual financial statements and the revised 2019 audited annual financial statements. The company had published financial information that was incorrect, false and misleading in material aspects. 

What doesn’t deceive, however, is the cash flow statement. The group has a significant cash holding balance of R3.2-billion from which it earns interest income. This will be the figure that the PIC is interested in – considering this was accrued thanks to its largesse.

Of concern is the fact that AYO is burning through this cash at quite a rate. In the 2019 financial year, the company burnt through R624-million, reducing its cash balance from nearly R4.3-billion to R3.6-billion. 

During 2020 it spent R457-million, ending the year with a cash balance of R3.2-billion. 

Cash generated from operations of R27.9-million and finance income of R201.6-million in 2020 were dwarfed by outgoing expenses. This included R272-million in investments and R305.8-million in financing activities. Of this, R168-million was dividends to shareholders.

In total, R388-million has been paid to shareholders since listing in late 2017, while interest income of R686-million has been earned in the same period.

What all of this suggests is that AYO is a small technology company that is able to grow thanks to its rather large cash balance, which is currently the subject of litigation. It does not explain why the share price would have appreciated in the leaps and bounds it has done.

In a share like AYO, which is tightly held and thinly traded, this opens the movements up to speculation that the price has been manipulated. AYO spokesperson Kaz Henderson confirmed that the company had requested that the market regulator investigate the irregular share price movement as a matter of priority.

While manipulation remains a possibility, data from the JSE shows why small-cap shares that are tightly held and thinly traded should be avoided: as fast as they go up, they go down. 

After halving in value in the early days of January 2020, the share traded between 170c and 300c until 5 May, when it abruptly jumped to 900c.  Less than a week later, on the 11th, it fell to 420c, only to jump back to 700c on the 27th. The volatility continued, with the share falling to 250c on 9 October. On 24 November, shortly after the results were released, the price jumped to 775c. 

Analysts approached by Business Maverick do not cover the company, specifically because it is tightly held, thinly traded and the price bears no relation to reality. DM/BM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

This story has been amended to reflect the jump in the share price as of 11 January and comment from AYO.