APEXHI - MY LITTLE NEMESIS

I was a founding director of ApexHi which we reversed listed in 2001, taking a company with R275m in property assets to its current +- R7billion.

This company was launched with classic financial engineering that has way surpassed all concerns wildest dreams. A structure of subordinated debentures was put in place offering investors with a more conservative profile a much safer investment and others with apetite for risk a higher risk reward instrument.

Fortunately for the company and its shareholders the bull market was just getting ready to take off and ApexHi maanged to be in the perfect spot at the right time. The quality of assets was really poor, but this higher yield proved to be immensly attractive to investors seeking yield, and being part of a bull market, risk premiums we about to shrink (quite frankly I think some investors forgot such a valuation criteria existed).

So what happened? In classic terms 1 + 1 = 3 not to shabby for a company with poor assets and a "thin" management team. Once again management were fortunate to hold an inflated asset which enabled them to continue buying better quality properties with overvalued paper. Hence the appetite for this companies higher yield has driven its price to a level that it can purchase assets far better than its original portfolio, and still at the same time increase the growth in distributions.

What a story.!!

Management now are about to embark on phase 2 of the amazing financial engineering story they pulled off in 2001, with the launch of the C debenture. Will it work or will 1 + 1 + 1 = 3.

As a natural contrarian, I believe ApexHi has come one debeture too far. I look at the forward projections maangement see's in its distributions going forward. Yes certainly in the next few years things look good. No actually more than good - great.

The problem is the next few years is not going to last for ever. Just like every cycle in life or business comes to an end, so will this incredible journey. The question I ask is will the downturn in the cycle finally play catchup to the incredible 1 + 1 = 3. My view is I think so.

I recently took a look at the premiums the A & B debentures were trading at relative to NAV; 60% , 130%. This is just unsustainable.

So my view is that this next chapter is likely to mark the companies history with the inevitable reversion to the mean of whatever a reasonable premium/discount to NAV is appropriate for this stock.

One thing I know for sure is that management is likely to pay for the day of being the dumping ground for "dog" properties, and although it is now a much smaller part of the portfolio, I suspect the downturn whenever it might come will occupy way too much of managements time.

Your ever faithfull contrarian.

Mickson