South Canterbury Finance: $4m loss = 'a small profit'

On a 15 November 2009 post:

South Canterbury Finance: New Losses Reported

I wrote:

On 29th Oct 2009, it was reported 'South Canterbury Finance is the third-biggest PGC shareholder with just over 4 per cent, preserving its previous more than 4 per cent stake by taking part in the rights issue.' On 30th June 2009 the shares in PGC closed at $2.03, today they are about $0.48, and the rights were not of significant value. This translates to about $6.4m in losses for South Canterbury Finance on this shareholding.

 Today Radio New Zealand reported:

SCF sells entire stake in Pyne Gould

Updated at 11:02am on 22 December 2009

South Canterbury Finance (SCF) has sold its entire stake in Pyne Gould Corporation. The sale, at 50c a share, netted the company more than $14 million.
SCF had a 4.5% stake in in the rural services firm, or 29.5 million shares.
Chief executive Nigel Gormack says the sale, which made a small profit, is part of a programme to sell off assets not related to the company's main lending business.
He says the money raised will be used to shore up the balance sheet by providing extra liquidity.
South Canterbury Finance will carry out a capital-raising early next year, and is considering floating on the sharemarket.

This doesn't quite add up, however. Each 7 shares sold is made up of 6 subscribed to via the 6-for-1 rights issue, and 1 originally held share. The 1 original share value was $2.03 on 30 June 2009, last time the firm reported its results, since then we have to add 6 times 40c ($2.40), to give a total of $4.43, which is more than the firm realised by selling 7 shares at 50c each ($3.50), so this gives a loss of $0.93 for each 7 shares sold. When they next report their financial results, this shareholding will have contributed 4.21m original shares times minus $0.93 in profits, i.e. a $3.92m loss.

What can we make of all this? We can only guess the firm wrote down the value of the shareholding to, say $0.45/share on 30 November 2009, so now that they've sold at 50c/share they can book a profit in December 2009.  But isn't this a bit like a retailer marking up the price of its carrots to $2/Kg on Monday, so it can then have a 50% off sale at $1/Kg on Tuesday? We didn't have the company calling up Radio NZ to report that the firm had made a $6m loss when it wrote down the shares to $0.45c, so why are they telling everyone they made a profit by selling them at $50c?

Although it is good to see them rationalising their investments, reducing equity exposures and increasing their cash, let's be honest and say they lost about $4m on the shareholding since they last reported, rather than pretending to have made a profit.