I'm back from a wonderful holiday at the coast and am expecting a strong 2012 year for equity (see my previous article here: SmallCaps.co.za 2012 Forecasts). Nothing has changed my opinion on the intermediary period, so I continue to maximize my exposure to equity.

I am always suspicious of SENS that are released in "off" or "holiday" periods. While certain news items legally have to be published via SENS, there are times when not all the eyes in the market will be watching and legalities can be conveniently slipped in below the radar. Thus, a fair number of the SENS released from about Monday the 26th December 2011 till last week Friday will include restatements, auditor qualifications, restructuring announcements, write-downs, impairments and other nasties aplenty.

For example, Zaptronix (ZPT) released a trading statement, got a warning from the JSE for late submission of its results and then released its terrible results all during this "off" SENS period.

Zaptronix is a business that, well, is superb at losing money. The Group is a hodge-podge of deals and failed deals and defines itself as a "sell[er of] operational risk control solutions, applications and systems as a supplier in the electronic and communications industry."

Zaptronix's trading update during this festive period indicated that its results for the twelve months ending 31 August 2011 has been restated to reflect the consolidation of its long (very long) anticipated I-to-I transaction. The Group then reported its results that revealed Diluted HEPS fell from 0.33cps to a loss of 1.07cps. This is despite the consolidation of I-to-I into these results, a business that Zaptronix has lauded as necessary to the Group's turnaround.

Dig a little deeper and one will see two worrying aspects in Zaptronix results. Firstly, I-to-I is being sold to Zaptronix from the controlling shareholder in Zaptronix, Gandalf Trust (via Strider Holdings et al). Secondly, Zaptronix auditors have qualified their audit report. Not just has PKF (Gauteng) Inc. emphasised the risk that Zaptronix may no longer be a 'going concern' (auditor talk for 'Zaptronix may go bankrupt'), but the auditors also found certain unlawful acts or omissions by persons responsible for the management of the Group that constitute a 'Reportable Irregularity' (auditor talk for what is basically 'fraud or similar such worrying acts or omissions').

And Zaptronix released all this nasty news on the 20th of December. Nice (sarcasm).

But, then again, if you have invested in Zaptronix, it really is your fault for ignoring the Group's tarnished history.

Some more nastiness from another perpetual dog of the JSE, John Daniel Holdings Ltd (JDH). JDH was a 1c share for ages before doing a 100-to-1 share consolidation. Since then, JDH has been a negative '9 bagger' as it has fallen all the way to c.9cps.

JDH also released a trading update at five minutes to the close of the market on 15th December (i.e. everyone has already left the office for the holidays!) indicating that it expects an "...improvement in both the loss pe share and headline loss per share for the 15 months ended 30 September 2011 of a between 90% and 110%..."

Sounds great, doesn't it?

No, not actually...

An improvement in a loss per share is still a loss per share, except if it is an improvement of between 100% or more. At best, it is still a very marginal break-even profit. Also, if you read further, JDH explains that a large portion of this swing in profits comes from "...clarity on the valuation of certain of the company's assets..."

This means that JDH has fair valued some of its assets (probably its investment property) and pushed this through its profit and loss. In other words, the Group is almost certainly still running at an operating loss, minus some convenient IFRS clauses.

But who at five-minutes-to-the-start-of-most-people's-holiday is going to check this detail out? Exactly the point, I suspect.

Racec (RAC) has been through a terrible time of late (see - Trading Updates of IQG, ERB, RAC, ADR). The rail-focused niche construction and engineering Group has made some bad investment decisions, seen its sector come under pressure and even needed to be effectively bailed out by issuing shares to a BEE partner to strengthen it frail balance sheet.

Hence, Racec decided to push out a rather disastrous trading update at 17:50 on 15th December 2011 (even later than JDH!) indicating that it will be making a loss of around R60m for the year ending September 2011. This is a pretty big loss for a business with a market cap of only R78m.

Racec then pushed out its full results for FY 11 on the 28th of December 2011 (yes, three days after Christmas when even the most hardened workaholics will be on leave...) that have simply so many nasties in them that I am not even going to waste space and time going into them.

In management's favour, they have decided to focus on Racec's core business, that of rail-focused entity and consolidated its existing operations into this while disposing (or in the process of disposing) non-core operations. Especially with a 55 year old track record in this industry, this makes sense. Thus, if you strip these non-core numbers out of Racec and look at what is left behind after the restructuring and excluding the once-off adjustments, the Group earned a Diluted HEPS from Continuing Operations of 9.3cps (FY 10: 5.0cps).

This places the RAC share on an implied PE of 4.8x, but at a Price-to-Book ratio of 2.1x. It also implies a fairly high RoE (%) of around <40%, but perhaps inflated by the Group's high gearing, written-down equity and not taking into account the future dilution from the further BEE issue of shares.

These are three of the nastiest little sets of pennystock results I saw during this festive period, but they are also far from the only bad news that was dropped into this traditionally quiet period. My advise is to double check any SENS that shares in your portfolio released over this period...

That said, let's start 2012 a little more positively and tomorrow I'll be writing about some of the good news that was quietly released during this "off" SENS period.

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