Myopic avarice at Africa Israel

Any offering has to be judged from two perspectives: that of the issuer and that of investors. The initial public offering of AFI Development was a glittering success from the perspective of the company, but it was rather less so from the viewpoint of investors. AFI's parent company Africa Israel (TASE: AFIL) took advantage of the intense demand to raise the share price at the company's flotation beyond the original range, which had already represented a hefty premium over the net value of its assets.

But the moment trading in AFI stock began, its share price began to plummet. It sank from $14 at the IPO to hover at $11.20 at present, representing a loss of 20% for investors.

Africa Israel glibly explains that investments of this sort have to be judged over the long term, not that of a month or two.

But investors insist on finding little comfort in that cliché. Nor are they pleased that two of the four investment banks that ushered AFI onto the market, Goldman Sachs and Morgan Stanley, set targets for the share price that are lower than its IPO level.

At the start of July, Goldman Sachs gave AFI a 12-month price target of $13.10. Yes, that was higher than AFI's share price in London, but it was 6% below the price at which the company, which focuses on the Russian real estate market, floated.

Morgan Stanley was even less generous, giving the stock a target of just $12.30, a cool 12% below AFI's share price at its IPO.

That is also the recommendation of UBS, which had no part in AFI's flotation.

The only one among the underwriting team that set a target above the IPO price was Citi, which cited $15.

Yes, the very banks that sold the stuff  to their clients at $14 per share are now saying the stock is worth less. What happened to the company in the two months since its IPO, that could justify the decline in value? Nothing.

On the bright side, the developments prove that there really are Chinese walls at the investment banks, separating their buy-side and sell-side operations, between underwriting and equity research.

On the less bright side, the whole thing is very embarrassing for Africa Israel and its leader Lev Leviev.

Africa Israel's greed left little room for investors to profit, at least in the short run. Its avarice may prove short-sighted, though, vis a vis its relationship with institutional investors.

To be fair, it's also true that price targets in the case of AFI are pretty much meaningless. How can one accurate assess the value of a company still taking shape, which operates in a high-risk country rife with risks and parameters? Any number might be right.

If you have a taste for high-risk real estate investments and believe in Leviev, then investment in AFI would make sense for you. If you're just hopping on for a short but hopefully lucrative ride, it doesn't.