Johannesburg — BACK in July, ahead of the details of the rights issue of Illovo Sugar and after the report made by chairman Robbie Williams at the company's annual general meeting, I wrote: "If I held Illovo's shares, I'd stick to them and, dependent on the discount, follow the rights."

I had noted Williams' warning that the strong rand against the dollar would affect profitability and emphasised this volatility risk. I expected this negative investment fundamental would be more than offset by the strong world sugar price. I also expected that the inflow of equity funds from the rights issue would reduce financing costs.

I did not yet know the discount price for the rights, but I knew that the new issue of shares would dilute future bottom-line earnings per share.

In spite of the currency volatility risk, when details of the rights issue rights were published -- a subscription of R27,69c per share on the basis of 3083459 rights offer shares for every 100 shares, a discount of 16% -- they seemed fair relative to then current share price around R33.

My reasoning was probably similar to those who followed their rights and those who bought shares cum rights or who bought the rights only. I was not prompted to estimate the value of the rights or to comment on further on them.

Had I dug further, I would have made a conservative guesstimate for 20% growth in headline earnings per share for the financial year the year ending March 31 next year to 254c from 211,6c in the current financial year. The rights issue would add about 31 new shares to 100 shares already in issue. This would dilute forward earnings on a ratio of 100/130 and the guesstimate would, therefore, have been reduced from 254c to 195c. The 20% forward earnings guesstimate would not have induced me to grab the shares. The offer rights had, therefore, been based on a much higher forward earnings guesstimate. In fact, on 30% growth, forward diluted headline earnings would be 211,5c, just about its 2009's figure.

In other words, the share price then of R33 was neutral on value. It would have been positive only on forward earnings growth of more than 30% in the financial year 2010.

As the issue was almost wholly subscribed, the market view was much more bullish than mine would have been.

No wonder that the market was so disappointed on the trading update this week which confirms my conservative guesstimate above.

Even so, the share is trading at more than R33 a share. This means that, if headline earnings per share for the financial year 2010 are maintained -- possible if the rand weakens -- the forward price:earnings ratio is 15,63 and the earnings yield is 6,4%.

These are heady market ratings, and far too heady for the Private Investor portfolio.

As a postscript, relevant to comments I've made on management investment fundamentals and for what it's worth, I don't agree with Public Enterprises Minister Barbara Hogan . She's right that Eskom CEO should not shoulder all the blame for Eskom's problems. However, he was on his watch when the problems arose and his short-term solution was a costly fracas. Surely, it's a good thing he did fall on his sword?