Perhaps read the below in conjunction with reading: Top Ten Small Caps.
This is an exert from the AlphaWealth Prime Small & Mid Cap monthly investor letter for August 2019:
Adcock Ingram Holdings (AIP): FY 19 Results & Bidvest-control Optionality
The domestic, ungeared pharmaceutical and healthcare Group, Adcock Ingram, produced a superb set of FY 19 results showing revenue, profits and HEPS all growing c.+11% y/y while the dividend was hiked +16% y/y. The Group’s BEE structure unwound and Bidvest increased its stake in the Group to a controlling one.
Perhaps more importantly, Bidvest has reversed their view to dispose of their investment in the Group and, after taking control, are talking specifically about “maximising shareholder value”. This could mean a range of synergies and partnerships between the two groups but, if Adcock Ingram’s share price remains depressed, it could also simply mean the buying-out of the minorities (at a nice premium) and delisting of the Group.
ADvTech (ADH): H1:19 Results
The private schooling and tertiary education group, ADvTech, published fair H1:19 results with revenues growing +15% y/y, HEPS rising +28% y/y and, more importantly, learner and student numbers growing.
While the Group’s (high-end) Schooling segment remains under pressure from emigration, the Group’s Tertiary segment (the largest contributor to its profits) remains a star performer and grew strongly during the period.
Clientele (CLI): FY 19 Results
The niche, low-LSM insurer, Clientele, continued to struggle with policy lapses in a constrained consumer environment. Despite that, a H1:19 -26% y/y slip in Diluted HEPS softened to a H2:19 -9% y/y decline. Interestingly and indicating confidence, the Group increased its dividends by +5% y/y (putting the stock on a Dividend Yield of 7.8%) and continues to generate an attractive Return on Equity of 38% and Recurring Return on Embedded Value of 8.3%.
The Group is investing (at the expense of these short-term earnings) in alternative routes to market (currently performing well) and rolling out a mobile app and a loyalty programme (both gaining nice traction). While these results are disappointing, the initiatives make sense and appear to be working while the Group’s longer-term earnings potential remains well above current levels.
Much like Adcock Ingram/Bidvest above, it is worth noting that Clientele’s controlling shareholder cluster (Hollard & its related parties) have increased their stake in the company during the year.
Datatec (DTC): AGM & Update
We attended Datatec’s AGM last week (we were the only external shareholder in the room!) and cast our votes, particularly relating to the continuing material share buy-back programme at the Group.
Perhaps more interestingly, we asked management about the current trading of Logicalis and Westcon International. These informal updates are always valuable to ensure that no curveballs are heading our way.
The Chairman’s comment was that Logicalis continues trading well and Westcon International’s turnaround remains on track. The relatively jovial atmosphere of the AGM seemed to back this sentiment up and we look for another positive set of results out from the Group in due course.
Grindrod (GNDP): H1:19 Results
After unbundling the risky, debt-laden shipping business, Grindrod released a clean set of H1:19 results. Excluding non-core investments (one of them was announced as disposed this week), the Group’s core operations remain profitable, cash generative and ungeared.
This is particularly pleasing for holders of the preference share where we are picking up a relatively safe c.11.2% Dividend Yield.
Both from a preference share perspective and from Grindrod’s operationally-perspective, we continue to wonder how long such a great group with such an expensive capital structure (i.e. the preference shares) can continue to remain listed. Surely these port, freight and terminal assets are attractive to the right buyer? Surely the buying and delisting of the preferences shares make sense to either an external bidder or even an internal capital allocation?
In the meantime, though, we are happy to sit back and pick up our relatively safe 11.2% yield. We are being paid to wait and we are quite good at doing just that with a patient portfolio.
Metrofile Holdings (MFL): Trading Statement
While several prior periods own-goals continue to haunt this filing and document storage group, Metrofile Holdings, the new Financial Director is sweeping wonderfully clean. A prior month’s strategic review is now resulting in non-core business movements and a restructuring of debt into a more tax-efficient position.
The Group published a trading update showing that Normalized HEPS have not worsened from half-year while some impairments are obviously coming through from the strategic review (hence the material drop in EPS).
FY 20E is going to be key for the Group, but operationally they appear sound and the new FD is driving all the right changes. The stock is currently trading at or around the value of its property portfolio and you are getting the rest of the business “free” at this point.
Much like a lot of our portfolio, we wonder how much longer Metrofile will remain listed if its share price does not recover to a more reflective level? In the meantime, though, we continue picking up a c.9% Dividend Yield (forward DY is probably a bit lower) and that gives us the luxury of time and patience.
Sabvest (SVN): H1:19 Results
Diversified investment holding company, Sabvest, published solid results in August 2019 that saw its NAV growing +8% y/y. We are comfortable as to the “tangibleness” of this NAV and, thus, note how materially lower than the Group’s current c.3200cps share price is against this value.
The Group continues to work on collapsing its dual-structure and releasing locked up liquidity into the market. We remain of the view that this is a wonderfully uncorrelated event and should help unlock the share’s large discount to its NAV.
Santova Logistics (SNV): FD Emigration
We are sad to see Santova’s Financial Director, David Edley, handing in his resignation. He and his family are emigrating and, thus, the Group has begun the process to find his successor. We are confident that this is an accurate narrative and do not fear any nefarious things in the background.
Our advice to the Group was to use this as an opportunity to hire in a heavy-hitting, external FD from the industry. The “external” part is important as we think that the Group—like all organisations from time to time—could benefit from a new set of eyes. If this were to happen, we would view it as a positive event.
We want to personally wish David Edley and his family well with their move.
Wescoal Holdings (WSL): Share Buy-back
The junior coal miner, Wescoal Holdings, started a share buy-back and announced the acquisition of R27m worth of its own script during the month. While not very material in quantum, it is symbolic and does edge the Group’s black-ownership percentage higher (quite important for dealing with Eskom SOC).
As always, while a share buy-back in and of itself may not mean much, it does lend weight to our view that the Group’s shares are extremely mispriced and should be viewed as a positive.