Santova Logistics (SNV) has been a core holding in the ASM Fund since its inception due to its unique, capital-lite business model with global reach and the potential for a compounding network effect across its operations.
In brief, Santova offers a fourth-party logistics (“4PL”) solution for clients. The Group’s system—TradeNAV—embeds itself into client operations and allows it to aggregate logistical requirements, bulk-buy from existing logistics players, manage and track &, ultimately, report on the flow of inbound and outbound goods globally. Around this core, the Group is steadily building out its offering, including clearing, forwarding, buying, insurance & a range of other value-added services.
In summary, Santova’s logistical technology-orientated BPO offering has the following benefits:
- Capital-lite: Santova uses other logistics providers’ fixed assets (e.g. ships, trucks, warehouses, etc.). While this gives away some margin, it also means that Santova does not need to spend the capex or finance costs for the assets nor need to worry about downtime and filling capacity in slow periods. While the trade-off is a smaller gross margin, it potentially comes with less risk and greater cash flows (as free cash flows are not consumed by endless fleet and fixed asset requirements).
- Returns to Scale: As Santova gets bigger with more clients and more volumes, it can negotiate lower rates from the logistics providers due to having access to higher volumes. The ability to aggregate volumes from clients together means that Santova can not only get better logistics prices for its clients than they could for themselves but that Santova can even take more margin for itself, improving its own profitability while lowering client costs.
- Scalable: The core system of Santova is largely automated and, thus, with little to no capex requirements, the Group can keep adding more and more clients, and more and more volumes that all start to drop to the bottom-line. This works in harmony with the Returns to Scale noted above.
- Network effect: Beyond the benefits of and ability to scale, Santova also has several “network effects”. For example, as the Group gains more clients in more jurisdictions, it can start to offer platform advantages to all its clients. There are some future initiatives that should make this clear but already Santova can source products from its existing client base for its clients in other jurisdictions. The above noted buying power is another network effect.
- Diversified: At last disclosure, Santova did not just have almost 5,000 different clients, but the top ten clients only accounted for 11.39% of its revenue! For the purposes of the point we make below, it is more important to note that in Santova’s latest set of results a whopping 87.1% of profits came from outside of South Africa!
On Point (5), for years Santova has been diversifying offshore by building new trade routes, opening new markets and signing new clients. Some of these have been acquisitive and some have been organic, but over time, they have become the weight of the Group’s earnings (Figure 1).
In fact, we would argue that Santova should no longer be viewed as a South African group. If anything, it is now effectively a small but global 4PL logistics player.
Yet if we compare SNV’s market valuation to its larger, global peers, it is vastly out of sync with their valuations (Figure 2).
The only conclusion we can arrive at that market inefficiency is still pricing Santova shares as if they were a South African small cap logistics provider. While it is certainly a small cap, we strongly disagree with the lowly ‘SA Inc’ rating and think that the stock should be valued closer to the peer-group average Price Earnings (PE) of c.18x. This would imply material upside from the lowly 4.7x PE that share is currently trading at.
Originally appearing in the Alpha Prime Small & Mid Cap investor letter for November 2019.