Some­times it is worth the ef­fort of dig­ging so deep

Financial Mail - Investors Monthly - - Editors Note - MARC HASENFUSS email Marc on hasen­fussm@times­me­dia.co.za

AFRIEND OF MINE who has been in the in­vest­ment game an aw­fully long time has con­fessed to be­ing on the verge of aban­don­ing his quest for un­cov­er­ing value at small-cap stocks. His con­tention is that the broader mar­ket would these days rather not take on the some­times ar­du­ous task of re­cov­er­ing value in “dif­fi­cult busi­nesses” by un­pick­ing com­pli­cated con­trol struc­tures and push­ing for ex­ec­u­tive shake-ups or or­gan­i­sa­tional re­struc­tur­ings.

And I must say there is some­thing masochis­tic about try­ing to un­lock value or im­ple­ment a turnaround in a busi­ness that has its prospects locked into a trad­ing en­vi­ron­ment that is sub­ject to desta­bil­is­ing eco­nomic and po­lit­i­cal de­vel­op­ments.

I still love my small-cap shares, but am fret­ful at the dis­mal (even dis­mis­sive) mar­ket rat­ings tagged onto more than a handful of prof­itable in­dus­trial coun­ters.

Let’s pe­ruse a few. Alu­minium sup­plier Hu­lamin — which has hinted at a fairly rosy out­look — trades on a five times earn­ings mul­ti­ple. House­hold goods sup­plier NuWorld — un­der re­view in this edi­tion — trades on a six times earn­ings mul­ti­ple in spite of a looooong track record of prof­its and div­i­dends. Lo­gis­tics group Value — which con­firmed a strong re­cov­ery in its re­cent set of in­ter­ims — trades on a seven times mul­ti­ple that be­lies the fact that this busi­ness is a re­li­able cash flow gen­er­a­tor and a payer of div­i­dends and has a bal­ance sheet that can ac­com­mo­date ac­qui­si­tions.

While these earn­ings mul­ti­ples sug­gest that long-term prospects are dim, at least share­hold­ers in the busi­nesses have seen a spurt in the share prices. Hu­lamin is up 19% over a year, Nu-World a stun­ning 53% and Value 35%. In­vestors who backed these com­pa­nies last year have se­cured a pretty de­cent re­turn sans any sig­nif­i­cant risk.

With this in mind, I am ask­ing — for a friend — whether it may not be worth­while to take a closer look at a few other poorly rated in­dus­trial coun­ters where the share price might be poised for a low-risk bounce. I am think­ing of com­pa­nies like San­tova Lo­gis­tics — trad­ing on an eight times mul­ti­ple — whose shares have dropped more than 20% in a year even though its spe­cialised lo­gis­tics sys­tems churn strong prof­its. The shares of in­dus­trial ser­vices con­glom­er­ate ENX Group have plunged 25% over a year. Judg­ing by re­cent in­terim num­bers, it is trad­ing on a for­ward mul­ti­ple of around five or six.

Con­sol­i­dated In­fra­struc­ture trades at a less than seven times mul­ti­ple, and its shares are down 42% over a year. Tim­ber spe­cial­ist Kay-Dav — steadily prof­itable over the last few years, with nice div­i­dends — is on a seven times mul­ti­ple, while in­vest­ment hold­ing com­pany Stel­lar Cap­i­tal Part­ners trades at a HUGE dis­count to in­trin­sic net as­set value.

Does op­por­tu­nity knock in these stocks, I won­der?

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