EDITOR’S NOTE

Rush to Steinhoff enough to make anyone sick

IF THIS BOUT OF SWINE FLU

variant that I’ve contracted does not kill me, it’s fairly likely that this fickle stock market will. Being under the weather, short of sleep and sans appetite is bad enough. But watching the share price of Steinhoff skittling off its historic lows on nothing other than an effort to stretch debt arrangements a little further, really left me gutted.

I had just written my weekly FM column in which I advised, after perusing what passed for unaudited Steinhoff interim results, that punters would do well to steer clear of this debacle. Oh boy. Look, I can handle making a wrong call. I’ve made a few in the past, and I don’t doubt there may be a few more in the future.

But the Steinhoff situation really burns me. Punters are so easily lulled into the debt-laden corporation’s murky valuation prospect that they will look past indiscretions that put Steinhoff firmly in the dwang, as well as vicious impairments and hazardous fundamentals.

So while Steinhoff more than doubled in value, I was left to watch another bunch of small cap companies — most that have not put a foot wrong strategically or operationally — drift aimlessly close to new lows.

They include media conglomerates Tiso Blackstar (which owns this illustrious publication, among others) and eMedia Holdings, mobility specialist Super Group, empowerment investment counters like Brimstone and Grand Parade Investments (GPI), perennially profitable technology counters Alviva and Mustek, asset manager Coronation Fund Managers, forestry group York Timber and telecommunications innovator Blue Label Technology.

However, I agree with pundits who bemoan the lack of decent sentiment for quality small-cap counters — some arguing that the universe of smaller companies on the JSE offers striking value not seen on too many other bourses.

It’s worth having a crack at Novus (despite its printing challenges) on a four earnings multiple, Metair on a five times rating or Santova Logistics and Master Drilling on 7.5 times. Hell, there are even micro-cap counters with fair profit histories (SilverBridge, Workforce, Primserv, Quantum Foods and CSG Holdings) that carry ratings that suggest an investor will earn back the entry price in earnings within a few years — even if growth is stunted.

Buying into small caps remains a test of nerves and resolve. But these ratings have become so diabolically low that there must be many a temptation to pitch a premiumpriced offer to minority shareholders. Industrial specialist Torre has signalled such a move, and I’d say an offer of 130c/share will do the trick.

It’s just enough to placate long-suffering minority shareholders — and just enough to offer the “take-out party” an attractive long-term upside.