Just getting started
Santova has been an unsung star, and it’s only getting going, say its followers
It’s not a significant transaction that will change the risk profile of the group. But there could be a lot of upside if we get it right
● Punters who missed the good ship Santova at low tide a year ago do not have to despair. There is still much left to float this boat: more market share gains, plans for a US acquisition and the launching of an Alibaba-type ecommerce platform.
Admittedly, it’s difficult not to conclude that the easy money has already been made by those brave investors who piled in last June, when the share sank to about 330c on worries about how higher freight rates would affect the business. Since then, the share price has doubled, even notching up a record high of 725c in mid-May.
But the FM contends that Santova is still dirt cheap. Aside from the impressive income statement (and the cash flow statement) there are some standout facts and figures to mull over for the year to end-February.
For one thing, earnings jumped 169%, to 127c a share. This was driven by organic growth in all regions, and only partly by the passing on of higher rates. The topline gain didn’t come at a cost either, with the operating margin at close to 40%. In Africa, year-on-year growth in earnings was 445.5%, in Europe 221.5%, in the UK 70% and in Asia Pacific about 50%.
But what’s most impressive is the evidence that Santova’s technology-driven logistics business is scalable. Turnover per employee rocketed to R2.5m (compared with R1.3m in 2021) and profit per employee more than doubled to R694,000 (R269,000 in 2021). In 2010 these figures were lower than R500,000 and R15,800 respectively.
Unlike the models of traditional logistics businesses, Santova’s is asset light — its technology platforms control and co-ordinate the cheaper movement of goods between customers without the company having to invest and maintain fleets of vehicles (or of ships and planes) or large warehouses.
Keith McLachlan, investment officer at Integral Asset Management and a longtime Santova acolyte, argues that the business should be seen as a technologyenabled logistics platform. “The back-end architecture is so sophisticated that the
incumbent players are struggling to compete. Santova is way ahead of the pack, and, much like Capitec Bank, it is not lumbered with the legacy systems that the more established players still operate on.”
In fact, McLachlan believes the growth story has just started at Santova.
The company still trades on an earnings multiple of just over five. On a forward basis it veers closer to 4.5; the FM estimates earnings will be at least 145c a share in the 2023 financial year. The business is still not paying dividends, despite its strong operational cash generation, but it has been buying back its own shares.
What Santova CEO Glen Gerber made very clear at a recent presentation is that the firm continues to reel in new business. It has signed up a significant number of new clients in the past financial year — most notably in
SA, the Netherlands and the UK.
Gerber says: “Our big differentiator has been our TradeNav [cloud-based order management system]; the number of users is doubling every third or fourth month.”
In SA, where turnover growth was 400%, Santova scored as heavyweights like Barloworld and Imperial Holdings shifted out of the market. “Some of our competitors have endured a torrid time in the past two years. We have ended up being a recipient of a lot of that fallout. That is continuing,” says Gerber.
Last year Imperial cut back parts of its Imperial Cargo Solutions, while Barloworld exited its logistics business.
Santova is likely to reap the benefits of this trend for perhaps the next 18 months. Gerber says the significant new client take-on did not reflect fully in the numbers for the year to endFebruary. “It typically starts off slowly, with new clients making a few shipments.
Once trust is built, it evolves into bigger shipments. So we will definitely see the benefits of the new-client business in the financial year ahead.”
Perhaps the most reassuring aspect of the new business gains by Santova is that the client base still looks widely diversified. A slide that was displayed at the investor presentation showed that the biggest client in the past financial year was a German company for personal protective equipment
— it accounted for just
2.3% of turnover. The next four biggest were customers in the UK for ceramics and garments (1.3% each) as well as a furniture business in Netherlands and a retailer in SA (1.3% and 1.1% respectively). Santova’s top 10 clients represented a mere 11.7% of its total business.
Gerber is also keen to set up a presence in the US market, where Santova has had increased trade volumes, mainly from the Far East. “It’s not like we haven’t tried. But when you look at multiples of 12-15 on an earnings before interest, tax, depreciation and amortisation basis, it makes a deal difficult. The logistics sector is highly rated in the US, and comes at a huge premium — especially if it’s a company that is technologically orientated.” Santova is “busy” with a potential US deal. “It’s not a significant transaction that will change the risk profile of the group. But there could be a lot of upside if we get it right. The earnings stream for logistics in the US is truly impressive, but it’s also been a graveyard, due to regulations. So we will be careful how we proceed,” Gerber says.
He says opportunities in the Balkans and Asia Pacific are also being weighed up.
Another promising initiative under way is the building of a business-to-business e-commerce platform, which will be branded as Sekida. This initiative, which Gerber says carries some Alibabatype e-commerce platform services, not only takes a fee on the goods traded but also provides a logistics offering.
Gerber stresses that Sekida has been built on a shoestring budget. “If it does not work, at least we will have given it our best shot. If it works, we foresee significant earnings coming through.”
As for buybacks, these make sense at the current multiple, whereas acquisitions would typically be executed on an eight-10 multiple and perhaps a 15-16 one in the US.
“For acquisitions, the frame of reference is our own shares. There’s not a lot [of acquisition opportunities] available right now.”
Naturally, the loftier earnings multiples for other internationally listed logistics players do raise the question of whether Santova, which earns more than 80% of its income in hard currency, should look for a listing on the Nasdaq or a similar international bourse.
Gerber understands the JSE’s smallcap malaise, and concedes that an international listing is an obvious consideration. He believes Santova’s status as a technology-based logistics platform should attract a premium on most international bourses, bearing in mind that some peers trade at three or four times the group’s earnings multiple on the JSE.