Smaller growth stories
PICKING OUT the ultimate growth stocks from the JSE’s surfeit of small and medium cap contenders is a task requiring a careful sifting through fundamentals. Readers probably don’t need reminding of the many highly promising (and popular) smaller growth stocks that hit the wall with a nasty splat. For example: LeisureNet, Profurn, Macmed, MGX, DNA Supply Chain, Toco Holdings, Tridelta Magnet and Viking Investments & Asset Management.
Indeed, so many promising starts on the JSE fizzle out either because management has overextended itself in pursuit of critical mass or has simply lost the plot strategically by making costly acquisitions. A lack of corporate governance has also been a major factor in companies’ downfalls. So how do you pick a smaller growth stock that has the legs to run for many years and not splutter out after a few? Make sure of the following: • Consistent (and strong) cash flow, which should roughly match operating profits unless there’s a valid reason, such as a technical issue delaying collection of a large payment. • Brand strength. Small companies must be in the process of building strong brands or trademarks that are already recognised in the sector in which they operate. • Dependable and incentivised management. The management team should be consistent in composition and well incentivised to ensure they’re in the same boat as shareholders. • Responsible expansion. Make sure a company isn’t overextending itself with corporate action (which may accumulate a serious debt load) or expanding too fast into new markets (which can be vastly different, especially offshore). • Relative competitive strength. Is the small company able to withstand any competitive pressures from larger rivals, which may start feeling flustered by the presence of a promising upstart? With that in mind we’d rate the following five stocks as “ultimate emerging” growth stocks: CAPITEC BANK A superbly run mass banking business, whose brand identity is certainly being raised (even
if mainly by word of mouth). Its great success is creating a banking atmosphere that isn’t intimidating and offering services that are genuinely useful to the man in the street. Big banks are simply not focusing hard enough on this sprawling market to really give Capitec too many competitive worries. DIGICORE Vehicle tracking technology is a growing market in SA and this group is well poised to cash in on such growth. The business is tightly managed and its offshore expansion has been undertaken selectively and profitably (especially in Britain). PHUMELELA While casinos are popu- lar plays with investors in SA, perhaps more attention should be focused on this group’s lucrative Tote business. Phumelela spins loads of cash and has also entrenched itself as a major force in SA’s racing industry. Offshore expansion has been cautious to date – but highly profitable. COMAIR With national carrier SA Airways flying haplessly in the red it’s amazing to see just how profitably Comair is run. It’s a great brand (helped by its alliance with British Airways) with great service and a company that’s poised to benefit strongly from 2010 Soccer World Cup business.
Management is smart and dogged and streaks ahead of its competitors in terms of innovative services and brand building. Sceptics say that eventually SAA – with taxpayers footing the bill – will squash Comair. We doubt that… very much. JSE LIMITED Operating a monopoly always helps, but JSE Ltd really has built a robust business model that’s meant far less reliance on traditional “market” income. As a brand, JSE Ltd is recognised as a top emerging market bourse, something that no doubt will attract the attention of those powerful parties (do we hear Macquarie?) that have penchants for stock markets.
Riaan Stassen – Capitec CEO
Gidon Novick – Comair joint CEO
Russell Loubser – JSE CEO