Smaller growth sto­ries

Finweek English Edition - - Cover - MARC HASENFUSS

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

Nick Vlok

Gi­don Novick – Co­mair joint CEO

Rus­sell Loub­ser – JSE CEO

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