Signs of life for mid-caps

The small-cap index has fallen 14% this year, while the mid-cap index is down 11%. It doesn’t sound too bad until you consider that Dawn has fallen 99% this year; Taste has fallen 97%; and Aveng and Group Five have seen their share prices massacred.

On the other hand, Value Group is up 62.5% year to date.

“There are pockets of excellence within the small- and midcap universe,” says independent analyst Anthony Clark.

“But they are all being tarred by the same lack of interest. The entire sector has become a backwater and that is when things become interesting – interest wanes, valuations decline and PE [price earnings] ratings unwind.

“When ratings do not reflect fair value, that is when activists, private equity and other vultures start circling.”

Examples include two buyout offers for Clover, another for troubled Dawn at one cent per share and the offer by the Van Straaten Family Trust to acquire Verimark shares at R1.50 per share.

Clark points to the Value Group as an example of a firm where corporate activity could be in the wings. The market value is R1.5 billion, the net asset value (NAV) is R5.81 per share, and the share price is R6.50, after starting the year at R4.

Despite valuation in the sector being under pressure since 2014, operating companies below R2 billion market cap PE multiple has derated by 10% to 7.9x since March 2017 and are trading at a 22% discount to their five-year average of 10.1x.

Companies to watch in this environment, says Clark, include Quantum Foods, with a healthy balance sheet and cash resources; Argent which is NAV rich; Metrofile, which will benefit from the Protection of Personal Information Act and inherent growth of paper storage; Rolfes; Bowler Metcalf; and CSG Holdings, which is particularly well run and has caught the eye of private equity players.