Investing in JSE hidden gems
NOT PENNY STOCKS: THESE ARE OUTSIDE TOP 40 Treasures hiding in plain sight on the market that have a consistent track record.
Despite the near never-ending torrent of doomsday headlines that flood South African news websites daily, there remain some wonderful, well-managed local businesses tucked away on the JSE. Many of these exist in the mid-cap space – outside of the Top 40 but are sizeable enough not to be penny stocks.
AVI Limited is not a small business by any stretch. Its market cap is around R31 billion, and it reported R1.8 billion in operating profit on revenue of R8.4 billion in the first half of its financial year (to December).
It has R500 million of cash in the bank.
This, despite a long list of challenges it is operating under
– a “tough trading environment”, “constrained consumer demand”, “unreliable municipal infrastructure”, “port inefficiencies disrupted supply chains” and of course the perennial favourite “load shedding” (with direct costs of R21 million in the six months to 31 December).
AVI owns Bakers, Willards, Five Roses, Freshpak, Frisco, Koffiehuis, House of Coffees, I&J, Provita, and a number of smaller brands.
It also owns some fashion brands, including Spitz, Kurt Geiger and Green Cross, and produces beauty products under licence from brands such as Lenthéric and Yardley.
In calendar 2023 (H2 of 2023 and H1 of 2024), this business reported a return on capital employed (ROCE) of 30.8% – an astonishing result considering just how tough it is to trade in South Africa. Over the last decade, ROCE has consistently been in the high 20s (aside from the Covid year, where it dipped to closer to 25%).
Share price
Shares are trading above R90, which is not far off its 52-week high of R93.75 hit last week. However, this is very far off its 52week low of R60 hit in June last year. The price is up about 50% since then.
Over the last five years, the share is flat. (It is up over 26% over the last three – since the post Covid lockdown slump.)
At these elevated levels, its forward price-to-earnings (PE) ratio is 14. Not quite single digits, but not exactly demanding either. This company has delivered a compound annual total shareholder return of 17% since the 2005 financial year.
It is comfortably converting more than 100% of its earnings before interest, tax, depreciation and amortisation (Ebitda) to cash and, remarkably, has paid out an effective 93% of headline earnings to shareholders – in the form of dividends, special dividends and share buybacks – in the last 20 years.
Since 2012, it has paid out a total of R52.78 to shareholders in the form of dividends and special dividends. This equates to about 60% of the current share price.
(In fact, at the 52-week low of R60, the dividends paid since 2012 are about 90% of the price.)
A sizeable contributor to this has been the R9.10 in special dividends paid since its 2013 financial year.
Now, this article is not for a second suggesting that widows, orphans and pensioners should pile into it with all their savings!
Buying at current levels – at/near 52week highs – would be a brave call (not to mention the concentration risk inherent in a single stock).
Rather, this piece simply aims to illustrate that there exist some high-quality businesses on the JSE that have a consistent track record – over the “real” longterm (not just five years) – of delivering returns to shareholders. Sometimes these are hiding in plain sight. And sometimes, when there are broader sell-offs when the market gets spooked (say, when Russia invaded Ukraine), this presents a potential buying opportunity.
Buying at current levels would be a brave call