Q&A

Small-cap dar­ling Torre’s share price is up an im­pres­sive 364% in less than three years. The 34-year-old CEO, Charles Pet­tit, cut his teeth in cor­po­rate fi­nance at bank­ing group AfrA­sia and deal-mak­ing has been a hall­mark of Torre’s short history, writes

Financial Mail - Investors Monthly - - Contents - Charles Pet­tit CEO: Torre In­dus­tries

Charles Pet­tit, CEO of Torre In­dus­tries

Q The latest deal in­volv­ing Torre also in­volves Stel­lar Cap­i­tal. They’re tak­ing a big chunk of your shares, but it’s clas­si­fied as a re­verse takeover. What’s this deal all about?

A It is a re­verse takeover — those Torre share­hold­ers swap­ping out their shares (for shares in Stel­lar) will end up, be­tween them, con­trol­ling Stel­lar. From a Stel­lar per­spec­tive, the idea is to build bulk in the port­fo­lio and reach some level of crit­i­cal mass quite quickly.

Q But from Torre’s per­spec­tive? There are a lot of links to Stel­lar: your chair­man, Peter van Zyl, is the CEO of Stel­lar, for ex­am­ple. So do these deals mean that Torre as a busi­ness is in­vested in Stel­lar, or are they trans­ac­tions sim­ply at share­holder level?

A Torre won’t hold a stake in Stel­lar — cer­tain Torre share­hold­ers will now own their stake in Torre in­di­rectly through their share­hold­ing in Stel­lar. So there’ll be no cross-share­hold­ing. Q There seem to be a lot of ties be­tween you and the folks at Stel­lar. Are they bind­ing ties or fairly in­ci­den­tal to your busi­ness?

A It’s not just Peter and me — there are a cou­ple of in­di­vid­u­als who are in­volved as share­hold­ers and/or man­age­ment be­tween the two en­ti­ties, but re­ally, there are no for­mal ties be­tween us. We have sim­i­lar in­ter­ests and we’ve cho­sen to con­sol­i­date some of our in­ter­ests in Torre into Stel­lar, so we’re rep­re­sented as a sin­gle unit in terms of our am­bi­tion in Torre.

The Torre share price has per­formed well and that means lots of the in­sti­tu­tional guys are al­most obliged to take profit. What we’ve tried to do is con­sol­i­date those guys and set the base for Torre at a higher level, be­cause we’re very bullish and we don’t want large sellers con­stantly in the mar­ket.

Q Who are your main share­hold­ers?

A Our main in­sti­tu­tions are Investec As­set Man­age­ment, Mo­men­tum and Stan­lib. The three have sup­ported us con­sis­tently as we’ve built Torre.

Q Why do you think you’ve be­come such a dar­ling among the re­tail in­vestor fra­ter­nity?

A It’s just de­liv­ery, re­ally. In the be­gin­ning there was a lot of scep­ti­cism to­wards the strat­egy. I think we were seen as be­ing too small, not hav­ing ac­cess to cap­i­tal, not hav­ing proven skills for in­te­grat­ing and turn­ing around busi­nesses. But as we ex­e­cuted quite com­plex trans­ac­tions . . . I think that’s cre­ated some trust.

Q Is there pres­sure on you to con­tinue do­ing deals, be­cause all the ac­qui­si­tions have been in­stru­men­tal in pro­vid­ing the huge growth in rev­enues?

A We’re un­der less pres­sure, I would say, than a num­ber of other JSE-listed busi­nesses, which rely on buy­ing busi­nesses to gen­er­ate their earn­ings growth. I think that we’ve got a proven ca­pa­bil­ity to re­duce costs and en­hance ef­fi­cien­cies in busi­nesses that we’ve bought.

We’ve done some ac­qui­si­tions in the last six months where there’s still plenty of ben­e­fit we can get from in­te­grat­ing them prop­erly, but we’re op­er­at­ing in mar­kets that are slow growth, or ex-growth, so to get growth you’ve got to get mar­ket share, and of­ten the most ef­fec­tive way to do that is to buy busi­nesses.

It’s a well-oiled ma­chine, our ac­qui­si­tion process, so I think we’ve got the abil­ity to do some very ac­cre­tive smaller deals, and we’ve also shown that we can do more com­plex, larger deals.

We’re look­ing to ex­e­cute a bolt-on buy at least once ev­ery sec­ond month.

Q It sounds like most of the skills in Torre are in deal-mak­ing, as op­posed to op­er­at­ing the com­pa­nies.

A No. In the whole team I’m prob­a­bly the only per­son with a deal-mak­ing back­ground. The rest are in­dus­trial pro­fes­sion­als and we’ve hired from var­i­ous other busi­nesses. Our COO joined us from Bar­loworld, we’ve hired ex­cel­lent man­agers across the board, so we’ve got a good mix of en­trepreneur­s and pro­fes­sional man­agers.

Q If you stripped out all your ac­qui­si­tions, what’s Torre’s like-for-like sales and profit growth?

A We haven’t pre­sented that now and I don’t think we will for another year or so, be­cause of the small base we’re com­ing off. The first busi­ness we owned — SA French — is about a R120m

turnover busi­ness to­day, but as a group we’re R2,5bn. If you had to look at the per­cent­age con­tri­bu­tion it’s given our over­all group, it’s mi­nus­cule — the bulk is driven by cor­po­rate ac­tiv­ity. But ev­ery busi­ness, with the ex­cep­tion of our trac­tor and grader sup­pli­ers — which is a min­ing fo­cused busi­ness — has grown ev­ery year since we bought it, in terms of prof­its and turnover.

Q At what point can in­vestors start look­ing for­ward to com­pa­ra­ble re­turns?

A We haven’t had a strong de­mand from in­vestors for that in­for­ma­tion yet. But we’ve al­ways lis­tened to what our share­hold­ers and po­ten­tial other in­vestors have asked for and pro­vided it quickly af­ter they started ask­ing for it.

Q On the share­holder register, you hold only 0,05% of Torre. Is man­age­ment cor­rectly in­cen­tivised?

A We put in place some share op­tion schemes last year and I was given awards that are deeply in the money al­ready. So we are heav­ily in­cen­tivised.

Q What do you think Torre’s shares are worth? Do you think the stock’s over­val­ued or is it a fair re­flec­tion of where you’re at and where you’re go­ing? A Well ob­vi­ously I’m privy to in­side in­for­ma­tion about our bud­get and that kind of thing, so I be­lieve our share price will con­tinue to ap­pre­ci­ate over the next year. The mar­ket price now is prob­a­bly a proper re­flec­tion of the value based on the in­for­ma­tion that the mar­ket has.

Q Vu­nani’s small-caps an­a­lyst An­thony Clark of­ten de­scribes Torre as a mini-In­victa. In­victa is chas­ing growth out­side SA. Are you also at that point that you need to cast your net wider?

A We’re not In­victa’s size so it is eas­ier for us to grow in the South African con­text than it would be for In­victa. We want to push all our busi­nesses into a num­ber 1, 2 or 3 po­si­tion. Apart from that we are grow­ing, pri­mar­ily or­gan­i­cally, in the rest of Africa. We don’t have In­victa’s bal­ance sheet so we can’t do a big in­ter­na­tional ac­qui­si­tion, but we are op­er­at­ing in 13 African coun­tries now. With the Set Point ac­qui­si­tion we picked up a few small oper­a­tions in Dubai and In­dia, so the idea is to push or­ganic growth in­ter­na­tion­ally and look for ac­qui­si­tions in SA.

Q Is part of the plan to build up Torre for sale? Would you be in In­victa’s sights, for ex­am­ple?

A I don’t think so. From what I’ve read about them in the press, they’re very fo­cused on in­ter­na­tional deals, so I don’t think we’d nec­es­sar­ily be of in­ter­est to them. We are not build­ing the busi­ness to sell it.

Q Have you made any strate­gic er­rors since start­ing Torre?

A One thing we’ve been very dis­ci­plined on since we launched the busi­ness is strat­egy: we de­fined in 2012 ex­actly what we wanted to be, the mar­kets we wanted to op­er­ate in and the kind of ac­qui­si­tion tar­gets we wanted. We’ve stuck to that and it’s worked well. We also de­fined a cou­ple of things we wanted to do a bit dif­fer­ently: we wanted to bring in a fi­nan­cial so­lu­tions of­fer­ing for our cus­tomers to in­crease mar­gins for the group and in­crease sales; we wanted to use tech­nol­ogy more ef­fi­ciently and try to leapfrog some of the cost-heavy dis­tri­bu­tion net­works that other peers have to have …

The core strat­egy was: an in­dus­trial group, equip­ment dis­tri­bu­tion, parts dis­tri­bu­tion and other value-added ser­vices and di­ver­sity. Hav­ing come from the back­ground with SA French we didn’t want to just have ex­po­sure to the con­struc­tion mar­ket — we wanted to be ex­posed to mul­ti­ple mar­kets, so con­struc­tion, min­ing, agri­cul­ture, man­u­fac­tur­ing and so on, and we wanted to get size be­cause these mar­kets are all cycli­cal and when you get scale, you can fi­nance your­self through dif­fi­cult times.

Q Your lend­ing busi­ness is all in-house. Is there a risk that you could ex­pe­ri­ence a blowout if you had any bad debt ex­pe­ri­ence?

A No. First of all, we only lend to our own cus­tomers, so we’re not a broad fi­nan­cial ser­vices busi­ness. Se­condly, we lend against our own equip­ment, so it’s prod­uct that we un­der­stand — we al­ways have a full main­te­nance agree­ment in place so we’re main­tain­ing that kit.

Also the way we’ve struc­tured the lend­ing is we’ve es­tab­lished a spe­cial-pur­pose ve­hi­cle which has a cer­tain amount of cap­i­tal from Torre in it; Torre man­ages that SPV and then ex­ter­nal in­vestors have been in­vited to par­tic­i­pate in it and its re­turns. So Torre’s risk is al­ways lim­ited to the cap­i­tal it’s in­jected into that SPV.

Q Have you taken any hard knocks?

A Ja, we’ve paid some school fees in the fork­lift mar­ket. I think we’ve got a great busi­ness now but it took two ac­qui­si­tions that weren’t great be­fore we got the for­mula right. And the whole listed en­vi­ron­ment’s been a bit of a learn­ing curve in terms of re­port­ing obli­ga­tions and re­la­tion­ships with in­sti­tu­tions.

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