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
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.