Rocky road to re­cov­ery

The grad­u­ates of the 2007 list­ings boom, es­pe­cially those in­volved in the broader in­fra­struc­ture space, have en­dured tough times over the past decade. So which of the sur­viv­ing small coun­ters still have a foun­da­tion for en­dur­ing growth?

Financial Mail - Investors Monthly - - Opening Bell - Marc Hasenfuss

MAZOR Share price: 151c JSE code: MZR

BUY THIS CAPE TOWN-BASED firm spe­cialises in alu­minium and steel cladding for build­ings and runs a glass op­er­a­tion.

Since list­ing, Mazor has en­dured ups and downs, pay­ing gen­er­ous div­i­dends in good years and knuck­ling down to en­sure a swift profit re­cov­ery in bad years. It looks very much as if fi­nan­cial 2018 will be a bad year, with in­terim prof­its tak­ing a se­ri­ous hit in the eco­nomic slow­down.

In­terim earn­ings to end-Au­gust plum­meted to 1.9c/share, from 21c in the cor­re­spond­ing in­terim pe­riod in 2016, mean­ing it will take a se­ri­ous ef­fort to pro­duce even a 10th of the 2017 full-year earn­ings of 43c/share. But if the lo­cal econ­omy is re­in­forced, Mazor will be a strong ben­e­fi­ciary of in­creased build­ing ac­tiv­ity.

There isn’t huge down­side risk in Mazor, which is un­der­pinned by a tan­gi­ble NAV of more than 225c/share. The firm has also been smart in its share-buy­back en­deav­ours, and there must be an op­por­tu­nity to re­pur­chase scrip again at sen­si­ble prices.

Gut feel is that there might be a temp­ta­tion for larger share­hold­ers to make an of­fer to buy out mi­nor­ity share­hold­ers and delist the firm. Of course, a buy­out will be less likely if Mazor’s fi­nal re­sults to end-Fe­bru­ary show signs that man­age­ment is con­fi­dent that the alu­minium and steel di­vi­sions can latch onto new op­por­tu­ni­ties in the changed po­lit­i­cal cli­mate.

KAYDAV Share price: 94c JSE code: KDV

HOLD THERE IS SOME­THING dis­tinctly “yawn-wor­thy” about be­ing a pro­ducer of wooden boards. But KayDav has been a fairly de­cent div­i­dend dis­trib­u­tor, fork­ing out 31c/share to share­hold­ers be­tween the 2012 and 2015 fi­nan­cial years. At the time of writ­ing, the com­pany’s shares were trad­ing at pretty much their low­est level in five years (ig­nor­ing a brief dip to 77c).

The share price weak­ness is un­der­stand­able, given that KayDav’s earn­ings in the year to end-De­cem­ber more than halved to 6c/share. Mar­gins were crushed, with the com­pany man­ag­ing just R22m in op­er­at­ing prof­its from turnover of R945m.

It did, how­ever, re­in­force its bal­ance sheet, with gear­ing im­prov­ing to 21% (24% pre­vi­ously), and the cur­rent ra­tio ratch­eted down to 1.6. KayDav’s board seg­ment — rep­re­sent­ing more than 90% of turnover — bat­tled for trac­tion un­der ex­cess sup­ply, which put a squeeze on sell­ing prices. This is un­likely to change in the first half of this fi­nan­cial year, and man­age­ment will need to fo­cus on cost ef­fi­cien­cies while de­vel­op­ing prod­uct lines to boost top-line growth.

KayDav has the where­withal to pull through — though in­vestors would be wise to take a long view. It has an added ad­van­tage in its foray into spe­cial­ist pack­ag­ing, which is show­ing growth of 18% in rev­enue and 11% in profit. KayDav is one to watch for fur­ther share price weak­ness.

SOUTH OCEAN HOLD­INGS Share price: 35c JSE code: SOH

SELL THIS SMALL ELEC­TRI­CAL goods group is pur­su­ing a cap­i­tal rais­ing by is­su­ing new shares at a con­sid­er­able pre­mium to the cur­rent share price. This is­sue, though, is be­ing un­der­taken at a marked dis­count to the last stated NAV. But NAV can be brit­tle when there is per­sis­tent op­er­a­tional un­der­per­for­mance.

For­tu­nately for SOH, there’s an em­pow­er­ment part­ner will­ing to un­der­write the share is­sue, be­cause not many share­hold­ers would have fol­lowed their rights, given SOH’s aw­ful per­for­mance over the years. The core elec­tri­cal busi­ness has fiz­zled, while Ra­di­ant Light­ing — for which the com­pany over­paid grossly in 2007 — has ex­pe­ri­enced a com­plete profit blackout.

A key ques­tion is why ma­jor share­hold­ers don’t of­fer to buy out what must be very dis­af­fected mi­nor­ity share­hold­ers.

There are plans to bol­ster the bal­ance sheet by sell­ing Ra­di­ant, but the price tag won’t be near the orig­i­nal pur­chase price.

SOH has shown re­mark­able in­ep­ti­tude in find­ing the right strat­egy for sus­tain­able prof­its, and a dol­lop of fresh cap­i­tal is not likely to al­ter the bot­tom line rapidly.

SOH is for in­vest­ment masochists who can en­dure what at best will be a grind­ingly slow re­cov­ery. Even though the gap­ing dis­count to NAV seems at­trac­tive, IM would steer well clear of SOH.

Pic­tures: 123RF

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