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?
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.