Value stock of­fers good op­por­tu­nity

Financial Mail - Investors Monthly - - Analysis - Petri Redel­inghuys

Ver­i­mark Hold­ings Lim­ited is a seller and dis­trib­u­tor of di­rect re­sponse TV prod­ucts. It has been around for 41 years and has been do­ing the same ba­sic thing for that en­tire pe­riod.

The model is sim­ple: find and im­port qual­ity prod­ucts, then cre­ate in­fomer­cials and ad­ver­tise on TV. Cus­tomers call in and make pur­chases, or buy on its web­site. But wait, there’s more. It has about 88 Ver­i­mark Di­rect stores and 1,120 store­within-a-store out­lets through­out South­ern and East Africa.

It sources high-qual­ity prod­ucts that it can mar­ket to a wide de­mo­graphic, with an ex­clu­sive im­port and dis­tri­bu­tion agree­ment with the man­u­fac­turer.

In­fomer­cial-style ad­ver­tis­ing al­lows it to cre­ate strong brand recog­ni­tion for the prod­ucts. It’s a sys­tem that has worked for a long time.

Tech­ni­cally it is a small-cap stock, trad­ing at about R1.10 a share. So, there is a higher level of risk than you would find in a blue-chip stock. But that ex­tra risk is re­warded with a solid set of fun­da­men­tals.

With just over R500m turnover, Ver­i­mark boasts a very low p:e ra­tio of 3.86, com­pared to an in­dus­try av­er­age of 14.27. The com­pany’s to­tal

debt-to-eq­uity ra­tio is 19.81%, which classes it as rel­a­tively safe. Cur­rent div­i­dend yield is 12.83% and the div­i­dend growth rate is 42.22% (and an im­pres­sive 12.02% av­er­age div­i­dend growth rate over five years). By those met­rics, this is a lit­tle value stock.

In fact, the com­pany’s biggest share­holder, the Van Straaten Fam­ily Trust, which no doubt is con­trolled by CEO Michael Van Straaten, has ex­pressed an in­ter­est in delist­ing the com­pany. The trust owns 64% of the com­pany. To delist the com­pany, the trust would likely have to make an of­fer to buy out the mi­nor­ity share­hold­ers, which could see the share price re­act pos­i­tively, or even a bid price sig­nif­i­cantly above where the share is trad­ing now.

Given the value in the stock, share­hold­ers would likely not ac­cept any­thing but a healthy pre­mium for their hold­ings. Also, it is worth not­ing that when founders and CEOs want to delist com­pa­nies and buy out all the other share­hold­ers, it is usu­ally be­cause they see value that they be­lieve is not be­ing re­flected by the mar­ket price of their shares. This is ev­i­denced by the eq­uity on the bal­ance sheet re­flect­ing an en­ter­prise value of R150m, while the mar­ket cap­i­tal­i­sa­tion is only R131m.

Ver­i­mark is not im­mune to the tri­als and tribu­la­tions of the broader econ­omy. As a re­tailer, it is de­pen­dent on im­ports and sen­si­tive to ex­change rate fluc­tu­a­tions. In Au­gust Ver­i­mark re­ported a 1% de­cline in rev­enue, cit­ing that it has felt the pinch of the re­ces­sion. Given the solid fun­da­men­tals, it should be a bit more re­silient in the face of a drawn-out down­turn in the econ­omy and should rel­a­tively out­per­form tra­di­tional re­tail­ers.

The pro­posed delist­ing has been made pub­lic and the board of direc­tors have ap­pointed an in­de­pen­dent board to con­sider the terms of the pro­posal.

Mi­nor­ity share­hold­ers will likely be bought out and the com­pany delisted. For in­di­vid­u­als, this could be an op­por­tu­nity to make a good re­turn in a rel­a­tively safe and short-term man­ner.

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