Worth considering for a recovery portfolio

In the Covid-19 market of the past month to six weeks, many stocks have become even cheaper than they were in terms of valuations.

But what if a company was already at the bottom of the bargain basement before the slump? Balwin Properties could be classed as such a stock. The company tipped to a low of 180c (reflecting an earnings multiple of less than two) in the last quarter of 2019, then doubled as the market took cognisance of an updated corporate business strategy as well as a more generous dividend payout ratio.

In mid-March it released a trading update for its year ended February 2020. These results will not be affected by the lockdown’s disruptions.

Interim results to August 2019 reflected headline earnings ahead by 5%, to 40c a share. The interim dividend was 11.7c a share. For the previous full financial year Balwin paid a total yearly dividend of 14.51c a share, so the interim results reflected the new dividend policy. Cash on hand at the interim stage was R274m (a near R200m increase), which gave investors comfort about the operating position. For the full 2020 financial year, IM forecasts the cash position to rise to R475m, roughly a third of Balwin’s current market cap. That position of strength should reassure investors that the company can withstand the challenging conditions.

Balwin traditionally has a better second-half performance as new developments are marketed and sold. In the trading update Balwin said 2,700 apartments were sold in the period — a rise of 10.7%.

Revenue for the period

Restaurant franchisor Spur Corp, which originally listed on the JSE in 1987 as Spur Steak Ranches and Spur Holdings, is a robust brand. Its share price has fallen almost 40% this year, and the share appears cheap on most valuation metrics — with the current share price back at 2012 lows and discounting a great deal of negative news.

The group trades through 600 franchisee outlets and five company-owned restaurants and has strong brands such as Spur Steak Ranches, Panarottis Pizza Pasta, RocoMamas and The Hussar Grill. It has exposure to the rest of Africa, Australasia, Mauritius and the Middle East.

Spur has navigated through many challenges in its fight for share of the consumer wallet — and has never (until the Covid19 pandemic) skimped on its dividend. More recent challenges have included an onslaught of foreign brands and load-shedding.

Spur revolves mainly around its eponymous steakhouse brand, but the group has also seized opportunities to expand its appeal to a wider audience with The Hussar Grill and RocoMamas. These “upmarket” brands target different LSM customers and have arguably placed the group in a strong position to navigate an economic downturn.

The group reported an admirable 14.6% growth in comparable diluted headline EPS and revenue growth of 8.4% for the first half of the 2020 financial year. The results, released at the end of February, predated the Covid19 lockdown, which will cloud the near-term revenue outlook.

Spur’s income is directly linked to fee and other income related to franchised restaurant sales. Due to the suspension of nonessential services, no material income is expected for the duration of the lockdown.

Fortunately, Spur has avoided the mistakes of some of its main competitors, such as making large investments in foreign markets, and the group is entering these trying times with a strong balance sheet. In addition, directors decided to suspend the interim dividend, which would have amounted to R71m; this preservation of cash reserves will give the company more flexibility as it deals with the uncertainty of the Covid-19 impact.

Spur’s strong financial position, relative to competitors, has also enabled it to take steps to assist its primary revenue generators — the 600 franchisees — by zero-rating franchisee and marketing fees for half of March and all of April.

This step will obviously have an impact on profit in the second half of 2020. But by taking active steps now to assist its franchisees, the group could take market share from competitors.

Much will depend on how long the economy takes to recover once the lockdown ends. As restaurants resume trading, consumers could well have slightly more income — provided they were able to keep their jobs — on the back of lower interest rates and petrol prices as well as a more muted inflation outlook.

The benefits of a strong balance sheet cannot be underestimated in the current environment. Management can focus intensely on reigniting growth, instead of being distracted by the need to service large interest rate payments and renegotiate debt with financiers.