Financial Mail - Investors Monthly
Putting the pieces together
Getting to grips with a company’s prospects involves more than just the numbers
My alter ego, @Smalltalkdaily Research, was asked by Dylan Puchert, chair of the University of Stellenbosch Investment Society, to be the guest speaker at a 2021 society dinner on April 6 at Middelvlei Wine Estate.
Seems I had to sing for my supper, metaphorically speaking, to the Covid maximum audience of 100 students.
Puchert follows me on Twitter and wanted a guest speaker who could talk about the real-life experiences of a seasoned onthe-ground analyst.
I was honoured to be asked. I’m certainly no luminary, or as august as some of the society’s past speakers.
Some say I have experience and gravitas. I say I just have grey hairs from all the hard work covering a wide swathe of the JSE small- to mid-cap sector for 27 years.
At the event I ran through the way I think and work, which is surely what the students’ professors or lecturers would not teach them from the books: the real world of being an analyst.
There is more to understanding stocks than just theory and poring over the accounts. Yes, they are important but there’s more to it than that.
In my small- and mid-cap universe, getting to know a company, its management and operations — alongside consistently kicking the proverbial tyres — is as, or sometimes more important, in sensing the direction of the company’s earnings and share price than through just looking at the numbers.
I gave some classic examples of how following a company on a granular level more often than not gave me unique insights.
You get a better understanding of the levers and drivers of the company and, importantly, get a feel for the earnings direction.
Stocks including Afrimat, Argent and Balwin have all given me more than 80% returns over the past year or so through the simple mosaic theory analysis.
Mosaic theory is the use of seemingly insignificant or fragmented information from various sources that are inconsequential in themselves, but when pieced together into a story often give the analyst a head start over the wider market. That has been my stock in trade for decades.
I will give a recent example of my mosaic theory. All were fragments of information, nothing untoward or privileged, all common knowledge — but you had to piece the fragments together to get the real story.
As many of you know, I love the food and agricultural sector. I’ve had many winners in this sector over the years.
One company that is almost unknown is KwaZulu-Natalbased agricultural and forestry counter TWK Investments, which has a market value of R1.2bn.
It’s listed on the ZAR X exchange, and its share price has softened over the past year as it, unlike many other agri co-op businesses, was hit harder during Covid due to its unique business mix.
In its financial year to August 2020, TWK generated revenue of
R7.7bn (–1%). Operating profits declined 32% to R294m and headline EPS (HEPS) slipped 31% to 385c a share.
Until that period, TWK had an excellent and growing five-year track record.
Certain Covid factors slammed TWK harder than the general agri sector, but it will also be faster to recover as economic normality returns.
About 24% of TWK’s revenue is derived from timber and related products.
It’s a big woodchip exporter to the international paper pulp market — a great rand hedge division.
Due to a slump in global pulp demand during the pandemic and with ports and borders being closed, timber’s revenue fell 17% to R1.84bn and operating profit by 55% to R110m.
Covid also hit TWK’s motor vehicle retailing and tyres business, as it did the entire domestic industry. Revenues in this unit declined 11% to R980m, with operating profit falling 46% to R19.2m.
These two units were the main cause of TWK’s earnings demise in 2020 but will be a source of its strong recovery in 2021/2022, aside from the bumper agri sector year expected.
Internationally, paper and pulp prices are booming on surging demand. Prices, in dollars, are higher too.
Domestically, demand for timber on the reopening of the economy is strong.
Motor vehicle retailing is coming back and the core agricultural and financial services businesses in TWK are performing well.
From a 31% slam in FY2020 HEPS, I’m forecasting a recovery in FY2021. A recent 2021 firsthalf trading update gave HEPS guidance as 30%-35% higher, indicating that the recovery is well under way.
At R31 on a historic p:e of eight times, that should fall to 6.5 times in 2021/2022. TWK pays a good dividend and is backed by a NAV of 4,285c a share.
Another mosaic titbit to add to the story is that TWK recently acquired a really nice forestry asset called Peak, which augments its existing operations.
And, if whispers are true, TWK is considering moving its listing to a more liquid exchange, so there will be more coverage and foot traffic. Currently, it’s in a backwater.
All of these mosaic fragments lead me to recommend TWK as my next play in agriculture; it is a buy for long-term portfolios.