Financial Mail - Investors Monthly
Overlooked excellence
The JSE has certain small, underrated companies that may be worth investing in, writes Marc Hasenfuss
he recent buyouts of services group CSG Holdings and specialist communications business Alaris — both at marked premiums to the share prices before the respective proposals were tabled — once again highlights the value of retail investors scouring the mustier corners of the JSE for deep-value gems.
Some smaller counters on the JSE simply do not attract the attention of professional investors and asset managers. For the most part the businesses are subscale, undercapitalised and plying their trades in difficult or diminishing niches.
That said, there have been some real gems uncovered in the JSE’s less frequented corners. Older readers might remember companies such as industrial services and security services business Klipton/Sentry, Ocean Diamond Mining Holdings (a feisty marine diamond miner), Amalgamated Electronic Corp (Amecor), logistics specialist Value Group, Digicore, First Lifestyle, Wetherlys, Interwaste and niche insurer Indequity.
More recently overlooked counters such as Jubilee Metals, Argent, Combined Motor Holdings, Universal Partners, Purple Group and York have started to come to the fore.
Of course, the big challenge is sifting through the chaff to uncover the potential winners.
TFor every winner that has been uncovered, there have been dozens more painful and frustrating forays into counters like Fridgemaster, OTR Mining, Sweets from Heaven, Winecorp, Essential Beverages, Best Cut, Explorer Corp, iGaming, and so forth, and so forth (the list is really looooong).
The trick is to spend less time listening to the “story” and more time crunching numbers. The narrative from management is obviously key to prospects, but if a company is consistently burning through cash to find growth traction it’s perhaps best to be wary. So investors must critically assess cash flow, review capital allocation records, check the track record of management in terms of the “promise/delivery” ratio and make damn sure the balance sheet is able to withstand a rattle or three.
A bright red flag is wild diversification efforts — especially desperate diversions into new areas designed to displace a flagging traditional or core business. It’s unlikely that a struggling company with scant resources will somehow stumble on a new operational asset that can haul the balance sheet out of the mire.
Here are the six best shares readers may never even have heard of:
PBT GROUP
This technology services group is never going to be your next
ICT giant. Perhaps the best way to describe PBT is to think of a smaller and simpler EOH — but EOH in its heyday, before the corporate controversies and without the debt burden.
In short, PBT offers a dependable set of technology services that not only manages to generate top- and bottomline growth, but also creates reassuring cash flows. Margins are expanding too; the year to end March results showing a 17% gain at top line, transformed into a nearly 40% gain at pretax profit level. A doubling of the annual dividend says a lot about executives’ confidence for the financial year ahead.
The main business is in SA, but there are operations in the UK and Australia as well. In fact, one of the more interesting asides at PBT is its interest in Australia-based Zuus, a fintech business that serves the building industry. By IM’s calculation the minority stake in Zuus — worth R93m, based on a recent shares-for-cash issue — and PBT’s cash balance are worth more than 170c a share. Strip out these figures and the earnings multiple comes in significantly lower.
ISA HOLDINGS
Never mind obscurity, this security technology specialist — or information security architect — might have been headed for the scrap heap in late 2019, when its long-time licence agreement with an international vendor was unceremonious ly changed. The new terms were most unfavourable, which was a huge problem for ISA, as most of its revenue was derived from this arrangement.
Fortunately CEO Clifford Katz had always managed the business conservatively, and ISA’s balance sheet was strong enough to endure this difficult impasse.
At the moment ISA is in a rebuilding phase, using new security technologies. Revenue in the financial year to end May was down markedly, from R101m to R67m, but subscription-delivered turnover represented R55m of that amount. More encouraging is that ISA’s margin fattened to 56% (previously 45%); this bodes well for profits as ISA’s new relationships gain traction. Cash flow from operations was R11m, which left the net cash balance at almost R50m. This is equiv