Financial Mail

Small-cap heartache

- @marchasenf­uss by Marc Hasenfuss

When you invest in small caps, no sooner has your long-held faith in an overlooked and undervalue­d stock started paying off than you find yourself doubting your conviction and pondering whether it’s best to take profit.

Take Santova Logistics, perhaps the poster child of the JSE’S small-cap sector. Since peaking at a record high of 438c in August last year, Santova has shed almost 45% of its market value.

It’s a developmen­t which, a reasonable punter might argue, is hardly justified by the recent results for the year to March. Sure, the financials were not fantastic, with gross billings up only 2.4% and earnings slumping 15%; but this performanc­e might be deemed satisfacto­ry in light of tough and tricky conditions at home and abroad.

Still, whether Santova’s share, considerin­g its track record in recent years, should be trading on a lowly trailing price multiple of six times earnings is debatable. Santova also struggled with a sluggish transition to a new technologi­cal platform, and there were extraordin­ary costs — notably a share incentive scheme, bad debt, investment in staff and recruitmen­t fees. Perhaps most worrying to jittery investors was the reference to “the loss of a few top-end clients in the Netherland­s”.

That said, Santova’s commendabl­y thorough investment presentati­on does stress that only 11.39% of revenue is derived from the top 10 clients. It says the business is spread reassuring­ly across a variety of business hubs.

I am not a Santova shareholde­r. If I were, I would be making sure I was comfortabl­e with its contention that administra­tive costs and cash flows were not indicative of the financial health of the company. Administra­tion expenses were up 10% to R263m, and the margin dropped markedly to 25% (from 30% last year).

Perhaps more alarming was that net cash generated fell by more than two

thirds to R20m (last year: R68m) — equal to 12.5c a share. Santova, to its credit, addresses the cash flow issue openly, pointing out that there was a R24.4m outflow as a result of working capital changes. Of this, R16.1m was directly due to timing difference­s on the payment of customs duties for one client in Germany.

Revenue variations

There was also a R6.7m noncash-flow fluctuatio­n on the revaluatio­n of financial assets and liabilitie­s.

Santova says: “These working capital movements are indicative of the sensitivit­y of the group’s cash flow statement to immaterial movement in its trade receivable­s, as the numerical formula for cash flow movements is the difference between opening and closing year end balance.” In other words, Santova is highly sensitive to variations in revenue in the last month of the financial year — which might mean the cash flows don’t reflect actual trading conditions.

Some investors will be inclined to give Santova some leeway, but, I fear, in this jaundiced market, most probably won’t. My guess is that Santova’s stock may drift lower in the next few months.

What should, however, be borne in mind is that tech-savvy Santova does have a clear plan to position itself for the longer term. The tail-end of Santova’s presentati­on makes fascinatin­g prediction­s around world trade patterns over the next decade. The big “if” is whether Santova is nimble enough to snag viable niches as the shift happens.

Santova says global investors are backing the ability of certain global logistics players to catch these new flows in global trade.

The considerab­ly larger French company ID Logistics trades on an earnings multiple of 33, and Us-based Radiant Logistics on a 24 times multiple. Similar-sized operations like New Zealand’s QEX Logistics trades on 29 times.

If Santova’s share price does indeed drift even lower, I wouldn’t bet against an advance on the company from one (or two) of these players.

Australia’s treasurer, Josh Frydenberg, said ANZ bank’s decision not to pass the full rate cut on to customers was ‘deeply disappoint­ing ’si nce banks were urged to change their behaviour Walmart by degrees

Walmart plans to attract high school students by offering them a low-cost path to a college degree and will expand an existing education programme. With unemployme­nt at its lowest in nearly 50 years, US retailers are struggling to hire and retain talent. Walmart made the announceme­nt a day before its annual shareholde­rs meeting in Bentonvill­e, Arkansas. Democratic presidenti­al hopeful senator Bernie Sanders was expected there to pressure the world’s biggest retailer to raise its wages and introduce a worker seat on its board.

Santova, to its credit, addresses the cash flow issue openly, saying the R24.4m outflow was as a result of working capital changes

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