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