Taking a nibble at the JSE
few weeks ago I spotted legendary fund manager Dave Foord at a nearby table at Magica Roma. In the presence of greatness, I urged my fellow investment club members to please make only hushed accusations about who was responsible for depleting the lunch fund with costly bets on EOH, Aveng and
Sasol.
Seeing Foord made me nostalgic about an easier time, when most of my measly savings were tucked away in Foord Compass debentures a fantastic investment vehicle that offered decent growth and a decent yield. Legislation unfortunately rendered Foord Compass less effective, and the vehicle was parked away from the public.
Finding a counter with share price growth and yield attributes is not that easy, after all. British American Tobacco (BAT), with its generous quarterly payouts, leans more to the yield side these days. So does Stor-Age, though the growth story is yet to be fully appreciated by local investors. Reunert, which is now plugged into a highly charged renewables niche, could offer growth and yield, and perhaps so could Caxton, when the market starts to appreciate just how well the core business is managed.
But the one share I am starting to nibble at is JSE Ltd, the operator of the local bourse and provider of a good number of ancillary services. The JSE, these days, is not totally reliant on the amount of trading activity on its main equity and bond markets. The group’s strategy to diversify revenue is well under way, with nontrading revenue now accounting for a quarter of operating top line. Importantly, the JSE’s results to end-December once again show reassuring cash generation of R978m, or R11.78 a share which underpinned a rather sumptuous 769c a share (R668m) dividend.
The market, however, is giving the JSE’s shares short shrift. The JSE trades on an earnings multiple of 11, which is modest for a specialised financial services business with an effective monopoly and promising elements of fintech.
Admittedly, it was a modest financial
Ayear, with operating revenue creeping up 5% to R2.7bn, and earnings before interest, tax, depreciation and amortisation (ebitda) up just 1% to R1bn on slightly squeezed margins. The dividend yield sits at an eyebrow-raising 7.4%. A couple of years ago shareholder activist Chris Logan acerbically remarked that the JSE’s yield was getting uncomfortably close to that of BAT which might, in some quarters, personify an ex-growth company.
At the time of writing, the JSE’s historic dividend yield of 7.3% was considerably richer than BAT’s 6.4%. While the JSE has been meticulous about ratcheting up its payouts over the past few years, the yield also reflects a nasty slide in the share price from about R200 five years ago to current levels of around R106.
New markets
So is the market pronouncement that strongly suggests the JSE is an ex-growth business correct? Perceptions are everything, and the “shrinking” of the JSE via the ongoing delisting of mainly smaller counters over the past 15 years does weigh heavily on investor sentiment. JSE CEO Leila Fourie pointed out that 30 years ago the JSE hosted about 680 listings. The collective market capitalisation of those listings was R800bn. Today the JSE probably has fewer than half the listings it hosted in 1993, but the collective market value of that smaller pool of companies is close to R22-trillion.
I don’t expect a listings boom on the JSE any time soon, and it could be many years before sparks of enthusiasm bring entrepreneurial ventures back to the bourse. That said, the JSE is not sitting on its hands. The recently launched private placement market has made a decent start with 22 new issuances.
Fourie expects further traction in this new market which, for the record, already has R4.9bn in capital ask and investor assets worth about R12bn. In time, one might imagine this being a springboard to listing on the JSE, which is envisaging a “growth board” for smaller entrepreneurial companies.
One key question raised at the JSE’s investor presentation was why there was no active pursuing of share buybacks. The JSE is both cash generative and cash flush, and I’d suspect value-accretive acquisitions are not too easy to come by.
Fourie said that while share buybacks are considered on “an ongoing basis” the JSE’s (share) liquidity status as a mid-cap stock has to be borne in mind. She suggested that a shift from paying dividends to pursuing buybacks would be a “dramatic move”.
Yet BAT famously has managed to execute share buybacks and pay generous dividends while trying to grow new product revenue in a shrinking cigarette market. I doubt the JSE would enjoy another comparison to the tobacco giant but making more profit with fewer listings and more nontrading services will be the way to go for the medium term.