Sabvest counts costs of TransCap fallout

We are barely through the first quarter and the first big corporate controversy of the year has erupted. Transaction Capital (TransCap) dropped a real clanger last week, adding extra jitters to a market nervous ahead of a potentially volatile “national shutdown”.

Highly regarded investment company Sabvest Capital — an early investor — had the ignominy of having to report results in the wake of the destruction. Fortunately, it sold 1-million TransCap shares in January for close to R50m. But the knock from developments was tangible.

Sabvest recorded the value of its remaining 5-million TransCap shares at the end of December at R165m; the updated value on Friday was less than R50m, roughly equivalent to the value of the tranche sold in January. At the time of the results release, Sabvest had estimated a net impact of R72.5m, which would have slashed 184c a share off the reported intrinsic NAV of R111 a share. By last Friday, I’d say the blow to NAV was more like 250c-275c a share.

It’s not a killer blow to Sabvest, with TransCap — even at pre-trading update levels — representing 3.3% of total investment holdings. Of course, reputationally speaking, the association with a fizzled investment is difficult to quantify — though the Sabvest share price is still holding up fairly well.

How Sabvest reacts to developments will be interesting — remembering that the group played a pivotal role in restoring document storage business Metrofile after the MGX collapse. Perhaps TransCap is a bit too peripheral for Sabvest to get involved in restoration efforts, though Sabvest prime mover Chris Seabrooke might sniff out some longer-term value.

Speaking of which, I noted that Sabvest has again hiked its valuation on its 44.8% stake in industrial hub Apex Partners, which is now reckoned to be worth a not insubstantial R504m based on a higher earnings before interest, tax, depreciation and amortisation (ebitda) multiple of 5.5 (previously 4.5). With most of its wideranging portfolio unlisted, the market needs to test the robustness of Sabvest’s unlisted valuations. This is fairly difficult because Sabvest still does not provide a surfeit of financial and operational information on individual investments.

It’s worth noting, though, that Sabvest received a smaller dividend of R18m from Apex in 2022 (R25m in 2021).

In terms of its largest investments, Sabvest values specialist tech business DNI4PL at R1bn, based on an ebitda multiple of 6.5, and specialist textile business SA Bias Industries at R1bn, based on a 4.5 multiple for the Narrowtex segment and 6.5 for Flowmax part.

DNI-4PL dished out dividends worth R102m, and SA Bias R44m. Interestingly, Sabvest’s 34.4% stake in apparel labelling and identification products business ITL Holdings — which has operations scattered around the globe — is reckoned to be worth R786m on a relatively heady nine multiple. This valuation is despite ITL’s tricky trading conditions in the second half of 2022 when production in China was hampered by a resurgence in Covid, and logistical and supply chain issues.

Though I said Sabvest’s share price has held up quite well, the share now offers a larger discount on the last stated NAV. If we work on a figure of R109 a share (to account for TransCap’s smack), Sabvest’s shares offer a discount of more than 20%. That’s not nearly as deep as the more than 40% discount offered on Remgro.

Whether Sabvest suffers from further fallout from TransCap remains to seen. But those coveting a well-assembled portfolio of unlisted investments might want to keep tabs on the discount moves.

Cash crimp

Speaking of discounts, Caxton & CTP still presents one of the most compelling value situations on the JSE. I have written about this on several occasions, but I think the model is worth revisiting. Caxton’s latest interim results reflect an NAV of R19.22 a share. I calculate intrinsic NAV at about R18.90 vs a share price of R10.29. Anyone buying Caxton is paying about 250c a share for operational assets that in the six months to end-June generated pretax profits of more than R500m and bottomline profits of well over R300m.

Cash generated by operations of R495m came close to matching profits — an increase of 28%. Another way of looking at it is that Caxton’s share price is roughly 75% underpinned by its influential holding in listed packaging group Mpact — which is worth about 450c a share — and a somewhat diminished cash balance of just over R1.1bn, or 316c a share.

The cash crimp was a consequence of abnormal investment in stockholdings and accounts receivable to fund the peak season and volume growth, and to stave off supply chain risks. I suspect the cash balances in the second half should be well restored. Quality earnings just don’t come this cheap.