Strong and becoming even stronger

Over the past 12 months, an investment in a JSE top 40 exchange traded fund would have returned you -5% at the time of writing.

That’s excluding dividends, of course, but it’s still terrible.

In stark contrast, CA Sales Holdings is up 53% over the same time period, also excluding dividends. You can certainly make money on the local market if you know where to look. Even measured in dollars, CA Sales shot the lights out in the past year.

The company has nothing to do with selling chartered accountants but everything to do with helping consumer brands reach the market. It sounds simple enough to design and manufacture a consumer product and sell it through retail channels, but the reality is different.

For smaller manufacturers, achieving efficient distribution is extremely difficult. Merchandising is also a problem, as obtaining shelf space at retailers is a constant battle. Even in developed markets with extensive infrastructure, it’s easy to see how CA Sales plays an important role in helping brands navigate the challenges of getting into shopping baskets. When you think about less developed markets in particular, it’s also understandable why CA Sales counts huge consumer brands such as Unilever and Tiger Brands among its clients.

Even Coca-Cola and ColgatePalmolive are on its client list. Reaching consumers in markets such as Kenya, Zimbabwe and Zambia isn’t straightforward, and CA Sales has a great business as a result.

Operating primarily in eight markets, and offering fast-moving consumer goods technology and data solutions in a further 16 countries, CA Sales essentially offers investors a smart way to play the African consumer story. The beauty of the model is that it relies more on volumes than on pricing, so regions with strong population growth (and thus demand for goods) are lucrative for the group.

This also means that where manufacturers choose to be aggressive on price to keep driving volumes and either win or maintain market share (a common strategy), CA Sales benefits. This is because the group doesn’t have direct exposure to the gross margin of the manufacturers. It is true that consumer goods are cyclical in terms of demand, but this is one of the more defensive ways to play in the space.

Such a growth story is only as good as the management team that makes the capital allocation decisions. The good news is that any engagement with the CA Sales management team reveals incredible humility and a genuine level-headedness that is rare in the markets. The team is clear on what it does and how it wants to do it. There’s an excellent organic growth underpin in the business, along with inorganic growth opportunities (acquisitions) that take the total growth story up a notch.

Bolt-on acquisitions are incredibly powerful. These are deals that are designed to either plug gaps in the existing offering or bring new markets or products into the group, without deviating in a material manner from the core business model. A reference point that has been built in a similar way is Bidcorp, one of our very best corporate stories in terms of international diversification.

The growth runway for the group is exciting, including in South Africa as the most developed of the African markets. The most recently announced acquisition is a deal to acquire 49% of Roots Sales, a South African business with a 10-year track record and operations that service more than 8,000 outlets across this country. Importantly, the deal includes a pathway to control, as the sellers have granted CA Sales the option to increase its stake over time. This is an excellent way to structure the acquisition of a private company.

Across organic and inorganic initiatives, the group plans to evolve its revenue split over time to enhance group margin. Currently, 85% of revenue is from warehousing and distribution, which is lower margin than sales and merchandising. By 2026 the plan is for this to decrease to 70%, resulting in margin uplift across the group and an expected improvement to the valuation multiple as a result. This is just one example of the strategic opportunity set available to the company.

The primary risk in the business at this stage is probably the extent of exposure to Botswana. Half of the group’s revenue is from that country. Botswana is pretty solid as far as African exposure goes, with the caveat of dependency on sectors such as diamond mining.

Overall, the group plans to almost double revenue from 2023 to 2026. With this management track record of execution and a p:e of 11.7, the good times for this group seem to be far from over.

The growth runway for the group is exciting, including in South Africa