Value in mid to small-cap companies

Clover announced on October 19 it was in talks with an unnamed company looking to acquire and delist it from the JSE. Since then, its share price has climbed from R14 to around R18.

Clover isn’t widely held and not everyone is bullish on its business model, but a number of analysts believe it has substantial, overlooked value.

“Fundamentally it is a very high-quality business now that they have got rid of the milk farming operations,” says 27four investment managers’ Nadir Thokan. “Replicating [its] cold storage would be extremely expensive and the distribution [network] Clover has would be extremely difficult to match.”

This strong position and the depressed share price is probably what attracted a potential buyer.

Given how it has changed its business model, grown its branded portfolio, its good logistics and cold-storage distribution network, “we think this is a business that could earn you R2.50 to R3 a share over the next 18 months to two years”, says ClucasGray Asset Management’s Andrew Vintcent.

Clover is far from the only JSE company under cautionary.

Verimark’s management has stated its intention to delist (again) and Torre Industries’ former chief executive will be taking it private at R1.40 to R1.50 per share – a 44.67% premium to its 30-day volume weighted average price.

Cargo Carriers has been taken private at R21 per share – a 40% premium.

“When you see delistings, it is often a sign that the market is cheap,” says Thokan. “When the public market fails to recognise the value in a business, the private market will step in and unlock that value.”

Northstar Asset Management’s Adrian Clayton agrees, saying: “We are in the depths of an ugly cycle and everyone is only looking one step ahead of themselves. But if there is any chance of getting through this cycle, some of these smaller companies are probably worth a lot more money.”

It’s particularly in the mid-cap and small-cap space where valuations are now at levels rarely seen. They’ve been sold-down because of the negative narrative on SA’s economy, but fundamentally many are quality companies.

“There are a number of good businesses that are all being stuck together in this basket,” says Clayton. “Investors don’t want to be in there because of the perception of liquidity in this sector, that the economy is not in their favour and the backdrop is terrible.

“So there has been a blanket approach to writing them all down.”

As the number of delistings suggests, however, there’s a lot of value being under appreciated.