The below is an exert from the Alpha Prime Small & Mid Cap Fund’s March 2020 investor letter: here.
Solvency & Liquidity Across Underlying Portfolio
|Descending Order of Weighting in Portfolio||Net Debt:Equity (%)||Net Debt:EBITDA (x)||Interest Cover (x)||Current Ratio (x)|
|Metrofile Holdings Ltd||95%||1.9x||3.0x||1.3x|
|Grindrod Ltd (preference shares)||Net cash||Net cash||Net cash||0.8x|
|Adcock Ingram Holdings Ltd||Net cash||Net cash||Net cash||2.0x|
|Stor-Age Property REIT Ltd*||36%||3.9x||11.6x||0.3x|
|Coronation Fund Managers Ltd||Net cash||Net cash||Net cash||0.9x|
|Sabvest Ltd (N-shares)||*||*||*||*|
|Astral Foods Ltd||Net cash||Net cash||Net cash||2.1x|
|Sirius Real Estate Ltd*||46%||–||10.5x||1.0x|
|Master Drilling Group Ltd||23%||1.3x||6.5x||2.2x|
|Santova Logistics Ltd||21%||1.2x||8.0x||1.5x|
|Pan Africa Resources Plc||61%||1.4x||4.6x||0.5x|
|Hosken Consolidated Investments Ltd||*||*||*||*|
|Wescoal Holdings Ltd||25%||0.6x||2.9x||0.9x|
Sources: Various company reports, Alpha Asset Management workings & assumptions; * Refer to specific commentary in the narrative below. Either unique circumstances or industry-specific solvency and liquidity ratios are more applicable.
Metrofile Holdings Ltd (Code: MFL; Price Earnings 10.8x; Dividend Yield 4.0%): The offer to delist Metrofile has been extended till 31 May 2020 due to the lockdown. While anything can happen, our discussions with management and our understanding of the parties involved make us confident that the deal will still conclude successfully. In the meantime, Metrofile’s core business (document storage) remains cash generative over this period and the Group balance sheet continues degearing, though net new boxes flowing in will likely be impacted as will one or two more peripheral businesses in the Group. The stock has also just gone ex-dividend, adding to the upside we see here via shoring up our cash weighting.
Grindrod Ltd Preference Shares (Code: GNDP; DY 14.3%): Grindrod’s balance sheet has nil net gearing but management are engaging with the banks regarding a facility over this period. The Group has suspended all capex, cut costs and does continue to move (only essential) goods through its ports and terminals. Results will likely be negatively impacted by this period but given that we are invested into the high-yielding preference shares, we expect Grindrod to keep paying us our current c.14.3% dividend yield. Yes, you read that correctly: we are currently getting almost four times inflation as a pure dividend yield on GNDP! Interestingly, as South African interest rates come down, an argument can be made that yielding preference shares become more valuable…
Adcock Ingram Holdings Ltd (Code: AIP; PE 10.3x; DY 4.6%): Adcock Ingram’s ungeared, cash-rich balance sheet is perfectly positioned for this period. Astute capital allocators, management have even announced that they will be buying shares back in the market over this period. Over and above these positives, Adcock Ingram is considered and registered as an essential service (i.e. healthcare) and, therefore, all the Group’s operations continue functioning. In fact, given that COVID-19 is a flu, Adcock Ingram has noticed some increased demand in certain parts of the business, especially analgesics, cough and colds, IV fluids and hand sanitizers while their supply chain continues to function, albeit under pressure. This stock may be one of the winners over this period.
Stor-Age Property REIT Ltd (Code: SSS; DY 9.2%): Stor-Age management has indicated that—prior to lockdown—South Africa was trading in line with budget. As Sirius Real Estate noted below, the REIT’s UK operations also experienced an uptick of enquiries before the UK lockdown took effect. Overall, though, the REIT’s balance sheet remains lowly-geared, its client-base unconcentrated and its underlying asset class deeply defensive. Much like preference shares, falling interest rates makes this REIT’s yield more attractive.
Datatec Ltd (Code: DTC; PE 75.3x; DY 3.8%): Datatec recently published an update indicating that trading has been positive, despite COVID-19 existing in all the territories the Group operates. Interestingly, as a distributor and integrator of predominantly networking equipment, the aggressive shift to remote-working should benefit demand for this equipment and we remain positive on the ICT Group and its prospects.
Coronation Fund Managers Ltd (Code: CML; PE 8.6x; DY 11.5%): Asset management is perfectly suited to remote-working while its revenue-generating mechanism (i.e. assets under management, “AUM”) continues to generate fees. Therefore, operationally, Coronation is largely unaffected by the lockdown. That said, the market turmoil and the drop in asset prices have likely shaved a large portion off of Group AUM and, therefore, its revenues and profits. Still, with a liquid and solvent balance sheet and business model with a large proportion of variable costs embedded, Coronation remains a comfortable holding that offers us upside in the case of a “V-shaped” market recovery.
Sabvest Ltd (Code: SVN; PE 3.0x; DY 2.6%): Many of Sabvest’s underlying investments continue to operate as essential services, while others operate either remotely or virtually (e.g. DNI’s airtime distribution). There will be some impact on some of the manufacturing assets, though, but Sabvest has a comfortable balance sheet and is offering liquidity to these underlying businesses. Furthermore, Sabvest held a key shareholder vote that has now approved its restructuring into Sabvest Capital with a single share class. This should aid the share’s liquidity and help unlock the material discount against its NAV that this good-quality HoldCo offers.
Astral Foods Ltd (Code: ARL; PE 11.4x; DY 4.7%): Ungeared and classified as an essential service (i.e. agriculture/food), Astral remains well-positioned to both operate and do so with cheaper inputs costs, a higher price points from firming domestic poultry prices & at a reasonable valuation in the stock market. The recently implemented poultry tariff further bolsters this Group’s topline.
Sirius Real Estate Ltd (Code: SRE; PE 22.8x; DY 4.3%): Sirius’ recent update points to comfortable solvency and liquidity across their balance sheet, a good debt maturity profile and reassuring major leases/tenant profiles. A freeze on meetings rooms and a halving of enquiries will no doubt negatively impact the Group’s coming results. Interestingly, the Group has noted a surge in self-storage demand across its portfolio (self-storage makes up 35% of their portfolio) – See Stor-Age REIT above on this note too.
Master Drilling Group Ltd (Code: MDI; PE 4.5x; DY 3.9%): Master Drilling’s geographically diverse operations offset some of the lockdown risks as it operates in countries without lockdown in effect (yet). That said, COVID-19 is global, and we cannot necessarily assume that it stays that way. Management performs daily stress tests on the Group’s balance sheet, solvency and liquidity. The Group remains comfortably solvent and liquid, but management is also investigating alternatives to bolster this. Overall, though, the Group remains conservatively geared, geographically and commodity diversified and with material ‘blue sky’ in its various projects and the fact that it services an industry (mining) that needs more and more of its services over time (mines are getting deeper).
Advtech Ltd (Code: ADH; PE 8.7x; DY 4.0%): Complying with our Government’s directive, ADvTech has closed its schools and tertiary institutes. Interestingly, over the years the Group has developed a fantastic distance-learning platform. While it has never been very loud about this online platform—we repeated told management that they should be!—it has allowed pupils and students to shift from contact-learnings to distance-learning. This is a competitive advantage as most competitors of smaller size will not have access to such a fantastic platform at short notice. Who knows, they may pick up market share with this? In the Group’s recent results presentation, management stressed that the Group has enough solvency and liquidity while it has suspended all non-essential capex until further notice.
Santova Logistics Ltd (Code: SNV; PE 3.4x; DY 6.2%): While business activity and trade volumes will be negatively affected, the volumes of essential goods will likely rise. Santova’s core platform—TradeNAV—is cloud-based and the Group has seamlessly shifted all its employees in all its offices around the world to remote-working. Many of the Group’s major competitors are struggling in this regard (they run older legacy systems) and, therefore, Santova is particularly excited about aggressively growing its market share over this period by targeting these un/under-services customers and winning them over. We expect them to be successful and expect margins to widen over this period as customers become less price sensitive and the Group’s ability as a Rand Hedge further bolsters upside. In summary, Santova may be one of the winners out of this period in history, yet—far from rallying—its share price has fallen with the rest of the market.
Pan Africa Resources Plc (Code: PAN; PE 7.6x; DY 1.1%): As noted earlier, the market crash saw asset prices correlate in a rush to USD-liquidity. While normally a hedge against downside, gold was no exception this time around. That said, the weakening ZAR offset this and Rand-gold hit new highs. Pan Africa stands to gain from Rand-gold appreciation but the lockdown will severely negatively impact their volumes over this period. The Group has announced key measures to extend some short-term debts and will maintain some volumes from tailings and the BIOX plants at Barberton. Post-lockdown, though, Pan Africa stands to gain massively from a buoyant gold price and a weak ZAR. We remain very bullish on gold in a global recessionary environment where central banks and government have run out of ammo and interest rates are likely to slip increasingly negative.
Hosken Consolidated Investments Ltd (Code: HCI; PE 2.4x; DY 10.2%): Of all our holdings, Hosken Consolidated Investments is the one that worries us the most. Given that its share price has collapsed by two-thirds in March, the market agrees with us. Its key underlyings—Tsogo Gaming and Tsogo Hotels—are at the epicentre of headwinds from the COVID-19 lockdown to the global collapse in the tourism/travel sectors. Both groups also have geared balance sheets. We have looked at the Tsogo family’s solvency and liquidity and think that they should both survive a short- to medium-lockdown. Perhaps more importantly, from an HCI-perspective, the market has written these investments to zero. HCI’s market cap is R2bn while its own portfolio of properties that it has developed and holds on balance sheet has a net value of R2.5bn! If we assume that these properties have followed all asset prices lower by c.-20% over March 2020, then HCI’s market is equal to its own property investments. Ignoring the Tsogo family, HCI also has its PGM, O&G, logistics, coal, media & industrial assets… We are not committing more capital to this investment but consider the share price reaction to be materially overdone.
Wecsoal Holdings Ltd (Code: WSL; PE -6.2x): Thermal coal mining for the supply of Eskom is classified as an essential service as it keeps our lights on. Wescoal will keep operating like normal, despite the pressure its share price has been under. While junior coal mining is risky, in this environment it has counted in Wescoal’s favour. Despite this, we lightened some of this stock into a large buyer in the market and managed to improve the Fund’s overall liquidity with that action.
Clientele Ltd (Code: CLI; PE 9.6x; DY 11.9%): Clientele’s insurance book should see a rise in lapses while its insurance float should feel some downwards pressure (despite being very conservatively positioned into short-term money market & fixed income investments). We were and remain worried about what a long-term lockdown scenario will do the Clientele’s core low-LSM client-base and, thus, lightened this stock into a large buyer in the market materially higher than where it is trading now. Once again, this improved the Fund’s liquidity while taking advantage of a short-term price action.