CSG Holdings: Undiscovered Gem

For some background to CSG Holdings (CSG), read my two older pieces on them:

Following from this background, CSG put out some superb results this morning.

You can read the full results here (and I do encourage you to read it), but, in summary, CSG’s revenue grew +26%, profits rose +37% and HEPS jumped +19% putting the stock on a c.4.5x Price Earnings (PE).

Furthermore, this growth was underpinned by good cash conversion, comfortable gearing on the balance sheet and logical structuring of the Group into three key segments (Staffing Solutions, Facility Management and Security & Risk Solutions).

While a number of acquisitions occurred during H1:18, my reversing of their contributions to the period sees HEPS still growing by at least +7% y/y. I do not reverse the dilution from shares issued for some of these acquisitions (i.e. the dilution), thus this is a base-line organic growth rate and the real organic growth rate is likely higher (c.10% to 15%, is my belief).

Perhaps quite importantly, management state that “...CSG expects the growth experienced during the half year to 30 September 2017 to continue for the next six months.

My original forecast for FY 18E is HEPS +7% y/y, but these H1:18E numbers indicate that I am overly conservative in these forecasts. Now, based on these conservative forecasts, I saw CSG’s fair value as a little over 150cps, implying a 12m return of over 80%. Better-than-expected H1:18 results imply that my fair value for CSG is too low, but given how ridiculous a fair value of 150cps sounds compared to a share trading on a price of only c.100cps, I will keep that fair value to myself.

Needless to say, I think CSG is amongst the cheapest of all the stocks on the JSE. And, this is not based on any turnaround premise, as the Group is growing fantastically.

My point here, though, is that I believe CSG is starting to prove itself a true ‘hidden gem’ in the small cap market. If you are willing to accept some liquidity risk with CSG, you may well be handsomely rewarded in the long-term.

Note: My money is where my mouth is with CSG and we hold it in the AWSM Fund. In fact, I bought a couple more today.

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