Revisiting Some Older Calls

Let me spend some time here updating older calls as we go into 2018.

 

Top Ten Investment Cases in AWSM

While Blue Label Telecoms (BLU) still remains in AWSM’s top ten, we have obviously exited Consolidated Infrastructure Group (CIL). Blue Label has seen a slower turn to profitability in Mexico than we hoped and Cell C is likely to report a loss this period (no surprise here, but hopefully the telcos will be EBITDA positive), but the Group’s core Distribution business sounds very robust indeed. On the other hand, CIL’s entire existence is hanging onto its funder’s fancy come the 15th of February… I expect a highly dilutive rights issue here.

Tongaat Hulett (TON) looks pretty perfectly positioned this year to benefit from a larger sugar harvest, low maize price and improving Zimbabwean fundamentals. The market currently gives the Group’s Zimbabwe operation a nil value or deeply discounts their Land asset. Either way, Tongaat appears very cheap and it is likely to produce great results this year.

(P.S. I am trying to get Tongaat to grow legally-licensed medical marijuana on its excess agricultural land. KZN is the perfect climate for this and as regulation relaxes on this commodity, Tongaat will be perfectly positioned to become a marijuana play. They are apparently looking into this now. This would add margin and it brings some diversification to these agri-operations. Do me a favour and add some pressure on management here to do this too! Thanks.)

The key drivers of ADvTech (ADH) remains sound. I had a pre-close with management and, despite the Schooling segment remaining under pressure (don’t expect fireworks from this segment), the Tertiary segment was doing extremely well. Given what is going on in the university sector in South Africa, I expect little to change here. In fact, I think Tertiary in ADvTech could even do better than expected as university chaos drives further students into ADvTech’s growing offering in this market.

Datatec (DTC) went ex-dividend yesterday. The special dividend was 2300cps, yet the stock fell -2400cps. I.e. There is a free 100cps or c.4% on the table. Then, also consider the fact that the remaining Group is driven by Logicalis, which won a large Brazilian contract that will add to earnings going forward. Add to that the view that the Westcon International business (that has the same revenue as the Westcon Americas business that was sold!) should go break-even within the next eighteen months and you have some great upside in this stock. I bought more yesterday.

Master Drilling (MDI) is perfectly positioned for the global commodity market while Santova (SNV) keeps putting out great, growing earnings and the market keeps ignoring it. Metrofile (MFL) I wrote about earlier this week while AdaptIT (ADI) may have some education sector risk (they have exposure to SA universities, currently a bit of a chaotic sector) but remains comfortably profitable, cash generative and management has asserted to me that their H2:17 organic growth rate has continued into H1:18E.

Finally, Rolfes (RLF) may continue to feel pressure from its Western Cape agricultural exposure. That is a sad fact. But, the rest of the business remains comfortable and I am getting increasingly excited about the new management team and the value they are adding to this Group. On a 9.5x Price Earnings, this remains a relaxed valuation, particularly if South African GDP begins to grow a bit faster this year.

So, other than CIL, many of my views on AWSM’s stocks remain the same. In fact, given that many of them are actually on lower valuations than when I previously published, I actually just hold more of these stocks (if you like a stock and it falls, you just like it even more).

EOH: The Cracks Appearing

I have previously noted that EOH Holding’s (EOH) sustainable growth was predominantly of low quality (as it was majority fueled by acquisitions) while a falling share price puts this metric at risk.

And then EOH’s share price halved from there.

See CNBC’s take on things here, though I apologize for my blue shirt. I was not aware that they were going to film this chat until they rocked up with cameras. I hope I still make sense to yourselves in the interview.

My point, though, is that whatever triggered the sell-off does not matter. EOH has been baking this risk into their business model for the last ten to fifteen years. Eventually, no matter what triggers it, the risk unwinds and EOH is left weaker for it.

We are still witnessing this risk unwinding.

CSG Holdings: Undiscovered Gem

I have liked CSG Holdings (CSG), its businesses and its management team for a while, so this should not be major news.

All I will add, after a positive conversation or three with management here, is that the Group remains on sound footing.

They are making all the right moves and are perfectly positioned for a recovery in South African GDP. Any increase in labour demand first draws on staff resourcing businesses and temporary employment services. The Group is also perfectly positioned for longer-term themes (particularly, rising security demand) while its 5.5x Price Earnings is simply ridiculous.

Why I Sold Ascendis Health

When facts change, change your mind. Only madmen and fools cling to previous opinions when proven wrong. The ability to pivot, if correctly used, is a powerful investing tool.

I changed my mind on Ascendis (ASC) a while ago and, interestingly, this continues to play out. From a deeply out-of-the-money rights issue (needed to fund the business) to a continuing collapse in its share price, things do not appear to be going well at Ascendis. All the anecdotal indicators also point to growing pressure here.

I see no reason here to change my mind again.

 

In conclusion, other than with CIL, I have not changed my view on many things. In fact, as political South Africa (hopefully) self-corrects itself this year, I am growing in bullishness towards our domestic stocks.

Besides, I think what appears to be rather static investments is a symptom of fundamental investing: once you take everything into account, most good businesses stay good businesses and most bad businesses continue to deteriorate.

Hence, there is not much churn in my stock picking. The rest is just patience.

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