Santova: Growing & Undervalued

Santova (SNV) is a non-asset based supply chain manager with more than 65% of its earnings coming from outside of South Africa, including the majority of hard currency in this.

For some background to the Group and my views on it, see my old articles over here (in reverse chronological order):

Santova put out a H1:18 trading statement yesterday that can be summarised as follows:

  • H1:18 EPS and HEPS expected to between +10% y/y to +15% y/y.
  • This performance was underpinned by organic growth.
  • The strong ZAR during this period actually saw the Group’s c.65% offshore earnings translated in less ZAR than they would have been in constant currency (and a mile worse than they would have been with a depreciating ZAR).

Something worth considering is that this H1:18 result was achieved during a period when South Africa experienced a recession and the GBP was c.20% weaker than the ZAR over the comparative period in H1:17 (and then there is Trump and Brexit, and so on). Although the GBP is their major trading currency, they have operations in a lot of other ones. The ZAR was c.10% stronger versus a basket of other currencies during this period.

Ignoring the recession’s impact, if we assume that Santova’s 65% offshore earnings would have added a further 10% from flat ZAR in H1:18 (i.e. constant currency), I arrive a HEPS growth of between 16% to 21%. Now imagine these results during a period of ZAR weakness…

Also, Santova achieved these results organically. This is always much higher quality than acquisitive growth. The latter comes with material risk and tends to once-off in nature too.

Subsequent to H1:18 and during H2:18, Santova has acquired the minorities out their profitable Australian business and the ZAR has weakened by about 7% against various hard currencies… Oh, and did I mention that South Africa is no longer in a recession?

In other words, despite Santova having a superb H1:18, I think they are actually going to have a better H2:18!

And, with all the boxes being ticked from profitability, growth and geographic diversification, Santova is also trading on a very low 7.9x Price Earnings (PE).

I hold Santova in the AWSM Fund and, personally, I wish various rules did not prohibit me from holding more of it at these levels (not my personal rules, but those of the CIS Act). I won’t state my fair valuation here, it just sounds ridiculous against the share price, but needless to say that I see it as worth materially more than where it is trading.

It is quite simple: Santova is proving its quality in this market, but the market has not yet responded by re-rating its share price. I am biased, but this is probably the cheapest stock on the JSE at this point.

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