Small Caps With Foreign Exposure

There is a misconception that the small (and mid) caps on the JSE are purely domestic. While historically relatively true, many small caps have steadily pushed outside of South Africa in the last decade or three.

Let’s pause and consider the difference between Rand hedges and foreign companies. All foreign companies are Rand hedges, but not all Rand hedges are foreign companies.

For example, a South African mine sells its product in USD-based commodity prices while its cost-base is in ZAR. Thus, a South African mine is a Rand hedge. But, if South Africa gets wiped off the face of the Earth, any companies in it will disappear too. Thus, while Rand hedges often have leveraged benefits from a weakening ZAR, they come with the same implicit risk as South Africa.

On the other hand, a foreign company will benefit on a 1-for-1 basis (often zero forex leverage) when the ZAR weakens because both their revenues and costs (i.e. their entire business) becomes worth more in ZAR. Thus, there is no leverage effect, but they do exist outside of South Africa’s implicit sovereign risk.

Getting back to small caps with foreign revenue streams, here is a list of them that is literally split from zero to hero (Disclaimer: I am using Bloomberg, so it not likely 100% accurate. Double check for yourself. I have just left the data as Bloomberg has generated it.):

On an equal-weighted average, about 21% of our small and mid cap listed companies revenues come from outside of South Africa.

Is that a lot or a little?

Interestingly, it is about half of what the Top 40 gets. The latter averages an equal-weighted 41% foreign revenue exposure. (Once again, not perfect data, pulled from Bloomberg with some estimates adjusted by me to make more reflective. Disclaimer noted.)

And, therefore, I arrive at the conclusion that there are plenty of ways to find non-ZAR, Rand hedge and/or foreign exposure even with the smallest places of our stock market.

But which ones?

Well, this is massively subjective, but here is my list of preferred Rand hedge and foreign exposures in the small cap space:

Rand Hedge:

  • Pan Africa Resources (PAN): A well-positioned gold miner with long-life assets (see here).
  • Oceana Group (OCE): The largest listed fishing company on the JSE with large USA exposure through a recent acquisition.
  • Wescoal (WSL): A well-run, undervalued coal miner with a niche inland coal trading operation. The Group is black-owned with long-term Eskom contracts and an outstanding bid for Keaton Energy that will pretty much double the size of the Group for a fraction of the price of the Group…
  • Tongaat Hulett (TON): A sugar and starch business that stands to gain from the drought breaking while it steadily develops its (massive) land portfolio in Kwa-Zulu Natal. Deeply undervalued, but benefiting from the USD-pricing of its core product: sugar.

Foreign Exposure:

  • Santova (SNV): A superbly-run, niche supply chain management business with over half of its profits earned outside of South Africa. See my update on them here and my original valuation of them here.
  • Consolidated Infrastructure Group (CIL): CIL earns c.68% of its profit (before the Conlog acquisition, which will further drive this percentage) from outside of South Africa. Not just that, but CIL is dirt cheap (8.3x PE) and fast growing (just wait for the next couple set of results…).
  • Datatec (DTC): Datatec is a non-South Africa, global ICT distributor. Read some comments here. Deeply undervalued, in my opinion.
  • Redefine International (RPL): UK-based property with some German exposure. See article here.
  • Sirius Real Estate (SRE): German SME-focussed, flexible property company.

In closing, do not take my words for gospel and go double check my numbers, read through the companies you like and arrive at your own conclusion. Stock picking is not actually the point of this article.

The point of this article is quite simply this: over the last decade the South African, JSE-listed small cap space has been aggressively de-risking itself from the South African economy and we are actually in a much better space to survive what is currently happening here.

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