OLD ARTICLE – Original posted on August 21, 2018
What makes for a good investment?
Simple: (1) Quality underlying, (2) Growth / yield / return, & (3) Underpaying for all this.
What makes a good investment fit into a diversified portfolio?
Simple: (4) Being as little correlated to existing investments as possible.
What makes all of this better?
Simple: (5) Some event that will drive upside and unlock (3) above.
How does Sabvest (SVN/SBV) fit into this framework?
Sabvest is an investment holding company that has been listed on the JSE for many years. For sake of brevity, I am not going to go into the Group’s history, structure and details. Rather, allow to me to leverage the Group’s own resources with links to this detail:
- Sabvest history – Note the rich history and track record.
- Sabvest Corporate Profile – Simple and straightforward.
- Sabvest Investment Strategy – Note the “Performance Metrics”, particularly NAV growth of 15% y/y, dividend growth of 10% y/y & HEPS growth of 15% y/y.
- Sabvest Investment Portfolio (as at 30 June 2018) – Note spread of geographies & listed versus unlisted while the Group remains largely ungeared.
- Sabvest H1:18 Results – Read through portfolio changes, updates and changes to underlyings.
Assuming you followed the above links and worked through the material, you should arrive at the same conclusion that I have: the majority of Sabvest is good quality businesses and the Group’s long-term track record certainly shows that its management is superb capital allocators.
Given that the Group–as an investment holding company–could sell all its assets and buy new ones tomorrow, the latter point is the important one: you are backing the jockey here, and Sabvest’s jockey has a superb track record.
Thus, I believe that Sabvest ticks (1)’s box: quality. It is both a high-quality investment vehicle and one with predominantly good quality underlying assets assembled therein.
Considering these underlying investments, I, personally, think that Rolfes (RLF) and Metrofile (MFL) hold great potential for growth going forward. Likewise, I think that Transaction Capital (TCP) is a superbly-run niche finance group with a long runway for growth, albeit a pricier valuation. I am less certain as to Net1 UEPS (NT1) and Brait SE (BAT), but they are less significant.
Likewise (and more importantly), in the unlisted portfolio, the core labeling and trimmings businesses (SA Bias & Mandarin Holdings) are great businesses with long track records and little risk of this changing (irrespective of technology, I don’t see people ever not wearing clothes and, thus, there remains a huge market for global trimmings and labels). Likewise, the Group’s niche food businesses also hold growth potential.
So, without getting too specific, the portfolio indicates likely growth going forward.
Then there is the consideration that management (as stated in their “performance metrics” above) are incentivized through a large direct shareholding in the Group and Key Performance Indicators (KPI) to extract growth from their capital through rising NAV, dividends and HEPS. Time and time again, Sabvest has proven that it can extract growth from its capital and I do not see this changing.
Thus, I believe that Sabvest ticks (2)’s box: growth. Be this through growth in the underlying, value extraction from private equity-like active management of the underlying or capital allocation by management. Growth is growth is growth, and all these things should result in a steadily rising capital base or NAV of Sabvest.
But how much are you paying for this?
Well, given the most conservative view that you are willing to cross the spread, Sabvest -N- shares (let’s ignore Ordinary shares for now) are current on offer for 3800cps. The Group’s reported NAV is 5458cps, thus implying that the stock is trading at a rather chunky 30% discount to NAV.
Then, consider that about c.69% (per my workings) of the Group’s sum-of-the-parts is tied into unlisted businesses with conservative valuations (see note at the bottom of this article*), and many have foreign or rand hedge elements to them, and suddenly you see how true intrinsic value in this NAV might be higher than reported NAV…
Either way, I think you consider that Sabvest’s share price currently ticks (3): undervalued.
Given that many of the Group’s underlying businesses have different drivers and that management are agile and can extract value through opportunistic capital allocation and deal-making, and you start to see that (4) is ticked: lowly-to-uncorrelated with many other typical stocks on the JSE.
But, (5) is really a key element that helps drive this uncorrelated upside and it can be easily explained: liquidity.
Sabvest’s Ordinary and N shares have barely traded over the last couple decades being listed on the JSE. This is not because no one wants them but because they were tightly held by insiders and anchor investors.
This historical lack of liquidity is a large reason for the major discount in the share price against the NAV underpin.
Given that a major investor is reshuffling his investment portfolio, a major bookbuild and placing of Sabvest N script has recently occurred (see here). In fact, this was so large that if you viewed the bookbuild as “trade” on the JSE, then almost a quarter of the entire Rand-value that has ever traded in Sabvest N shares traded on that date about a week ago.
Let me put this differently, over half of the N shares were placed from a single investor (who did not trade) to multiple investors across our market (who will trade), thus infinitely boosting the Group’s free float and its share’s liquidity.
Add to this fact that Sabvest’s Board recently approved a new KPI tied to unlocking the major discount between the share price and the Group’s NAV.
Also, the next logical move looks to be collapsing the Group’s Ordinary and N share structure. Combining both free floats will add to liquidity while improving the symmetry between shareholders will improve the attractiveness of the script and, thus, improve liquidity.
And, improving liquidity will lower the illiquidity discount locked into the script.
Thus, we have point (5) ticked: free float unlock will drive increasing liquidity in Sabvest script going forward and aid momentum to unlock its discount to NAV. This process is uncorrelated to beta, JSE, politics, and global markets, thus (4) is also ticked, as the process is uncorrelated to pretty much anything else.
And, hence, I think Sabvest offers a truly special proposition at present and is very much worth a look. I built a position in the Alpha Prime Small & Mid Cap Fund during the N-share bookbuild and I look forward to future NAV growth and value-unlock in this unique investment. (*Sabvest has the following to say about its valuation methods for its unlisted businesses: “Unlisted investments are valued using the maintainable earnings model. The earnings are calculated on an EBITDA basis and also referenced to NOPAT and are considered relative to current and forward earnings. Multiples are based on transaction multiples usual for small cap private companies and are in the range of 4 to 6 times. The Mandarin Industries multiple is at a higher level of 9,5 times which is below the 2018 acquisition multiple. Each resultant calculation is then adjusted for net cash/debt/equivalents to determine EV.“)