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Santova: Growing & Undervalued

Posted on 27/08/2020 by Keith McLachlan

OLD ARTICLE – Original posted on October 11, 2017

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.

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 Alpha Prime Small & Mid Cap 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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