I have a filter that I apply to investment holding companies (so-called “HoldCo’s”) to see whether it may be worth digging deeper into them:
- Is there an external ManCo? External ManCo’s can mean a misalignment of interest with shareholders. I want HoldCo’s where management are invested with other shareholders.
- How expensive is the HoldCo structure? How much extra cost does the HoldCo overheads insert in between itself and the underlying investments. The cheaper the better.
- What discount does it trade against its Net Asset Value (“NAV”)? This goes hand-in-hand with (2) above; the more expensive the HoldCo, the larger the discount needs to be.
- How are its unlisted assets valued? Besides providing me with comfort as to the asset underpin of the HoldCo, unlisted asset valuations also reveal the integrity of management. Look for evidence of whether earnings or multiple expansion are growing the unlisted valuations. The latter is a red flag!
- Is NAV growing? If NAV is not growing, then what exactly is the point of the HoldCo?
After simplifying its N-share structure in 2020, Sabvest Capital (SBP) has released a series of good updates. The most recent update being last week’s excellent trading statement where the Group expects:
- FY 21 NAV to grow by at least 19% y/y to at least 8858cps,
- HEPS and EPS are both expected to almost double, &
- Dividends should rise by at least 80% y/y.
At the time of writing this, Sabvest Capital is trading at 6021cps or a 32% discount to the bottom end of the NAV guidance (this guidance is uncapped and final NAV could come in higher).
Now let’s apply my above HoldCo filter to Sabvest Capital:
(1) Is there an external ManCo?
No. Sabvest Capital’s CEO, Chris Seabrooke, both manages the Group (i.e. internal ManCo) and is materially invested in the Group (i.e. aligned with shareholders as a beneficial shareholder).
(2) How expensive is the HoldCo structure?
Sabvest Capital’s HoldCo has averaged a reasonable 2.4% p.a. of NAV (compared this to the top performing domestic general equity unit trust’s TIC of > 2%~4%, depending on the period). Also, this cost is dropping as NAV grows (returns to scale from an internal ManCo) and is currently closer to 1.5% p.a.:
(3) What discount does Sabvest Capital trade against NAV?
As mentioned above, Sabvest Capital shares are currently trading at a 32% discount to NAV. If final NAV comes in higher, though, this discount will be higher too.
(4) How are its unlisted asset valued?
Sabvest’s major unlisted investments have not recently seen multiple expansion in their valuations. In fact, there has been multiple contraction! This implies that NAV growth has been driven by underlying businesses growing their profits, which is exactly what we want to see.
(5) Is NAV growing?
Sabvest Capital’s NAV has compounded by c.19% y/y over the last decade and a half. So, yes, Sabvest is certainly growing.
In a recent interview with Simon Brown on MoneywebNOW, I expressed how Sabvest Capital is one of my favourite investment companies on the JSE. Hopefully the above detail helps unpack the Group and adds contextual background to this statement.
THIS ARTICLE FIRST APPEARED ON MONEYWEB.