Last week, the JSE hosted one of its small cap showcases. This series is part of a broader initiative to help the flagging smaller capitalization counters on the bourse. Interestingly, the JSE will be also introducing a sell-side market making scheme in the small cap market to help bolster liquidity across the counters.
Exchanges around the world all want lots of large, liquid listings, but it is worth remembering that large companies start life as small companies. The cheapest new large cap listing for an exchange to get is helping an existing small cap grow into a large cap! Thus, the small cap sector on exchanges is really the incubator that the precedes the rise of new large caps.
Not just from an exchange perspective, but broadly, the health of the small cap sector is a strong driver of employment (small caps tend to be more labour intensive than large caps), tax revenues (more profits means more taxes) and, indeed, growth and innovation so vital to long-term economic success. This is a topic that Stefano Marani touches succinctly on here.
Five unique small caps presented at this showcase. Below is a short summary and brief thoughts on each one:
Capital Appreciation (code: CTA)
Listed as a Special Purpose Acquisition Company (‘SPAC’) in 2015, Capital Appreciation has acquisitively become a payment and payment solutions group with a range of point-of-sale, platform, software and service offerings in this quickly evolving space. The Group terms itself a “business-to-business fintech group” and focuses on banks and insurance companies with services in over 20 countries around the world.
The global payment space has strong long-term tailwinds that were, at least partially, accelerated by COVID pushing more payments into non-contact digital channels and away from cash. While some of this demand was pulled forward by the pandemic, in the longer-term, these tailwinds of growing digitization are likely to remain valid.
With a cash pile of R530m on its balance sheet (or c.40cps of its 182cps share price), Capital Appreciation’s is in a good position to fund growth, make acquisitions and pay dividends – assuming it evolves on the right side of the fast-changing payment eco-systems.
Similar to Capital Appreciation, Renergen also listed as a SPAC before acquiring its key underlying asset that is now called ‘Tetra4’. Tetra4 holds the first and only onshore petroleum production right in South Africa in the Free State, approximately 250 km southwest of Johannesburg.
This unique gas field holds vast amounts of both methane (which will make Liquid Natural Gas or ‘LNG’) and helium (critical, unsubstitutable input into semiconductor manufacturing, aerospace, MRIs and welding industries).
While LNG offers great, domestic exposure to global energy prices, it is helium that is the real hidden gem in this resource. For a more detailed discussion on helium, see my article on Renergen’s spot helium token it issued here.
The Group is currently ramping up Phase 1 while building up to a much larger Phase 2. Indeed, in securing the financing for Phase 2, Renergen has seen strong interest from Ivanhoe Mines, the Central Energy Fund (‘CEF’) and the Development Finance Corporation (‘DFC’), amongst other funders. This all somewhat debottlenecks and derisks Phase 2’s financing while pointing to a significantly large second phase than we all originally envisioned.
For research on Renergen, see this useful list of reports.
Southern Palladium (SDL)
Recently listed on JSE, Southern Palladium is a long overdue resource exploration play.
The Group has raised AUD19m to fund a drilling and exploration programme of its Bengwenyama project, which it expects to complete across the next two years. If this is successful, this should arrive at a Prefeasibility Study (PFS) that will allow them to apply for a full mining right and begin developing the mine.
The Bengwenyama project is 290km from Johannesburg on the Eastern Limb focusing on the Platinum Group Metals (‘PGM’) basket. With a direct 30%-stake and an indirect 12.3% stake via Southern Palladium, the Bengwenyama Community around the project area is strongly supportive of this resource’s development and, indeed, a similar setup to the Royal Bafokeng Platinum (RBP) cooperative labour model could be arrived at.
The underlying resource has a strong revenue split toward rhodium (53%) and palladium (30%) and the Group estimates its (unproven) resource to be c.19Moz (inferred) to 53Moz (including additional exploration targets).
Spear REIT (SEA)
Spear REIT is the only domestic regionally focused REIT on the JSE (we do have a range of offshore regionally focused REITs) focusing specifically on the Western Cape. Within the Western Cape, the REIT diversifies its property exposure with the balance of its portfolio currently lying in industrial, logistics and convenience retail properties.
Importantly, Spear insiders hold c.28% of the REIT’s shares and the Group and its properties are internally-managed. This ensures that Spear’s management focus remains on efficiency and returns rather just size (which externally-managed REITs do and, thus, see lower and lower quality properties added to their portfolios over time).
Spear has a reasonable Loan-to-Value (‘LTV’, kind of like a property company’s Debt-to-Assets ratio) of 39%, paid out 88% of its distributable earnings in FY 22 that sees it currently trading on a Dividend Yield of 10.2%. Its tangible book value is 1130cps (with an average cap rate on its property portfolio of c.9%, which seems reasonable) putting the stock on a 32% discount or 0.67 Price-to-Book ratio.
Stadio Holdings (SDO)
Spun out Curro (COH) that, itself, was spun out of PSG (PSG), Stadio (SDO) is a focused play on tertiary education and has progressively built a tertiary offering that has 5 faculties, 10 campuses and over 50 qualifications.
Importantly for future growth, the Group has 33 new programmes in the accreditation pipeline. These include widening the law faculty & in-demand IT qualifications with a longer-term view to offer a range of engineering qualifications.
Outside of UNISA, Stadio Holdings is the largest distance learning offering in South Africa. Indeed, their target is quite literally to be the alternative to UNISA (UNISA has 320,000 students).
The Group currently has 38,414 students across its offerings and has previously communicated a target of 56,000 students by 2026 (this would imply a growth rate in students of +8~9% pa). They have an ultimate target of 100,000 students over time, which is wonderfully audacious. With a market cap of R2.8bn, Stadio is currently trading at a valuation of R74,172 per student. The temptation to compare Stadio to either AdvTech (c.R111,166 market cap per student) and Curro (c.R81,981 market cap per student), but that would be inappropriate as ADvTech is offers tertiary, schooling and distance education while Curro offers only schooling (with some degree of distance offering too). That said, if Stadio really does reach 100,000 students, the rest of its economics, cash flows, profits and, yes, valuation should follow suite.
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