South Africa’s Government of Nation Unity (GNU) has been a momentous event that markets have rewarded by strengthening the Rand and buying into our bonds and our equities.
While nothing is certain and plenty of risks and challenges lie ahead for so-called “SA Inc” (i.e. South African centric investments), this is potentially a trajectory change for our beloved country and one that may be worth allocating to for investors.
Below is a list of SA Inc small caps that have proven their mettle over the lean years and, thus, are potentially best positioned to capture the upside of any positive trajectory in the local economy and the JSE. Sometimes merely surviving proves your quality.
Spur Corp (code: SUR):
Having previously written on Spur Corp (Tucking into Spur), the sit-down and QSR Group was excellently positioned to win from lockdowns and then loadshedding. …and, in any vaguely positive consumer future in South Africa, Spur is fantastically positioned for growth in disposable income.
The stock still trades on a lowly Price Earnings of 11.8x and EV/EBITDA of 7.8x. Offshore, these sorts of companies tend to trade on multiples double to triple this.
Tsogo Sun (code: TSG) & Hosken Consolidated Investments (code: HCI)
If consumers have more disposable income locally, at least some of them will just gamble more. Tsogo Sun (along with Sun International) are perfectly positioned to capture any growth in this space and, particularly after Tsogo’s deep cost-cutting in COVID, this should fall to the bottom line. On a 7.0x Price Earnings, basically no growth is priced into this stock.
The major shareholder in Tsogo Sun, Hosken Consolidated Investments, is an alternative way to get exposure to this investment. HCI’s 49.7%-stake in Tsogo Sun (at Tsogo’s current share price) makes up R6,2bn of its R14.9bn market cap. The rest of HCI’s value comes from a range of investments from Southern Sun (R3.4bn market value for its 44.9%-stake here) to eMedia Holdings to property, gaming, golf and (let us not forget) oil and gas. HCI’s Net Asset Value is 23504cps at the end of March 2024 versus its current share price of c.17400cps.
ADvTech (code: ADH) & Stadio (code: SDO)
If consumers have more income, the first allocation of this income is likely to go towards one of the most important parental decisions: education of their children.
Despite any potential GNU has, private education (schooling and tertiary) is likely to remain very much in demand. Furthermore, if real incomes can rise, these institutions pricing power can start to work in their favour (and their bad debts will hopefully lower). A win-win-win situation for these businesses, as more volumes at higher prices with lower bad debts almost all fall to the bottom line in these predominantly fixed cost businesses.
My preference here is ADvTech and Stadio (see a short interview here on them).
Hudaco (code: HDC)
As a domestic (industrial) distribution gem, Hudaco has done well over a zero-growth period where it needed to win market in order to grow. It has done just this and ground out a respectable return despite SA Inc headwinds. Imagine what Hudaco could achieve if these headwinds turned into tailwinds?
Particularly in our economy, any growth in SA Inc should involve our industrial base with vast, aging spare capacity. And, any growth here will use consumables which Hudaco is perfectly positioned to supply them.
The stock is only on a 8.1x Price Earnings and a 5.9% Dividend Yield.
Afrimat (code: AFT)
Afrimat’s has well-established and quite diversified domestic exposure to construction, aggregates, and building materials sectors. Following the acquisition of Lafarge’s South African operations, the Group now also has cement exposure (predominantly inland, which importantly protects it a bit from a stronger Rand).
This positions the Group perfectly for any growth in the infrastructure spending or (re!)build of SA Inc that may occur. Lafarge’s significant assessed tax loss also means that any profits here are unlikely to attract much tax for some time…
Add to the above the Group’s great iron ore operations, coal and a growing range of other minerals and materials being (and to be) mined, and Afrimat’s mere 12x (historic) Price Earnings looks too conservative.
See this great interview with my esteemed colleague, Bruce Williamson, on Afrimat (Afrimat always on the hunt). He has been right on this stock for a long time.
Unum Small / Mid Cap SA Equity Portfolio (code: UUSMC)
Alternatively, if you would rather buy into a single portfolio of JSE-listed small caps that include all (and more) of the above list, you could always just trade directly into the Actively Managed Certificate (AMC) that I manage with the share code of UUSMC.
In the recent SA Inc rally and following the Rand strength, this AMC is now outperforming the global one that is also listed there (the UUGSMC)!
See more details on this AMC here (& the global one here). It can be traded directly on the JSE and on EasyEquities.
ARTICLE FIRST APPEARED ON MONEYWEB HERE.