Sabvest is a small-capitalisation investment holding company. It is listed on the JSE under the stock market ticker SBP. It’s essentially a smaller version of a Remgro, PSG, or HCI. As the name suggests, investment holding companies invest in a portfolio of assets/businesses, both listed and unlisted. Sabvest’s portfolio consists of 9 unlisted investments and 6 listed ones.
The challenge in valuing an investment holding company is that there’s often not enough public information available on what the underlying unlisted businesses do, and how they are doing. And thus it’s difficult to determine the different ways in which they may make or lose money, information which is of crucial investment importance.
Sabvest is unfortunately no different. Management gives us a short description of each unlisted business – e.g. that DNI – one of their large unlisted holdings – ‘provides technology, logistics and distribution services to the telecommunications industries and all network operators in RSA.’ That’s hardly informative. What is more useful is that Sabvest tells us that DNI is worth R839 million, or 24% of the total portfolio. The same holds for more than 82% of their portfolio – all the unlisted investments. In short, management gives one a short “Whats-app-like” description of what the different businesses do and a their valuations of these business. But how does management arrive at these unlisted company valuations? And are they reasonable?
Management values these underlying businesses following the following broad process: Firstly, they note what the underlying businesses earn, and have earned, and then go on to estimate what the relevant business will likely earn given the internal and external economic conditions they face. The earnings estimates arrived at in step 1 are then multiplied by what’s called valuation multiples – which are sourced from transactions involving companies similar to the unlisted businesses they are valuing. Sabvest’s management apply multiples of operating profit of between 5 and 9.25 time to their unlisted investments, with most in the 5 to 6 times range.
The only clue we have as to the reasonableness of these Sabvest management multiples is that similar unlisted businesses have sold at the sorts of multiples claimed. Unfortunately, I don’t have access to the information to verify this – here one will have to trust management. What does provide some comfort is that the value of the unlisted portfolio is equal to the entire stock market value of Sabvest – R35 per share – even if one assumes that the earnings multiples one should use are half of what management claims is justified. If you find this unsatisfactory, then investment holding company investing is not for you. (Incidentally, most of Warren Buffett’s Berkshire Hathaway is valued in this way.)
If one assumes that the Sabvest unlisted portfolio is worth R35 per share – the same as the current Sabvest share price – then it follows that if one buys Sabvest shares, one will get any other value in the portfolio for free. But what is the value of the remaining 18% part of the portfolio – the listed investments? Determining the value of the listed investments is straightforward. See what listed shares they own, how many shares they own, and then multiply it by the relevant share prices. Sabvest owns 10 million shares in Transaction Capital. Transaction Capital is trading at R30-odd a share. Sabvest therefore owns R300m of Transaction Capital shares, or R7.26 per share in Sabvest share terms. Similarly, it owns R141m in Metrofile shares, or R3.40 in Sabvest share terms. If recently-unlisted Rolfes is more or less the same business it was when it was listed in 2019, then the value in Rolfes shares in the Sabvest portfolio is R3.50. Finally, Sabvest owns a R72m stake in a UK listed business called Corero, equal to R1.74 a Sabvest share. Calculated in the same way, the balance of the listed shares in the Sabvest portfolio is worth a further R3.40 a share.
Adding all these listed-business-values – in Sabvest share terms – the resultant value of Sabvest shares is R47, or just over 34% more than the current Sabvest share price. In short; if the real intrinsic value is half the claimed value, and the value of the listed portion of the portfolio is reasonable, then the Sabvest portfolio is worth R47 a share – 34% more than the Sabvest share price. But, crucially, this is the value of the Sabvest portfolio, not Sabvest shares, for it costs money to manage the portfolio – salaries, transaction fees, etc. To account for this, one needs to subtract these from the R47 portfolio value. I estimate these costs to be around R12 a share, which means that the intrinsic value of the Sabvest share – on my calculations – is R35, its current market price.
The assumptions I’ve made in arriving at R35 a share have arguably been very conservative, but that’s just me; I want whatever I invest in to be a “sitter”. If you think the unlisted portfolio should really be valued at 75% of its claimed fair value, then the intrinsic value of Sabvest shares is R52.50 a share, which would be a sweet deal.
- The recommendations in these ‘Buy, Hold, or Sell’ articles should not be construed as financial advice, but as the opinion of the author in his capacity as investment analyst for Biznews.com. Always do your own research before making investment decisions. The author is Charl Botha CFA.
