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The JSE’s Top 40 shares are so well researched and followed, both in SA and abroad, that finding an advantage isn’t easy for a private investor. But look outside that elite grouping and excellent opportunities are often available. Cannon is a deep value asset manager which casts its net widely so is always likely to pick up some ideas that others have missed. In this Xmas Special, portfolio manager Victor von Reiche (right) hunts at around the R2bn market cap level to uncover his three stock picks for 2015. Well worth having a closer look. – AH
By Victor von Reiche*
The best investment opportunities (and stock picks) reside in places where others aren’t looking. In practical terms, this translates into mid- and small-cap value stocks offering an excellent hunting ground for great long-term investments. This leads us to recommend three under-researched companies as Christmas stocking fillers, namely Afrimat, Sasfin and ELB Group.
Afrimat is listed in the building materials and construction sector. The group is made up of a portfolio of strategically located quarries across the country which gives Afrimat a wide competitive advantage on the basis of high transport costs faced by competitors. The group embarked on a deliberate strategy over the past couple of years to diversify its product offering away from aggregates and ready-mix products into industrial minerals. This initiative was highlighted by the acquisition of Glen Douglas, a metallurgical dolomite mine, from Exxaro three years ago. The Clinker Group was acquired a little more than two years ago, further diversifying revenue streams and giving Afrimat access to a niche building material. These acquisitions have generated excellent returns for Afrimat shareholders. The group’s most recent acquisition was an 80% stake in the struggling listed industrial minerals group Infrasors, with early evidence pointing to a strong turnaround. While corporate finance is littered with the history of failed mergers and acquisitions, Afrimat’s executive team has demonstrated exceptional skill in consolidating assets at very depressed prices which, in turn, shows that a company with a good management team and a robust business model can thrive in a sector that is under pressure. Over the past five years investors have earned a total return of 544% (45% p.a.) at a time when the domestic construction and materials sector has fallen 27% over the same period. After a recent pull back in the share price, we think Afrimat offers investors an attractive opportunity.
Sasfin offers a range of comprehensive financial services focused on the needs of entrepreneurs, corporates, institutions and high-net-worth individuals. Amongst other things, what attracts us to the business is the strong balance sheet, long profit history and the high level of family ownership. On this last point, global evidence shows that companies which have high levels of family or management ownership (FOMO) generally outperform their peers. As intimated, further to the high level of inside ownership, our investment case is premised on a number of aspects. The company has a record of uninterrupted profitability since its listing in 1987 and the balance sheet and operations are managed conservatively. Sasfin is growing strongly into wealth and asset management as well as transactional banking, which should lead to a higher return on equity for the group in time. In a market which we believe to be expensive at the moment Sasfin offers good value, trading on a price-to book ratio of 1.4 times – a 25% discount to the banking sector – and pays investors a 4% dividend yield. Notably, Sasfin’s return on equity is materially higher than the industry average, underscoring the argument that this is a good business available to investors at a good price.
ELB Group is an engineering service provider focused on providing bulk materials handling solutions. A key part of the group’s business is the distribution of earthmoving, mining, construction and quarrying equipment in Africa and trench digging equipment in Australasia. The group is positioned to benefit from increased thermal coal mining activity in South Africa, as the two new coal-fired power stations Medupi and Kusile come online, as well as from increased African mining exports. Strong demand for trench digging equipment in Australia and New Zealand is also driving earnings growth. The group has an experienced management team, with a consistent track record of delivery. From an investment perspective ELB Group has been a stellar performer over the past decade returning, 28% p.a. to investors driven by earnings growth of a similar magnitude. ELB Group remains well positioned to continue growing earnings supported by the increasingly diversified business footprint, growing project pipeline and strong balance sheet which remains debt free. ELB Group is a compelling investment proposition trading on an attractive 11 times historical earnings and makes for an excellent investment heading into 2015.
* Victor von Reiche is a Senior Investment Manager at Cannon Asset Managers, a business he joined in 2013. A chemical engineer, he worked in the profession for six years before switching to money management. Victor is married to Nicolette, lives in Pretoria, is an avid squash player and also finds time to hike, read and occasionally try his hand at fishing.
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