Could Santova be a multi-bagger?

Arguments against the stock – and rebuttals.
Santova – its shares are cheap because it is small, and it is small because it is cheap. Image: Shutterstock

Santova Logistics (SNV) is a global non-asset-based (technology) supply chain manager benefitting from the necessity of global trade, trade’s growing complexity (the more complex supply chains, the more clients outsource that complexity), higher freight rates and, ultimately, the ‘network effect’ from having more clients across more territories trading on more routes with more volumes.

I’ve been quite open about my bullish view on this JSE-listed small cap stock (see my historical thoughts here), and I hold it in my and many of my client’s portfolios.

The group recently published a trading update for FY22 where it says it expects its earnings per share (EPS) and headline earnings per share (Heps) to more than double to between 121.21 and 127.75 cents per share (cps); in other words, to increase between 161% and 171% year-on-year.

The stock rose on this news and has itself more than doubled in the last 12 months.

Yet the stock still trades on a measly 8.3x price-earnings (PE) ratio, while that trading update puts Santova shares on a PE of between 5x and 4.8x. Why?

I’ve been speaking about Santova for years and have encountered a range of counterarguments. This is healthy and nothing to shy away from.

All good investment cases should be debated openly. These arguments are summarised below along with my rebuttals.

‘Santova is a South African business’

My rebuttal: While ‘Santova Logistics Ltd’ is incorporated in South Africa and its shares are listed on the JSE, the group’s H1:22 results showed that around 90% of its earnings came from outside of South Africa. Incorporation and listing are incidental, but earnings and cash flows are reality. Through that lens, Santova is not a South African business but a global one. Should it not, therefore, attract a global rating?

‘Santova’s cash flows are poor and it has large debtors in South Africa’

My rebuttal: South Africa is the only country that places the tax collection burden onto the clearing and forwarding agents for import duty and related. Santova follows legislation here, pays the tax over immediately and then collects it from the client (while earning an attractive interest rate on this effective lending arrangement).

Three things are important here:

  1. Santova’s debtors book in South Africa is predominantly of blue chip credit-worthiness;
  2. Santova manages credit risk carefully and has excellent bad debt and collections records; and
  3. As Santova grows globally (see above point about it not being a South African business), it is increasingly exposed to geographies that do not have this rule in place, and thus generates steadily higher and higher (free) cash flows.

You can regard the following graph of conversion of operating profits into operating cash flows as proof of this.

Source: Refinitiv, Integral Asset Management

‘Santova is a small/micro cap’

My rebuttal: Global, non-asset based supply chain managers – so-called fourth-party logististics (4PL) operators – trade on an average PE of 13.3x (see chart below).

Using the low end of the trading update’s range of Heps, if Santova shares traded at this multiple, the group’s market cap would be R2.3 billion (in other words, nearly triple its current share price).

Even at half that multiple, Santova would still have a market cap greater than R1 billion.

Thus, the argument that Santova is a small/micro cap, and thus should trade cheaply, is circular logic (Santova shares are cheap because it is small and it is small because it is cheap).

Source: Refinitiv, Integral Asset Management

‘Santova shares are illiquid’

My rebuttal: Firstly, see the above point about Santova’s size. If the share traded on a comparable multiple, the share price would be higher, and thus the rand-value of free float (and related liquidity) would be better.

Secondly, while its illiquidity may be a valid argument from an institutional perspective, from a retail investor perspective I disagree.

This is an opportunity to outperform. Let the fund managers buy Santova stock from you at a much higher multiple after years of growth once its ‘liquidity’ can finally be absorbed by the stock.

‘Santova is listed on the JSE’

My rebuttal: A world of capital is incentivised to find great opportunities, and a fair share of this capital is ‘exchange agnostic’.

This argument might hold weight if Santova was a large weight of a major index, and thus passive flows distorted its price. But it is not, and the JSE listing is thus a moot point.

‘Santova’s competitors are huge global groups the small cap will struggle to compete with/as a smaller player, you cannot extrapolate global peer group valuations to Santova’

My rebuttal: Global trade is a such a vast market that it can accommodate many large players. Plus the large established players often have legacy systems (you can read up about the billions of dollars written off by UTi Worldwide and others trying – and failing – to modernise their core technology platforms).

Thus Santova can compete agilely with them – much like how Capitec has beaten the older, legacy-heavy retail banks.

In fact, the revenue growth rates below show that Santova is beating most of the older, legacy players – and I expect this gap to keep growing larger.

Source: Refinitiv, Integral Asset Management workings using interim reported revenue figures for Santova

In conclusion, given what I believe is a fair debunking of the above counterarguments against Santova’s investment case, I retain my view that, from these levels, Santova could be a multi-bagger investment.

Listen to Simon Brown’s interview with Santova CEO Glen Gerber in this MoneywebNOW podcast (or read the transcript here):

Keith McLachlan is investment officer at Integral Asset Management.

* McLachlan and some client portfolios hold Santova shares.


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