Last week, the JSE hosted one of its small cap showcases. This series is part of a broader initiative to help the flagging smaller capitalisation 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, is helping an existing small cap grow into a large cap.
The small cap sector on exchanges is really the incubator that 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 Renergen’s Stefano Marani touches succinctly on here.
Five unique small caps were presented at the latest showcase, and here is a short summary and brief thoughts on each one.
Capital Appreciation (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.
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 digitisation are likely to remain valid.
With a cash pile of R530 million on its balance sheet – around 40 cents per share (cps) of its 182cps share price – Capital Appreciation 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 ecosystems.
Renergen also listed as a Spac before acquiring its key underlying asset, which is now called Tetra4.
Tetra4 holds the first and only onshore petroleum production right in South Africa, in the Free State, approximately 250km southwest of Johannesburg.
This unique gas field holds vast amounts of both methane, which will make liquid natural gas (LNG), and helium. The latter is a critical and unsubstitutable input into the semiconductor manufacturing, aerospace, MRI 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 the spot helium token Renergen issued: ‘Go long helium’ could be good advice.
The group is currently ramping up Phase 1 while building up to a much larger Phase 2. In securing the financing for Phase 2, Renergen has seen strong interest from Ivanhoe Mines, the Central Energy Fund and the Development Finance Corporation, among other funders.
This all somewhat debottlenecks and derisks Phase 2’s financing, while pointing to a significantly larger 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 Au$19 million to fund a drilling and exploration programme of its Bengwenyama project, which it expects to complete across the next two years. If is successful, this should arrive at a prefeasibility study that will allow it to apply for a full mining right and begin developing the mine.
The Bengwenyama project is 290km from Johannesburg on the eastern limb of the Bushveld Complex, focusing on the platinum group metals 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. 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 around 19 million ounces (Moz) (inferred) to 53Moz (including additional exploration targets).
Spear Reit (SEA)
Spear Reit is the only domestic regionally-focused Reit on the JSE, (the exchange does 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 around 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 (kind of like a property company’s debt-to-assets) ratio of 39%, and paid out 88% of its distributable earnings in FY22, which sees it currently trading on a dividend yield of 10.2%. Its tangible book value is 1 130cps (with an average cap rate on its property portfolio of around 9%, which seems reasonable), putting the stock on a 32% discount or 0.67 price-to-book ratio.
Stadio Holdings (SDO)
Spun out of Curro (COH), which itself was spun out of PSG (PSG), Stadio is a focused play on tertiary education and has progressively built a tertiary offering that has five faculties and 10 campuses, and offers over 50 qualifications.
Importantly for future growth, the group has 33 new programmes in the accreditation pipeline. These include widening the law faculty and in-demand information technology qualifications with a longer-term plan to offer a range of engineering qualifications.
Outside of Unisa, Stadio is the largest distance learning offering in South Africa. Indeed, its 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% to 9% per annum).
It has an ultimate target of 100 000 students over time, which is wonderfully audacious.
With a market cap of R2.8 billion, Stadio is currently trading at a valuation of R74 172 per student.
The temptation is to compare Stadio to either ADvTech (around R111 166 market cap per student) and Curro (around R81 981 market cap per student), but that would be inappropriate as ADvTech 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.
Keith McLachlan is investment officer at Integral Asset Management.
* Keith McLachlan and some of Integral Asset Management’s portfolios may hold Renergen shares.