I have a filter that I apply to investment holding companies – so-called HoldCos – to see whether it may be worth digging deeper into them:
- Is there an external management company (ManCo)? External ManCos can mean a misalignment of interest with shareholders. I want HoldCos where management is invested with other shareholders.
- How expensive is the HoldCo structure? How much extra cost does the HoldCo overheads insert between itself and the underlying investments? The cheaper the better.
- What discount does it trade at against its net asset value (NAV)? This goes hand-in-hand with (2) above; the more expensive the HoldCo, the larger the discount needs to be.
- How are its unlisted assets valued? Besides providing me with comfort as to the asset underpin of the HoldCo, unlisted asset valuations also reveal the integrity of management. Look for evidence of whether earnings or multiple expansions are growing the unlisted valuations. The latter is a red flag!
- Is NAV growing? If NAV is not growing, then what exactly is the point of the HoldCo?
Sabvest in focus
Since simplifying its N-share structure in 2020, Sabvest Capital (SBP) has released a series of good updates – the most recent being last week’s excellent preliminary trading statement where the group expects:
- FY21 NAV to grow by at least 19% year on year to at least 8 858 cents per share (cps);
- Headline earnings per share and earnings per share are both expected to almost double; and
- Dividends should rise by at least 80% year on year.
At the time of writing this, Sabvest Capital was trading at 6 021cps or a 32% discount to the bottom end of its NAV guidance (this guidance is uncapped and final NAV could come in higher).
Now let’s apply my above HoldCo filter to Sabvest Capital:
1. Is there an external ManCo?
No. Sabvest Capital CEO Chris Seabrooke manages the group (internal ManCo) and is materially invested in the group (in other words, he is aligned with shareholders as a beneficial shareholder).
2. How expensive is the HoldCo structure?
Sabvest Capital’s HoldCo has averaged a reasonable 2.4% of NAV growth per annum (compare this with the top performing domestic general equity unit trust’s total investment cost of 2% to 4%, depending on the period).
Also, this cost is dropping as NAV grows (returns to scale from an internal ManCo), and is currently closer to 1.5% per annum.
3. What discount does Sabvest Capital trade at against NAV?
As mentioned above, Sabvest Capital shares are currently trading at a 32% discount to NAV. If final NAV comes in higher, though, this discount will be higher too.
4. How are its unlisted assets valued?
Sabvest’s major unlisted investments have not seen multiple expansions in their valuations recently. In fact, there have been multiple contractions.
This implies that NAV growth has been driven by underlying businesses growing their profits, which is exactly what we want to see.
5. Is NAV growing?
Sabvest Capital’s NAV has compounded by around 19% year on year over the last decade and a half. So yes, Sabvest is certainly growing.
In a recent interview with Simon Brown on MoneywebNOW, I expressed how Sabvest Capital is one of my favourite investment companies on the JSE.
Hopefully the detail provided in this article helps unpack the group and adds contextual background to this statement.
Listen to that MoneywebNOW podcast with Simon Brown (or read the transcript here):
Keith McLachlan is investment officer at Integral Asset Management.