The small-cap sector offers investors entry to some of the market’s most exciting and risky investment propositions on the JSE. Attendees at this year’s Moneyweb Money Expo were afforded the opportunity of hearing from some experts on their current favourite stock picks.
Bright Khumalo, Vestact:
Three stock picks included Transaction Capital, ADvTECH and Holdsport.
Speaking about ADvTECH, Khumalo described the company as an education and resourcing business that includes many well-known brands like Abbots College and Crawford College. “This is a company that ‘captures’ customers at a very young age (pre-school) and provides them with a service all the way through to adulthood.”
Khumalo believes ADvTECH is quite different from Curro, one of its competitors. “It has a long track record, having listed back in 1993. Since then it has delivered compound annual earnings growth of 15% per annum and it pays a healthy dividend.”
Devin Shutte, MyWealth Investments
Three stock picks included Santova, Master Drilling and Advanced Health.
Shutte pointed to the incredible changes that are happening in the logistic space, where the likes of retailers like Amazon are promising to deliver goods within one hour of purchase to locations in the US. He thinks the same pressure is going to be brought to bear on logistics companies in South Africa. “The industry has a number of challenges that include speed to market, demand variability (individual consumer wants) and working capital, but Santova doesn’t suffer from these problems.”
This is because the company has a non-asset base model, which removes the capital constraint. “Santova focuses on providing logistics solutions to clients through technology, but they have people on the ground around the world to facilitate this end-to-end supply chain management. They are variable and flexible to put together bespoke solutions for their clients,” says Shutte.
The valuation is also attractive says Shutte. “Santova has been able to grow earnings at 25% in South Africa, and across the entire group this has averaged 30% pa. The share is trading at under R4/share on a price-earnings multiple of close to 11x.”
Three stock picks included: Consolidated Infrastructure Holdings, Rolfes, and Wescoal.
Mclachlan says that Consolidated Infrastructure Holdings (CIL) has a big exposure to the African power market, which is significantly under-developed in relation to the population it services. He believes this provides an enormous opportunity for the company’s subsidiary, Conco, to service in the decades to come. “It already has the track record to be a big competitor in this space.”
CIL’s valuation is also very compelling. “With a market capitalisation of R4 billion, the company has been able to grow earnings at 20%-30% a year, yet trades on a price-earnings multiple of just 10.9x. By my estimates, the value of Conco alone is worth more than the current share price.” CIL also has a building supplies business and oil services business in Angola that investors are essentially getting for free.