Parts, plants and poultry-beating tech

The reason for the recent outperformance in this segment of the market? Good results coupled with low valuations.
Investing is all about seeking maximum reward with minimal risk, but what 'risk' you are taking is not always apparent. Image: Siphiwe Sibeko/Reuters

Against all odds and popular sentiment, the JSE’s Small Cap Index has risen 44% over the last 12 months and its Mid Cap Index has done +20% over the same period.

Even our JSE’s Top 40 Index has ground out a respectable 17% over this period.

These are remarkable performances – not just due to the chaotic period we are living through – but because they represent outperformance against the Nasdaq 100 Index which is up only around 14% (in rands) over the same period.

Zooming into some of the recent updates from this segment of the market reveals why such outperformance is occurring: good results coupled with low valuations. Good old fundamentals.

Hudaco Industries

Hudaco Industries (code: HDC) has reported that its FY21 period is no longer affected by Covid.

This is a bold statement, but one backed up by a huge 52% year-on-year rise in headline earnings per share (Heps) for the year ended November 2021. Importantly, even Comparable earnings per share (EPS) has slightly more than doubled year on year.

The industrial parts supplier serves as a great barometer for ‘old school’ SA Inc activity, as it supplies consumables into the mining, industrials, automotive, construction, agriculture, and retail and consumer trade sectors.

On the back of this earnings update, Hudaco’s share price has rocketed from the mid-R120/share to mid-R150/share. The stock also remains on a lowly 10x price-earnings ratio (PE). (Its forward PE is obviously much lower now.)

Hudaco share price over three months

KAP Industrial

Another SA Inc industrial, KAP Industrial Holdings (KAP), has indicated that the group’s H1:22 Heps should be between +57% y/y and +67% y/y higher. Importantly, this figure relates to its continuing operations and drove its share price up from R4/share to nearly R5/share.

KAP Industrial has a broad portfolio, from PG Bison’s timber operations and Unitrans’s logistics fleet to polymers and bedding. Once again, this is a broad domestic GDP play and one still trading at a 13x PE (once again, with a much lower forward PE once it reports).

Astral Foods

Finally, integrated poultry producer Astral Foods (ARL) also put out a strong announcement seeing its earnings for H1:22 at least doubling. Note the “at least” means that this is uncapped to the upside.

Astral is reporting against last year’s low base where the pandemic, lockdowns and the weak takeaway-foods market hurt earnings. Included in this update is the fact that the group has felt both the benefit of recovering volumes and price increases.

Coming off a low valuation, Astral’s share price rocketed around 9% on this news and is trading comfortably up for the year so far. Yet the stock is still on a relatively modest PE of 14x (forward PE likely to be half of that).

Now add to the above company updates Italtile’s solid sales update, Sabvest’s growth and the occasional small/mid cap delisting creating pops in share prices …

Off in the US, Netflix, Facebook and Paypal all reported misses this quarter that have seen their respective shares dump at least 20% since reporting.

Despite all its alluring promise, the Nasdaq remains negative year-to-date while our SA Inc, small- and mid cap stocks keep knocking it out of the park.


Investing is all about finding risk and reward sets that lie in your favour. Seek maximum reward with minimal risk. But what ‘risk’ you are taking is not always apparent, because, if it was, then the market would have priced it in. And when it becomes known what this ‘risk’ is, the market very quickly prices it in.

Perhaps the risk many investors were taking for so long has been exposed by rising rates: valuation.

In closing, it is worth noting that the JSE’s All Share Index is still only trading on a 14.7x PE while the Nasdaq 100 Index’s PE is more than double that at 35.6x.

* Integral Asset Management holds Italtile, Hudaco and Long4Life in some of its portfolios. Importantly, before the share prices collapsed, Integral Asset Management did not hold any Netflix, Facebook or Paypal in any of its portfolios.

Keith McLachlan is investment officer at Integral Asset Management


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