While Blue Label Telecoms still remains in the AlphaWealth Prime Small & Mid Cap Fund’s (AWSM) top ten, we have obviously exited Consolidated Infrastructure Group. Blue Label has seen a slower turn to profitability in Mexico than we hoped and Cell C is likely to report a loss this period (no surprise there, but hopefully the telcos will be Ebitda positive). The group’s core distribution business, however, sounds very robust indeed. On the other hand, CIL’s entire existence is hanging onto its funder’s fancy come February 15 (I expect a highly dilutive rights issue here).
Tongaat Hulett looks perfectly positioned this year to benefit from a larger sugar harvest, low maize price and improving Zimbabwean fundamentals. The market currently gives the group’s Zimbabwe operation a nil value or deeply discounts its land asset. Either way, Tongaat appears cheap and it is likely to produce great results this year.
(I am trying to get Tongaat to grow legally-licensed medical marijuana on its excess agricultural land. KZN is the perfect climate for this and as regulation relaxes on this commodity, Tongaat will be well suited to become a marijuana play. It is apparently looking into the possibility, which would add margin and diversification to these agri-operations.)
The key drivers of ADvTech remains sound. I had a pre-close with management and, despite the schooling segment remaining under pressure, the tertiary segment was doing well. Given what is going on in the university sector in South Africa, I expect little to change here. In fact, I think tertiary in ADvTech could even do better than expected as university chaos drives further students into ADvTech’s growing offering in this market.
Datatec went ex-dividend yesterday. The special dividend was 2 300cps, yet the stock fell -2 400cps. This means that there is a free 100cps or about 4% on the table. Then, also consider the fact that the remaining group is driven by Logicalis, which won a large Brazilian contract that will add to earnings going forward. Add to that the view that the Westcon International business (that has the same revenue as the Westcon Americas business that was sold!) should go break-even within the next 18 months and you have some great upside in this stock. I bought more yesterday.
Master Drilling is positioned perfectly for the global commodity market while Santova keeps putting out great, growing earnings and the market keeps ignoring it. Metrofile I wrote about earlier this week while AdaptIT may have some education sector risk (it has exposure to SA universities) but remains comfortably profitable, cash generative and management has asserted to me that its H2:17 organic growth rate has continued into H1:18E.
Finally, Rolfes may continue to feel pressure from its Western Cape agricultural exposure. That is a sad fact. But, the rest of the business remains comfortable and I am getting increasingly excited about the new management team and the value they are adding to this group. On a 9.5x price/earnings, this remains a relaxed valuation, particularly if South African GDP begins to grow slightly faster this year.
So, other than CIL, many of my views on AWSM’s stocks remain the same. In fact, given that many of them are actually on lower valuations than when I previously published, I actually just hold more of these stocks (if you like a stock and it falls, you just like it even more).
I have previously noted that EOH’s sustainable growth was predominantly of low quality (as it was majority fueled by acquisitions) while a falling share price put this metric at risk.
And then EOH’s share price halved from there.
See CNBC’s take on things here.
My point, though, is that whatever triggered the sell off does not matter. EOH has been baking this risk into its business model for the last ten to 15 years. Eventually, no matter what triggers it, the risk unwinds and EOH is left weaker for it.
We are still witnessing this risk unwinding.
I have liked CSG Holdings, its businesses and its management team for a while, so this should not be major news.
All I will add, after a positive conversation or three with management, is that the group remains on sound footing.
It is making all the right moves and will benefit from a recovery in South African GDP. Any increase in labour demand first draws on staff resourcing businesses and temporary employment services. The group is also well positioned for longer-term themes (particularly, rising security demand).
When facts change, change your mind. Only madmen and fools cling to previous opinions when proven wrong. The ability to pivot, if correctly used, is a powerful investing tool.
I changed my mind on Ascendis a while ago and, interestingly, this continues to play out. From a deeply out-of-the-money rights issue (needed to fund the business) to a continuing collapse in its share price, things do not appear to be going well at Ascendis. All the anecdotal indicators also point to growing pressure here.
I see no reason here to change my mind again.
In conclusion, other than with CIL, I have not changed my view on many things. In fact, as political South Africa (hopefully) self-corrects itself this year, I am growing in bullishness towards our domestic stocks.
Besides, I think what appears to be rather static investments is a symptom of fundamental investing: once you take everything into account, most good businesses stay good businesses and most bad businesses continue to deteriorate.
Hence, there is not much churn in my stock picking. The rest is just patience.
This article was first published on SmallCaps.co.za here, and republished with permission.