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A small cap that flies under the radar

While these stocks are unpopular it may be worth a glance.

Small cap investment company Trematon, which has been quietly listed on the JSE for 20 years, has ramped up its investment activity in order to grow net asset value faster. In the process, it hopes to become more attractive to the institutional investment market.

With a market cap of R581.7 million it has a little way to go yet, but recent deal flow suggests this is a company to keep an eye on.

Trematon quiet performance

Last year the group sold its 30% stake in the Club Mykanos casino to Tsogo Sun, choosing instead to focus on developing land and infrastructure that it owns in the resort complex, and which the company says will deliver better returns.

This includes developing Marina Village, a complex of 24 high-end apartments on the Langebaan lagoon. “We think there are 3-5 years of development left there,” says Trematon CFO Arthur Winkler. “What is pleasing is that the demand is now proven.”

As a result of the sale, Trematon’s stake in Club Mykanos will settle at about 22% of NAV, down from 50%. “The group had a high level of exposure to a relatively small part of the Western Cape and we wanted to diversify our investments to obtain a broader exposure to the Western Cape in general,” says CEO Arnold Shapiro (pictured).

Shapiro and Winkler were talking to Moneyweb post the release of the group’s results for six months to February 28, 2017. During the period under review, Trematon’s net asset value per share increased 44c per share to 299c per share, owing mainly to the sale of the 30% interest in Mykonos Casino. Intrinsic net asset value per share declined by 7c per share to 361c per share due to adjustments in the valuations of certain commercial and residential properties and once-off school set-up costs.

The decline in intrinsic NAV, which the board believes is the best way to measure performance, is not viewed as a setback, says Shapiro. Instead, “our recent investments provide scope for us to grow our Intrinsic NAV and deliver on our target of a 20% internal rate of return over time while increasing the annuity income component of the group”.

With this in mind the R190 million earned from the sale of the casino has been recycled into other capital projects.

Notably, Trematon subsidiary Aria is in the process of acquiring R614.1 million worth of commercial property from Redefine Limited. This will add an additional 90 000m2 of gross lettable area to the Aria portfolio and will bring the value of its portfolio up to more than R1 billion.

The deal has not been completed and will only be reflected in NAV at year-end, being August 31 2017.

“The transaction fits into the Aria strategy of acquiring key assets that are undervalued and allow for significant value unlock by our team,” says Shapiro.

These assets, which have undeveloped potential such as Maynard Mall in the Western Cape, are not offering attractive yields presently. “We need to refurbish and secure the right tenants, which will take a lot of work. But we have staffed up and don’t shy away from complexity. When you buy at good value there is a reason it is at good value,” he notes.

The vision for Aria, he says, is to be a leading property company in the mid-tier space, which lies below large Reits like Resilient, Hyprop and Redefine. “We think at this level we can access good dealflow.” While there are still opportunities in Cape Town, management believes there are also opportunities in dormitory towns such as Vredenburg, Gansbaai, Langebaan, even George. “We have been quite excited about the IDZ in Saldanha – but that opportunity will take a few years,” says Winkler.

Trematon’s other property play is the Resi Group, which was originally intent on buying up underpriced rental units following the global financial crisis. However, this pipeline is drying up – particularly in the Western Cape – and the focus has shifted to new-build developments or redevelopments, usually with a joint venture partner with complementary skills.

The business that positions Trematon more as an investment holding company than a pure property play is its stake in Generation Education. This business kicked off in January 2016 with one school in Sunningdale, in Cape Town’s northern suburbs (age 18 months to school exit). The school’s capacity is already being increased. A second operational site in Hermanus was acquired and converted to a Generation Education school in January 2017. Two additional sites have been purchased, one an operational school not yet under the Generation Education umbrella, and a second site which is subject to a rezoning application process.

Trematon is in the fortunate position that while there is a lot underway, there is no call for additional capital. “We have no debt in the business and sufficient capital to fund our current pipeline,” says Winkler. “What is really required at the moment is management time and focus.”

While small-cap stocks are currently out of favour, Trematon’s management is of the view that its initiatives have the potential to reshape the group’s NAV and growth trajectory over the next few years. “We have a combination of organic growth through Generation Schools; stable annuity income through the rental business; and value adding opportunities from good purchases where we believe we can add value,” concludes Shapiro.

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