On October 19 Clover Industries announced that it was in talks with an unnamed company that is looking to acquire all of its shares and delist it from the JSE. In the four weeks since then, the company’s share price has climbed from R14 to its current levels of around R18.
This means Clover’s listed value has jumped close to 30% in less than a month. Clearly the market suddenly realised that the business is probably worth a lot more than it was being priced at.
“The base from which that bounced was at a price-to-earnings (PE) multiple of 6.5 times,” says Andrew Vintcent, portfolio manager at ClucasGray Asset Management. “It’s still not even at an 8 PE on our numbers.”
Clover is not a widely held company, and not everyone is that bullish on its business model, but there are a number of analysts who believe there is substantial value in it that has been overlooked by the market.
“Fundamentally it is a very high quality businesses now that they have got rid of the milk farming operations,” says 27four Investment Managers portfolio manager Nadir Thokan. “What it now owns is the cold storage distribution and the brand. Replicating that cold storage would be extremely expensive and the distribution Clover has would be extremely difficult to match.”
This strong position is likely what has attracted a potential acquirer. That, and the incredibly depressed share price.
“Given the way that the company has changed its business model, given the way it has grown its branded portfolio, given its good logistics and distribution network in the cold storage space, we think this is a business that could earn you R2.50 to R3 a share over the next 18 months to two years,” Vintcent argues. “A business earning you R3 a share shouldn’t be bought out at R20.”
What is even more telling is that Clover is far from the only JSE company under cautionary. Verimark’s management has stated its intention to delist the company (again), and Torre Industries has been in talks around a potential delisting since July. This week the company announced that its former CEO would be taking it private at between R1.40 and R1.50 per share, which is a 44.67% premium to its 30-day volume weighted average price.
In the days just before Clover made its announcement, Cargo Carriers was taken private at a price of R21 per share. That was a 40% premium to its prevailing price of R15.02.
This number of potential delistings is significant, because it is a signal that private investors are starting to see a lot of value that is being ignored.
“When you see delistings, it is often a sign that the market is cheap,” says Thokan. “When the public market fails to recognise the value in a business, the private market will step in and unlock that value.”
Chief investment officer at Northstar Asset Management, Adrian Clayton, agrees.
“Having done this for almost a quarter of a century, private money is often a lot brighter than listed money,” Clayton says. “A lot of us in the listed space are looking at prices, and not the true through-the-cycle valuations.”
This is exacerbated by the current weakness in both the overall market and the local economy.
“We are in the depths of an ugly cycle and everyone is only looking one step ahead of themselves,” Clayton says. “But if there is any chance of getting through this cycle, some of these smaller companies are probably worth a lot more money.”
It is particularly in the mid-cap and small-cap space where valuations are now at levels rarely seen. They have been sold-down across the board because of the negative narrative on the South African economy, but fundamentally many of them are quality companies.
Perceptions and generalisations
“There are a number of good businesses that are all being stuck together in this basket,” says Clayton. “Investors don’t want to be in there because of the perception of liquidity in this sector, that the economy is not in their favour, and the backdrop is terrible. So there has been a blanket approach to writing them all down.”
As the number of delistings suggests, however, there is a lot of value that is being underappreciated.
“I have not seen an opportunity set so compelling for some time,” says Vintcent. “You are paying trough multiples for bottom-of-the-cycle earnings for some really good companies.”
There is good reason for investors to be looking at what they might be missing.
“I wouldn’t use delistings as the only gauge, but they are an indication that there is value in the market,” Thokan says. “Perhaps they could be a catalyst for investors to ask where else they might find value, and they could look at gems like Italtile or Hudaco.”
“I’ve seen this before,” he says. “This is exactly what happens before you see a rerating in that area of the market.”